Market "Fatigued With Caring", But Goldman's One-Delta Desk-Head Warns We're "Not Out Of The Woods"

Decent yesterday's bounce (on what felt like somewhat misleading peace talk headlines)... 

Goldman's One-Delta desk-head, Rich Privorotsky, notes that the market’s sensitivity to further geopolitical escalation does seem to be diminishing as hedges have been put in place and portfolios have been de-risked.

But, he warns, we are 'not out of the woods'.

The KOSPI rebounded sharply, up roughly 9% from yesterday’s Asia close as the AI hardware trade appeared to find a near-term low (AVGO +5% after-hours helps). 

Oil/Geopolitics

Now it becomes a game of endurance… eventual outcomes versus short term pain in the energy markets.

Things are getting acute in jet fuel markets (see below). Qatar LNG disruptions could take weeks to normalize and there have been reports of tanker incidents near Kuwait. 

“China’s government has told the country’s largest oil refiners to suspend exports of diesel and gasoline...” (Bloomberg).

The nature of asymmetric warfare creates a persistent short term premium on the ability to move cargoes through Hormuz. That said, I’ve been inundated with clients who believe the pace of operation “Epic Fury” is moving far faster than US planners expected, encouraging some to press on until Iran’s military apparatus is dismantled.

The risk is obvious.

The thesis I still struggle to falsify is whether a single drone or RPG can effectively sustain a partial closure of Hormuz until a negotiated settlement emerges.

 I’m not sure how much the situation is improving and it may still deteriorate meaningfully… but the market does seem somewhat fatigued with caring.

Macro

Data: ISM Services was strong… very strong. ADP payrolls also came in above expectations. The combination points to resilient growth + lingering inflation pressure, reinforcing the view that the Fed has limited urgency to ease policy. The underlying economy still appears to be running at a fairly hot pace, though some of this may be backward looking given the BBB dynamics that boosted growth.

That said, the Beige Book painted a more cautious consumer picture.

Several districts reported that “consumer spending grew slightly, though uncertainty prompted some consumers to pause major purchases and pull back on spending.”

Businesses noted rising caution with “sales dampened by economic uncertainty, increased price sensitivity, and lower-income consumers pulling back on spending.”

Retail contacts described demand becoming increasingly bifurcated, with “financial pressures on low-income families remaining intense” and affordability weighing on autos and discretionary retail.

Risk

I think we’ve had a reflexive rally off the lows.

The environment still feels choppy and with oil threatening new highs it’s difficult to argue the market has fully moved on. 

My bias remains defensive.

Pullbacks in rates look like opportunities and I continue to look through the current stagflation impulse toward a longer term disinflationary path. 

Energy equities appear comfortable looking through the recent spike in front month crude (ie they stopped rallying)… arguably so should rates. 

Asia/EM looks meaningfully de-risked after the recent moves.

My overarching concerns remain in AI disruption + credit which means the bounce in US risk should be faded vs other pockets, think secular growth + defensives  but avoiding consumer.

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