Goldman Sachs: Over the last 3 months, markets have priced more risk from oil, rates and AI themes

Rates, energy and AI: same risks, better priced. Core rates have pushed to new highs in recent sessions, although so far they have served only to limit the gains in rather than to break risky assets. Similar stories have played out across the three main risk factors we have been flagging over the summer—rates, energy prices and AI. Our baseline views are still mostly benign in each case, but the distribution of market pricing has shifted in a more adverse direction so that the asymmetry is shifting to the constructive side.

Energy prices have moved higher, and with diesel product and European gas prices outpacing gains in crude, that has dragged front-end rate pricing up so that we are now pricing 100bp+ hiking cycles in the US, UK and Europe. Al-related equities have recovered somewhat, but the complex has still derated on the back of another stellar earnings season. The risks in each case remain, but with these worries now more clearly embedded in pricing, there are also more paths to relief. Last month we believed that higher yields were the main risk to a constructive view, and that remains true.

But energy price-driven relaxation about rate hikes also seems the clearest path to immediate relief in bonds, equities and EM carry. If energy and rate pressures persist, or escalate further, at some point markets will question the resilience of the global cycle. That too would serve to take the edge off bond yields but would be a mixed blessing for equities and other risky assets.