"I'd Be Fading This Rally" - Top Goldman Trader Warns 'Larger Issues Remain' Than Iran

"Markets create outcomes, not the other way around," is how Goldman Sachs One-Delta desk-head, Rich Privorotsky, frames the actions of the last 24-36 hours, as a fairly forceful jawbone from the White House last night sent global futures sharply higher and oil futures sharply lower.

The takeaway is that the political pressure and domestic appetite simply does not tolerate a drawn out conflict in the Middle East. 

Mid-terms + inflation > geopolitical ambitions... that pivot happened from $120 oil not $150.

The key takeaway today is that the right tail on oil is coming down quickly as there is essentially zero tolerance for a sustained conflict.

The moment oil spikes, the search for off ramps and de-escalation begins. 

Others will call it a TACO trade… I would call it reflexivity. Markets create outcomes, not the other way around.

Vol Compression

What is clear today is that whatever puts the street was holding against the right-tail oil / left-tail equity risk are decaying quickly. 

There are still structural issues in the market, but right now positioning likely remains too hedged for energy disruption. 

LT Oil Impact

That said, the impact of this conflict will linger.

Iran has proved that it does not need to actually close the Strait of Hormuz… the credible threat alone can disrupt flows and insurance markets.

That optionality will persist as a structural feature of the oil market.

Arguably the equilibrium oil price is now higher than it was previously.

Equally, a meaningful portion of offline capacity will take weeks to return, so I would not expect backwardation to disappear quickly.

Risk

Once the volatility reset is over and hedges are trimmed, we are really not down much at all in the US. 

I would be fading this rally.

The larger issues remain AI and its impact on multiples and terminal valuations… a debate the market has been temporarily distracted from but which certainly has not gone away. Alongside that are the related but separate issues in private credit… fund gating… and asset remarking that continue to weigh on the broader credit complex.  

Macro data is not helping the narrative either.

PPI ran hot… CPI tomorrow… and we had a negative NFP print last week.  

I still do not love US risk for the aforementioned reasons… and I suspect that is now consensus.

EM and Asia probably get bought on dips.

The equilibrium is shifting more defensive. 

Buying ERZ6 was the home run trade yday and I continue to think the market is wildly mis-calibrated on the probability of ECB hikes (think was a real a bloodbath in European rates).  

My base case remains that AI outcomes are disinflationary… and there are real risks in the labor market.

Remember when Block cut roughly 40% of its workforce...oh yeah that was last week.

Healthcare, telcos and utilities remain my preferred areas of length…

...though a hot CPI tomorrow would be a risk to everything.

Watch ORCL tonight

Finally, expanding on Privorotsky's warnings, Goldman's Shreeti Kapa warns (in addition to the Iran-dominated headlines)...we remain in a uniquely challenging risk environment.

• War in the middle-east is raging on,

• inflation remains sticky & now faces a supply shock,

• labor market is stalling,

• fed is boxed in,

• tariff policy is in legal chaos,

• stress in private credit markets,

• AI dispersion & disruption risks,

• hyperscaler capex vs ROI problem & cash flow concerns,

• data-center obsolescence/stranded assets risks &,

• the remarkably consistent ‘pre-midterm election weakness’

To add on, the technical picture is challenging as well:

• dealers are short gamma,

• implied volatility is high,

• liquidity is low,

• and positioning is still elevated.

All this with the backdrop that we have been in an extraordinary equity bull market since the pandemic & valuations & market concentration leave little room for error.

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