Goldman Warns Its Clients They Are Overlooking "The Largest Macro Market Risk"
By Tyler Durden
In the aftermath of Friday’s market “reassessment” and subsequent surge, when the ECB’s “bazooka” was found quite stimulative for risk assets after all (as opposed to the Thursday post-kneejerk reaction) one would think that Goldman which still has a 2,100 year end target on the S&P500, would be delighted. Oddly enough,
Kostin warns, just as Jeff Currie did earlier this week, that the oil rally is not sustainable and is actually counterproductive to eliminating near term supply imbalances, as the higher the bear market rally pushes oil, the more production will go back online, ultimately defeating the purpose of the Saudi shale “cleanse”, perhaps forcing the Saudis to boost output once again.
Our commodity strategists believe that the surge in commodity prices is premature and unsustainable. They believe that an extended period of lower prices is necessary to force the financial stress that will cause a reduction in supply, rebalance the market and lead to an eventual sustainable rally. They continue to forecast a trendless but volatile oil market, with spot crude prices in 2Q 2016 ranging between $25 and $45/bbl.
Which brings us to the main point of this post: what Goldman thinks is not being priced in by investors: a return to a hawkish Fed, and a resumption in the climb of the dollar.
While investors focus on oil and the ECB, they overlook the largest current macro market risk – and opportunity – which centers on the Fed. Next Wednesday the FOMC will announce a rate decision, release its revised projections, and hold a press conference. Although our economists expect rates will remain unchanged, a credible argument can be made for the FOMC to proceed with the “flight path” it had previously outlined. The unemployment rate stands at 4.9%, and core inflation has surprised to the upside, with PCE rising to 1.7% in February. Our economists expect three 25 bp funds hikes in 2016. However, despite the Fed standing within striking distance of its dual mandate, investors have rejected this forecast. Fed futures prices currently imply less than a 50% chance of a hike in June, and only two full rate hikes through the end of 2017.
The punchline: “The market’s eventual acceptance of the Fed tightening path will spur some parts of the momentum trade to resume and others to unwind.“
In other words, just as we took the elevator up after taking it down just as fast in February, and then again in early January, the whole process may repeat, especially if the stronger USD leads to the now well-known retaliation by the PBOC. To wit:
Fed tightening, especially contrasted with easing by the ECB and BOJ, should drive the dollar higher and benefit domestic-facing US stocks. As we discussed last week, our FX strategists expect policy divergence and interest rate differentials will drive the USD higher by …read more
Source: Goldman Warns Its Clients They Are Overlooking "The Largest Macro Market Risk"
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