Oil fracking rig at sunset ©Adobe Stock Images
Interest rates and energy prices are again playing a larger role in equity-market performance as investors assess monetary policy, inflation data and geopolitical developments, according to Barclays strategists.
Oil prices have risen amid the continuing U.S.-Iran standoff, while European gas prices have climbed to their highest levels since early 2023. They remain below the peaks reached during the 2022 Russia-Ukraine energy shock.
A Barclays team led by Emmanuel Cau said prolonged higher energy prices are adding to inflationary and interest-rate pressures. Markets are currently assigning roughly a two-thirds probability to a Federal Reserve rate increase in September following persistent inflation and hawkish remarks from Kevin Warsh at Jackson Hole.
Barclays economists have also changed their forecast, projecting two additional Fed rate increases during 2026, with moves expected in September and December.
The European Central Bank is expected to increase rates once more during September. However, the strategists said “upside risks increase if energy prices stay higher and stagflation concerns rise.”
At the same time, Barclays said a substantial amount of hawkish monetary policy expectations already appears to be reflected in markets. Signs of moderation in U.S. economic activity mean the payrolls report and the following week’s CPI data will provide additional information on the economic and policy outlook.
The strategists said earnings have helped equities absorb tighter financial conditions, but the effect of the second-quarter reporting season is diminishing.
“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,” they wrote.
Barclays pointed to several potential market catalysts during the autumn, including central bank decisions, the U.S. midterm elections, Xi-Trump talks and geopolitical developments. Against that backdrop, the strategists said hedging and some tactical reduction in beta exposure “appears prudent.”
The team nevertheless maintained a supportive broader outlook through the end of the year, subject to interest rates and oil prices stabilising.
Barclays also assessed the potential market implications of progress towards a Russia-Ukraine truce. The strategists said the recent rise in European gas prices has paused the broadening of the region’s equity market performance and that credible movement towards an agreement could be welcomed by European markets, even without a final settlement.
“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.
Under that scenario, Barclays said energy, utilities and other defensive sectors could underperform.