Despite the failure of U.S.-Iran negotiations to reach an agreement and former President Trump's announcement of a blockade of the Strait of Hormuz dampening risk sentiment, a temporary ceasefire still drove a notable relief rally in markets this week. The macro trading team at Goldman Sachs believes the most severe tail risks have narrowed significantly, indicating the market has formally entered a "new crisis phase."
Goldman Sachs macro traders Rikin Shah and Cosimo Codacci-Pisanelli pointed out that while questions remain regarding the details and stability of the ceasefire, Iran's demonstrated willingness to negotiate is a key signal that helps reduce extreme downside tail risks. For equity markets, this shock has been characterized overall as an inflation shock rather than a growth shock. If the "peak stress" has passed, stocks may refocus on forward-looking perspectives, trading on expectations of double-digit earnings growth.
On the monetary policy front, the ceasefire reduces the urgency for major central banks to take emergency action, although the pass-through of energy prices into inflation continues, and hawkish tendencies have not fully subsided. Among these central banks, the Federal Reserve is seen as the least likely to raise interest rates. However, the tail risk of a large-scale hiking cycle has been substantially reduced, and interest rate volatility is expected to continue declining.
The narrowing of tail risks has been accompanied by resilience in equity markets. The ceasefire news propelled global stocks to their largest weekly gain in over two years last week. Although weekend negotiations failed, Monday's market decline was relatively contained. The core feature of this week's market movement has been the post-ceasefire relief rally. Previously, uncertainty about Iran's response drove negative sentiment, forcing a significant buildup in risk premiums, with commodities and short-term interest rates bearing the initial impact.
Notably, during this period of turbulence, equity markets have shown greater resilience compared to physical commodities. Historical experiences, such as the COVID-19 pandemic and tariff shocks, suggest that equities possess the ability to shift their time horizon and look beyond short-term uncertainty—provided the path ahead becomes clearer.
Regarding oil price prospects, the base case anticipates energy flows through the Strait of Hormuz beginning to resume by this weekend, with Persian Gulf exports gradually returning to pre-conflict levels over approximately one month. Forecasts for Brent crude are $82 and $80 per barrel for the third and fourth quarters of 2026, respectively, which aligns closely with current market pricing.
Analyst Daan Struyven noted that for oil prices to fall to $70 by year-end, five conditions would need to be met simultaneously: rapid reopening of the Strait, no permanent damage to production capacity, sustained smooth inflow of sanctioned Russian and Iranian crude into the market, significantly higher-than-expected U.S. and Russian production, and weak demand. The high difficulty of achieving this combination of conditions implies that downside risks for oil prices remain relatively limited.
Markets maintain the view that the Federal Reserve is the least likely to hike rates, consistent with current pricing. The U.S. economy's sensitivity to oil prices is far lower than in the 1970s, and the federal funds rate remains 50 to 75 basis points above the median FOMC estimate of the neutral rate.
Market signals indicate that FOMC pricing suggests rates will likely remain unchanged for the year, with a small premium for a rate cut by year-end. U.S. breakeven inflation rates show no signs of inflation expectations becoming unanchored, and front-end dollar rate volatility has given back approximately 50% of last month's gains. Markets expect that if Nellie Liang were to become the next Fed Chair, the bar for rate hikes would remain high.
Last week's strong non-farm payroll data alleviated immediate concerns about the labor market, with three-month trend wage growth nearing the breakeven level calculated by Goldman Sachs' commodity research team. Overall, the likelihood of near-term growth risks materializing in the U.S. is low. Front-end rates should remain subdued in the short term, with realized volatility staying low.
However, long positions in 2027 U.S. rates could still serve as a hedge against growth downside risks—current market pricing for rate cuts remains insufficient, and fiscal support for growth is expected to gradually fade later this year.
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