'Bigger Issues Brewing': Goldman One-Delta Desk-Head Warns 'Mood Still Feels Cautious'

Despite strong earnings from ORCL overnight, supporting the AI complex, US equity markets have drifted lower this morning as oil prices rallied (shrugging off hopes that the 'biggest ever' SPR release will solve supply problems)...

As Goldman's One-Delta desk-head, Rich Privorotsky, pointed out this morning, yesterday was one of the most volatile sessions on record in the oil markets. 

Oil

The market appears to be of the view that the right tail in oil is curtailed as US (policy) reaction functions is clear - no patience for sustained spike... looking for all off ramps into rallies.

False reports that escorts might be arranged through Hormuz briefly sent prices sharply lower, before headlines around possible mines sent them back up. 

We are awaiting an IEA meeting today that could recommend a coordinated strategic reserve release. 

Mining is particularly alarming: clearing mines in a major shipping lane could take weeks or even months, making it effectively the nuclear option…not something used unless the situation becomes extremely desperate.

If it's confirmed its a big deal and not one to make light of. Need a quick resolution, reserve release I think gets bought by market. 

But there are problems elsewhere...

Credit

A few issues are starting to surface.

Another private credit vehicle appears to be under pressure: “Cliffwater’s $33bn flagship private credit interval fund is expected to see redemptions north of 7%” (Citywire).

Separately, we saw another idiosyncratic credit shock: “Shares of Canadian subprime lender goeasy fall ~50% after guidance of surging loan defaults and write-downs.”

Overnight, "JPMorgan reportedly told some private credit lenders that it had marked down the value of loans used as collateral for financing facilities" (Bloomberg).

HY OAS has begun to widen, with credit underperforming equities.

At the same time, there is heavy issuance in the backdrop…watch CRM supply today.

Rates

Some hawkish commentary from the ECB overnight: Peter Kazimir suggested the risk of further tightening in response to energy inflation may be closer than markets assume, while Christine Lagarde reiterated lessons from the early 2020s about not allowing inflation to become entrenched.

It would be a serious policy error if Europe hikes into an energy driven inflation shock…particularly given the vulnerability of the European consumer and the region’s heavy energy import dependence.

Risk

Tail hedges got crushed yday. Vol compression drove spot.

That said, the mood still feels cautious…particularly among oil specialists, who remain broadly bullish and somewhat confused by the price action (mere mention of mines should have added $5-10).

I remain hopeful that the energy situation eventually fades into the background and the market can move on.

The SPX is barely off its highs, and quite frankly there are bigger issues brewing.

The credit dynamics increasingly resemble late cycle.

When gating starts appearing its rarely a good sign.

Meanwhile, AI’s impact on terminal valuations remains a huge open question, and growth stocks continue to undergo a slow process of de-rating…even in hardware (just look at Nvidia, despite an extraordinary run of earnings beats 8 in a row its gone no where...).

Retail, for its part, had another near record ETF inflow last week, aggressively buying the dip.

Net…I am not particularly constructive up here.

The oil situation may be capped by the political incentive to find an off-ramp, but even with that the equilibrium likely shifts higher. 

My view was to fade yday's rally and I'm sticking with it...

Watch: banks, credit spreads, and Oracle.

Finally, while all eyes are on oil's impact on the global economy, perhaps it's also worth paying attention to the surge in food prices...

As we detailed her earlier, a food shock could be as bad for bonds as oil prices.

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