(Bloomberg) –Global markets may be getting too relaxed about downside risks related to war in Ukraine, strategists at Goldman Sachs Group Inc. said, warning that current prices no longer reflect more negative scenarios.
The recent outperformance of European assets and a reversal of sharp gains for oil prices “points to a significant relaxation in the market’s assessment of the global implications” of the invasion, strategists Dominic Wilson and Vickie Chang wrote in a note. Assets are now “more vulnerable if progress toward a resolution proves fleeting or if energy supplies are disrupted more severely.”
Europe’s benchmark Stoxx Europe 600 index is close to erasing all of the losses sustained since Russia’s invasion of Ukraine on Feb. 24, while the S&P 500 is now trading higher than where it closed on the eve of the attack.
Under Goldman’s downside scenario, a severe disruption in gas flows from Russia could shave off 2.5 percentage points from European gross domestic product and 0.25 points from U.S. economic output this year. According to the strategists, a deterioration of the conflict could push the S&P 500 to 4,059 index points — a drop of almost 8% from Thursday’s close.
“Our downside case is no longer well reflected in many areas and it is now easier to identify potential hedges than it has been for several weeks,” the strategists said. Adjusting for options volatility, long oil positions stand out, while European assets now screen more favorably too as downside tail hedges, they said.
Highlighting the contrast between sanguine markets and risks from the conflict, the U.S yesterday warned that Russian President Vladimir Putin may go as far as threatening to use nuclear weapons if stiff Ukrainian resistance to Russia’s invasion continues. Europe’s Stoxx 600 opened little changed.
Barclays Plc strategist Emmanuel Cau agrees with Goldman. “More substantial progress may be needed for the risk-on move to persist,” he wrote in a note to clients. “Even if a truce were to happen soon, it is unclear whether sanctions on Russia will be lifted immediately. So the negative impact on growth and higher inflation will still materialize.”
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