Last week we highlighted that macro surprises had turned positive among G10 countries. This fact combined with rising expectations for ECB stimulus, which did not disappoint according to price action, were likely the cause of why we saw an extension of the equity rally. But the weekend’s attack on Saudi Arabia’s largest oil processing facility and today’s weaker than expected Chinese macro data have for now ended the equity rally.
Recession probability has increased
The current US recession probability within the next 6-12 months is around 25-35% based on macro data available as of August. The weekend’s attack in Saudi Arabia has the potential to lift oil prices a notch on rising security and geopolitical risk premium which is obviously bad as it comes during an economic slowdown. Short-term energy stocks are bid, and investors are selling carmakers, airliners and industrials as higher energy prices mean higher input costs. Despite the short-term jump in oil stocks we remain negative and underweight energy stocks.
iShares STOXX Europe 600 Oil & Gas ETF