Goldman Sachs sees macro risks rising as oil volatility increases

Investing.com -- Goldman Sachs reported that markets remained rangebound last week despite increased volatility. Oil prices rose 30% over three weeks before dropping sharply Monday after the US and Iran paused hostilities.

The bank noted that earnings from US mega cap technology stocks raised concerns about AI capital expenditures and caused a pullback in technology equities. The European Central Bank kept rates unchanged at 2.25%, but higher energy prices and strong activity data increased the likelihood of a rate hike in September.

This week brings policy decisions from the Federal Reserve, Bank of England and Bank of Japan, along with the busiest week of earnings season in the US and Europe. Key US economic releases include second quarter GDP and core PCE data, both scheduled for Thursday after the Federal Open Market Committee meeting.

Goldman Sachs said investor focus has shifted from company-specific risks to broader economic concerns, with higher oil prices increasing the risk of inflation and rate increases. US two-year yields are near their year-to-date high, well ahead of breakeven inflation.

Option-implied probabilities for rate hikes by the Fed, ECB and Bank of England in the next 12 months have moved in a more hawkish direction. Goldman Sachs rates team estimated that if current pricing for the July FOMC meeting holds, it would represent the largest non-cut surprise in recent decades.

The bank maintains a neutral position for three months in its asset allocation but is modestly pro-risk over 12 months. Goldman Sachs remains underweight on credit over 12 months, noting that credit spreads offer limited compensation for rising default risks. The bank's credit strategists raised year-end default forecasts to 4% in the US and 5% in Europe.

Goldman Sachs economists' probability-weighted Fed forecast remains more dovish relative to market pricing, with a 35% probability of a rate hike. The bank expects the Fed to remain on hold at this meeting through year-end.

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