Equity markets have become more sensitive to changes in interest rates and energy prices, with upcoming central bank decisions and oil-market developments expected to remain important factors during September, according to Barclays strategists.
Oil prices have moved higher amid the continuing U.S.-Iran standoff, while European natural gas prices have reached their highest levels since early 2023. Gas prices nevertheless remain below the levels recorded during the 2022 Russia-Ukraine energy shock.
Strategists led by Emmanuel Cau said sustained higher energy prices are contributing to inflation and interest-rate pressures. With inflation remaining persistent and Kevin Warsh delivering hawkish remarks at Jackson Hole, markets are pricing roughly a two-thirds probability of a Federal Reserve rate increase in September.
Barclays economists have revised their forecast and now expect two additional Fed rate increases this year, in September and December.
The European Central Bank is also expected to raise rates once more this month, although the strategists said “upside risks increase if energy prices stay higher and stagflation concerns rise.”
Barclays said markets already appear to reflect a significant degree of hawkish monetary policy expectations, while some indicators point to moderating U.S. economic activity. The strategists identified the latest payrolls report and the following week’s consumer price index release as important data points for assessing that view.
According to the team, corporate earnings have provided support for equities during a period of tighter financial conditions, although the effect of second-quarter results is now receding.
“Equities have become more sensitive to rates and oil volatility recently, as the Q2 earnings tailwind is behind us and macro is back in the driver’s seat,” the strategists wrote.
Barclays also highlighted an autumn calendar that includes central bank decisions, U.S. midterm elections, Xi-Trump talks and continuing geopolitical risks. The strategists said hedging and some tactical reduction in beta exposure “appears prudent,” while maintaining a supportive broader outlook through year-end if interest rates and oil prices stabilise.
On the possibility of a Russia-Ukraine truce, Barclays said the recent increase in gas prices has interrupted the broadening of gains across European equities. The strategists said credible progress towards an agreement, even without a final settlement, would likely receive a positive response from European markets.
“Cyclicals would likely be the main beneficiaries, at least tactically, with Autos, Materials and other energy-intensive sectors gaining from improving energy cost dynamics, while Infrastructure and Industrial names may benefit from growing expectations around Ukraine’s eventual reconstruction,” they noted.
Barclays added that energy, utilities and other defensive sectors could underperform under such a scenario.