Commodities & Energy Sector

The market is pricing in a soft landing, but we see growing signs that the global economy is faltering. Investors should be defensively positioned.

The war in the Middle East is expanding, upgrading our subjective odds of a major oil supply shock to 37% and underscoring our 60% odds of Republican victory in November. Volatility should spike again as investors contemplate the prospect of rising oil prices amid slowing US and global growth. Tactically investors should stay overweight energy stocks relative to other cyclicals and favor oil producers in the Americas rather than Middle East.

Investors hope that the ECB rate cuts priced into the curve will be sufficient to achieve a soft landing in Europe. History argues against this view, but will this time be different?

Oil markets will not be impacted by Venezuela in the near term, but by shocks from the Middle East. Maduro’s ability to stay in power in the short-term removes an avenue of oil supply relief. The same avenue is cut off if Trump is reelected. Geopolitical shocks in Venezuela could present tactical buying opportunities for Chile, Peru, and Colombia.

Investors should focus on growth concerns rather than the “Trump trade.” Bond yields will fall in the short run due to cyclically disinflationary economic slowdown, rather than rise in anticipation of a Republican full sweep and inflationary policies, which are likely but not yet a done deal.

Investors should overweight US assets and de-risk their portfolios in anticipation of a major increase in policy uncertainty and geopolitical risk surrounding the US election and its global ramifications.

Don't buy the dip. The equity bull market is over. The US will enter a recession in late 2024 or in early 2025.