Markets Repricing Under Pressure from Higher Rates and Oil Prices

Markets are undergoing a significant repricing due to rising interest rates and oil prices, according to Goldman Sachs' portfolio strategy team. The team, led by Christian Mueller-Glissmann, notes that the market has not yet entered outright risk liquidation, but the pieces are no longer sitting comfortably together.

The recent surge in oil prices above $100/bbl is challenging the inflation outlook and exacerbating sovereign risk in Europe. Higher policy rates are also flattening yield curves, making it increasingly difficult to distinguish between defensive and cyclical assets.

Goldman's Risk Appetite Indicator has softened from its August peak, with a widening gap between its defensive and risky-asset components reaching the largest level since 2022. Front-end rate volatility is leading the repricing as central banks tighten policy, while institutional demand restrains the long end of markets.

Notably, higher energy prices are providing surprisingly little valuation support for cyclical equities and are instead feeding European sovereign-risk premiums. Goldman remains tactically neutral with a modestly constructive outlook over twelve months, citing lower rates and oil as the clearest route to broad cross-asset relief.