Goldman Sachs Highlights Rising Macro Risks as Oil Volatility Spikes

Investor focus is shifting from company-specific issues to broader macroeconomic concerns, with sharp swings in oil prices increasing the risk of inflation and more aggressive central bank policy, according to a recent note from Goldman Sachs.

Oil Volatility Fuels Inflation Fears

Markets have been rattled by heightened volatility in energy prices, which saw a 30% increase over three weeks before falling sharply on Monday following a pause in hostilities between the U.S. and Iran, the bank reported. This price instability has become a primary driver of macroeconomic risk, stoking fears of renewed inflationary pressures.

This shift comes as a pullback in technology equities, prompted by concerns over AI-related capital expenditures in mega-cap earnings reports, also contributed to a rangebound market last week.

Central Banks Signal Hawkish Tilt

The market's attention is now firmly on monetary policy, with decisions from the Federal Reserve, Bank of England, and Bank of Japan expected this week. The European Central Bank recently held its key rate at 2.25%, but Goldman Sachs noted that higher energy prices and strong economic data make a rate hike in September more likely.

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According to the bank, option-implied probabilities for rate hikes from the Fed, ECB, and BoE have all moved in a more hawkish direction. Goldman's rates team estimated that if current market pricing for the July FOMC meeting holds, it would represent the "largest non-cut surprise in recent decades." This stands in contrast to the bank's own economists, who see a 35% probability of a Fed hike and expect the central bank to remain on hold through the end of the year.

Credit Risks and Asset Allocation

Reflecting the cautious outlook, Goldman Sachs maintains a neutral asset allocation for the next three months, though it remains modestly pro-risk over a 12-month horizon. The bank is notably underweight on credit for the next 12 months, stating that current credit spreads offer limited compensation for rising default risks.

In line with this view, Goldman's credit strategists have raised their year-end default forecasts to 4% in the U.S. and 5% in Europe.