Barclays warns summer volatility may persist as September Fed hike odds rise

Investing.com -- Barclays has warned that equity markets face a potentially turbulent summer as rising real rates and a stronger dollar prompt a rotation away from this year's momentum winners, though falling oil prices could limit further hawkish repricing.

Analyst Emmanuel Cau told clients in a note that markets continue to adjust to what he described as a "new Fed reality" following a hawkish interpretation of Federal Reserve Chair Warsh's first meeting.

The bank said real rates have broken out of their year-to-date range while the dollar has surged, tightening financial conditions and driving risk-off sentiment across equity markets.

"With a September Fed hike looking more likely now (although not our economists' base case), but a still unclear Fed's reaction function under new chair Warsh, volatility could remain high during summer," Cau wrote.

The rotation has hit year-to-date momentum winners hard, with Barclays noting that stocks in the technology, AI and commodity space "have seen some profit taking in recent days, while the laggards (mostly defensives and quality) finally caught a bid."

Barclays cautioned that "the end of the global easing cycle is a risk for equities into H2," adding that investors may continue to question central banks' willingness to support markets given high inflation and resilient growth.

On semiconductors, Barclays said strong results from Micron provided reassurance that AI demand "remains very strong," suggesting investors are "likely to stay in buy the Semis dip mode."

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