Historically, geopolitical issues haven't mattered longer-term for equities; we get knee-jerk reactions but things sort out. Is this time different?
Romaine Bostick
Venu Krishna
I think so. The risk is likely higher. This conflict has expanded beyond a narrow target. The risk that it spreads more affects the oil markets, affects the whole Middle East.
We see a direct correlation: energy prices and yields drift higher, then we see a drop in stocks. What does that tell us?
Romaine Bostick
Venu Krishna
You have to watch oil right now. Already the rates market is repricing the cuts we assumed this year. The concern is about the inflationary impact.
Where does this leave energy equities? The knee-jerk reaction was to buy energy stocks. Is that not the trade going forward?
Katie Greifeld
Venu Krishna
The challenge is the energy sector is outrunning fundamentals right now. It's also difficult to fight the tape because the sector has seen significant outflows but recently strong inflows.
Could this conflict throw a wrench in European stock outperformance, given Europe is more dependent on Middle East energy?
Katie Greifeld
Venu Krishna
Absolutely. That is the trade we recommended this week. The US is a net exporter of oil and relatively immune. It's exactly the opposite for Europe.