Fed Rate Hike Could Be a 'Clearing Event' for Stocks Amid Oil Shock, Barclays Says

A recent surge in oil prices above $100 a barrel is renewing inflation concerns and pressuring global equities, according to a note from Barclays. The bank's strategists suggest that while an immediate market reaction to a resulting Federal Reserve rate hike could be negative, it may ultimately provide needed policy clarity.

Oil Surge Fuels Rate Hike Bets

Global stock markets have struggled as rising energy costs have lifted the market-implied probability of a Fed rate hike to approximately 70%, strategists led by Emmanuel Cau noted. The bank highlighted that the upcoming Consumer Price Index (CPI) release will be "pivotal" for the central bank's decision.

Barclays' economists forecast a month-over-month increase in core CPI of 0.23% for August. They believe a print at this level "would not preclude a hike next week" and now expect the Fed to deliver two rate increases by the end of the year.

As long as energy prices stay elevated, Barclays warned that "markets are likely to continue pricing the risk of further tightening down the line." This sustained policy uncertainty creates a headwind for both equities and duration assets like bonds.

A 'Clearing Event' for Markets

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Conversely, Barclays argues that a rate hike could serve as a "clearing event for markets." While acknowledging the initial market response could be mixed, the move would reduce uncertainty by clarifying the Fed's reaction function and the likely peak, or terminal, interest rate.

The bank's analysis suggests that historically, "equities eventually tend to regain the uptrend soon" after the Federal Reserve resumes hiking rates mid-cycle. This precedent frames a potential hike as a move that could stabilize market expectations over the medium term.

European Risks and Sector Positioning

The note also flagged the growing risk of stagflation in Europe, where a strong negative correlation between equities and oil prices has emerged. Rising natural gas prices ahead of winter are adding to inflationary pressures in the region.

Given this global backdrop, Barclays stated it remains Overweight the banking sector and continues to favor "old economy" capital expenditure beneficiaries. The firm also identified Utilities and Telecoms as increasingly attractive "bond-proxy" plays, noting that rate-hike risks appear to be largely priced into their valuations.