Goldman Sachs said markets traded in a narrow range last week even as volatility rose, driven in part by a sharp swing in oil prices and renewed investor attention to macroeconomic risks.
Oil advanced roughly 30% over a three-week span before tumbling sharply on Monday after reports that the US and Iran paused hostilities. The bank said the sudden moves in energy markets have shifted investor focus toward inflationary pressures and the prospect of further monetary tightening.
Meanwhile, results from US mega-cap technology companies prompted questions about capital spending on artificial intelligence and contributed to a pullback in technology stocks, according to Goldman Sachs.
In Europe, the European Central Bank left its policy rate unchanged at 2.25%. However, Goldman Sachs noted that higher energy prices together with resilient activity indicators have elevated the chances of a rate increase by the ECB in September.
The coming week is heavy with policy and corporate news. The Federal Reserve, Bank of England and Bank of Japan will all announce policy decisions, and the week will host the busiest tranche of earnings reports in the US and Europe. For the United States, second-quarter GDP and core PCE inflation data are scheduled for Thursday, after the Federal Open Market Committee meeting.
Goldman Sachs observed that investor attention has moved away from idiosyncratic, company-level risks toward broader economic concerns. A primary channel for that shift is oil: higher energy prices amplify the risk of renewed inflation and a corresponding need for higher interest rates.
On rates, US two-year yields are trading close to their year-to-date highs and sit well above breakeven inflation measures, the bank noted. Option-implied probabilities for rate hikes over the next 12 months from the Fed, the ECB and the Bank of England have moved in a more hawkish direction.
The bank's rates team estimated that, if current market pricing around the July FOMC meeting persists, it would amount to the largest surprise toward tightening - without being a cut - in recent decades.
In its asset allocation framework Goldman Sachs retains a neutral stance over a three-month horizon and is modestly pro-risk over a 12-month horizon. On credit, the bank remains underweight across a 12-month view, arguing that current credit spreads do not adequately compensate for rising default risks.
Reflecting this view, the bank's credit strategists raised their year-end default rate forecasts to 4% for the US and 5% for Europe.
Despite market pricing that has become more hawkish, Goldman Sachs economists' probability-weighted Fed forecast remains comparatively dovish versus markets, assigning a 35% chance of a rate hike. The firm continues to project that the Fed will hold policy steady at this meeting and remain on hold through year-end.