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- [00:06]
A
Markets reacted very sharply to news of the Iran ceasefire agreement last week, only to be met with news to start this week of a U.S. blockade of the Strait of Hormuz, which is critical for global energy flows. So how are markets navigating this uncertainty and what can investors expect ahead? I'm Alison Nathan and this is Goldman Sachs Exchanges. My guest today is Dominic Wilson, Senior Markets Advisor in Goldman Sachs Research. Dom, welcome back to Exchanges.
- [00:35]
B
Thank you.
- [00:36]
A
So, Dom, we have had nothing short of a roller coaster of developments and headlines related to the war in Iran. And I have to say the most recent ones in terms of this blockade I just mentioned are not very encouraging about seeing a quick resolution to this conflict. But if you look at the markets and the S&P 500 in particular, it is pricing the just below where we were before the conflict even began. So let me just start by asking, does that surprise you at all? And is the market really underestimating the downside risk here?
- [01:10]
B
So the two parts of those questions I think are different from each other. So the first, is it a surprise? What I would say is that the thing that we've been reminding ourselves is that as you move through crises, as you move through these kinds of events, what you tend to see is the market worry a lot. And then the first stage of relief comes mostly from removing the weight that people put on the very bad tails that are out there. And so seeing a recovery period where there's a lot of things unresolved, I think that in itself is not unusual. If you think of COVID if you think of tariffs, the recovery periods often came before a lot of the worst things on the ground had happened. And I do think that is essentially what the market is doing, which is we can see that oil prices have stayed at high levels, we can see the oil flows are not yet moving, but the market has made a judgment. I think that when it looked at the distribution a few weeks ago, it could think of extraordinarily extended periods. It could think of very bad military situations. And what it's decided, rightly or wrongly, is that the track that we're on here with a negotiation ongoing, obviously nowhere near complete, is one that allows you to put a lot less weight on those very bad outcomes. And even if the medium term outlook isn't great, the fact that you can look through that weakness, even if we have temporarily weak activity, and even if that lasts for a while, is overwhelmed by the fact that your equities in particular can discount on a much longer period. I think obviously the critical issue Is are they right to make that judgment? And I would say, again, in terms of the evolution of the story, I think the direction is clearly right in my view, which is that relative to where we were a couple of weeks ago, where we had no idea whether the sides would even start talking to each other, and where the kind of military solutions that were being floated were certainly more severe than anything we've seen so far, I think we are in a better place. And I do think it makes sense that the market has put less weight on that downside tail. To the extent that I'm surprised, I'm less surprised by the recovery in the market itself. But when you say, is that risk being underestimated, that downside tail risk, I think it's got further away. It's the threshold to really shake people's confidence has risen, but there's real risk there. Right. So can we be confident that we're out of the woods on that, that some of those scenarios we worried about won't come back? And the answer is no, we can feel more confident probably than we were. And so that deep tail risk is the bit that worries me less. Where is the market here today? But what's the market vulnerability to moving back in that direction? And I think that tail, as we relax, starting to look a little bit underpriced.
- [03:48]
A
But just to be perfectly clear, I agree with everything you said, but we now supposedly have this blockade. So effectively some oil was getting through. Not a lot, very little, but some was. And now we're saying none will.
- [04:02]
B
Yeah. And I'm saying in a funny way, this is the reminder, the way that I've kind of experienced, and I think some of us have experienced this round of crisis is that in the beginning, the commodity specialists were extremely negative and. And the markets were very relaxed and the commodity specialists were effectively saying, you do not understand the consequences of this closure. And they were right. And so we went down for the first few weeks, a period of realizing, I think in market terms that there was a proper downside risk that was not being taken seriously, that this is. It's a big deal and it's not an easy problem to solve. I think what's changed a little bit, like I said at the margin, is if you told people now people know the straits aren't open, that we're going to have a few months or even where the straits are not open and oil prices continue to rise and we get economic damage from that. But on the other side of that, for sure, this problem is resolved for an equity market discounting process, you can tolerate quite a lot of short term damage. What really hurts you is your lack of confidence of what lies on the other side of it. And so I think that a little bit is the conflict between a spot market and a forward looking market. Doesn't mean the equity market's right. But it is also true that if what the market is saying is this is part of the ins and outs of a negotiation process, yes, bad, we could walk away, we'd have threats, we could have renewed conflict. But if this is ultimately something that we now feel comfortable will just lead within some number of weeks to a resolution, then the difference between that and a situation where that takes two weeks, six weeks, eight weeks for a multi year duration asset is not that big. And as I said, there's some assumptions in there, there's assumptions could be challenged. But it's what I would say is it's not as transparently crazy as I think it looks crazy, but I think some of that is the forward looking nature of the equity market. I said we looked through Covid before the case rates and the mortality rates really started rising. We had pushed that all behind us and we didn't look back. So there is that sort of tension between spot reality and the future that makes these things harder to grapple.
- [06:05]
A
Understood. It is pretty interesting to me that even though the s and P500 and the equity markets have been very resilient, if you look at the rates markets, they're pricing quite differently at this point. So what do you make of that?
- [06:18]
B
Yeah, and that is striking. I think, you know, it was right from the start of this, but still true that when we look at the rate market, it's been striking that the market has worried more about hawkish central banks in response to this than about growth. And so we had some growth worry. But when we look at our measures, the kind of most of the growth damage that people have feared sort of over the medium term, we've unwound that in this relief. But what has stuck is the notion that central banks are going to be significantly more hawkish than they were coming into this. Now some of that is because we obviously anticipate there's going to be a bulge of inflation that leads to caution, although that shouldn't make a huge difference to the medium term path. I think the history of the inflationary process that we've been through, this high inflation period that amplifies that sense that central banks will be more cautious. And some of it I think is also that the market's probably not quite in the right place to start with. We were pricing extended cuts. We had, it seems quaint now, but we were worrying about AI job losses in February and the market was expecting at that point two and a half cuts for the Fed with a reasonable degree of confidence this year. And so that was already starting to look like probably too dovish a picture, at least from our perspective. And so now we're pricing some of that out in an environment where it's easier to see that central banks will be more careful. But yeah, it is striking and it's a bit of a tension still between thinking this shock is going to be bad enough that the inflation impacts will worry central banks, but not bad enough that the growth impacts will outweigh that in other ways. And so yeah, I feel like that is one area where I'm a little surprised we've hung onto as much of that as we have.
- [07:56]
A
So you think the market has swung a bit too far and shouldn't be anticipating rate hikes to the extent that it is?
- [08:03]
B
I think, yeah, look, there's variation obviously across different countries. Europe's more likely to hike than the U.S. but I think on balance when we look at our forecast view and Jan and the team have pushed that across the range of scenarios, there are more ways that rates could end up lower than the market is pricing than higher. So the skew of forecast and the probability weighted forecast is dovish to where we are. It was much worse than this like two weeks ago. There was real stress in those front end markets. We were pricing extended hikes in Europe and real probabilities of hikes in the US that looked like really clearly stretched. Now there's more room to debate and I think a lot of central banks will find it easy just to sit back and do nothing in this environment. So anchoring on a path of nothing happens, no, rates don't go up, rates don't go down. Maybe where we end up anchoring on, which is more hawkish than where we came into this. But yeah, I would say still biases to think that the market's still on average too hawkishly priced.
- [08:58]
A
So where does that leave the dollar? Obviously just to remind our listeners, we were kind of bearish on the dollar coming into the year. Then it received a lot of support amid this conflict. Now it seems to be moving back in the weaker direction. What are you making of all?
- [09:11]
B
Yeah, it's a more complicated picture and I would say like we were bearish coming into the year but in a fairly mild way. And what we had emphasized much more than last year where we were sort of more consistently negative about the dollar was that there were going to be other things going on around the kind of FX axis that probably more important some of the cyclical and carry currencies doing well and that axis would probably dominate. We saw then February, January, February, this dollar weakness that in some ways was probably more pronounced. It was more pronounced than we had been forecasting and expecting. And now we've essentially reversed that. Right. And I think at a high level, oil shocks are doing what you would expect them to do in the FX markets. They are dollar supportive. The US stacks up well both in terms of safe haven flows, but also in terms of the side of the oil exporting profile that it has. Where we sit here, we're just a touch weaker on a trade weighted basis than we were at the start of the year. So it's not been a lot of what you've done is unwound the weakness. I think it's got more complicated. I mean, if you look there are forces in both directions. The more we deal with this oil risk, the more the terms of trade and we are expecting oil prices to stay at higher levels than they would have done for longer. That's dollar supportive. You've just reminded people that the dollar can strengthen in the face of some shocks, that in some ways is quite protective in the face of some shocks, which is something we've known from the past. But I think that lesson's been reinforced. So this notion that you hedge yourself by getting out of dollars, which is less common in fact over longer history, we've challenged that a bit. And so I wouldn't be surprised if there's just a bit more reluctance to press on that dollar weakening theme than there was before. I think the counterpart to that is that structurally, strategically, when you look over, the dollar's still a rich currency, still expensive, got a bit more expensive as we bounced here. The Fed's probably still more likely to cut than other central banks on the cyclical side, even with US growth holding up relatively well. That's certainly what our forecasts have. And questions over the strategic geopolitical shifts, some of these institutional shifts that help drive the dollar weaker, some of the AI kind of concentration related risks, those haven't gone away. So I think over the medium term that story for dollar weakness probably still intact. I do think over the short term in some ways you're providing a bit more support for the dollar than we would have anticipated if you'd come in and not had this event.
- [11:34]
A
Let me broaden out that question a little bit and talk about this narrative coming into the year, again, that there were flows out of the US and into other parts of the world, other assets globally. Where does that trend really sit amid a lot of this volatility around the conflict?
- [11:51]
B
Yeah, again, I think the honest answer is that it's complicated, that view. I don't think it's reversed it and I'm not sure that it's necessarily invalidated it. But you've had, again, a reminder of a shift that is much more damaging for some of the key non US markets, particularly non US Developed markets, parts of Europe and North Asia, than it is for the US Fundamentally. I hope they're more exposed to that. They were heavily positioned. We started having that reallocation process. So it really twisted against the dominant trend in the market. And that's obviously been painful and I think it will as a reminder of that. Particularly also because these risks are unlikely just to disappear completely, that they're going to be on the table for a while unless you get a very sharp and complete resolution of the tightness in the oil market that's going to hang over the process. And so that's going to make people, I think probably more discerning, at least in terms of where they go outside the US and a bit more reluctant to do it.
- [12:49]
A
Again, as we've discussed heading into the year, it was a lot about AI, it was a lot about thinking about labor markets. There were other themes that were really quite dominant. Are there any themes competing at all with the Iran conflict at this point? What are investors telling you that they are focused on?
- [13:05]
B
So no doubt still number one, and this is where you say, like with the tension, for all the relief we've seen in the equity market, I don't think there are a lot of people saying, we're done with this, let's move on. There are people starting to think about what they should be doing if that is the case. But I think people are still very focused on this issue. Still. The number one question is around how that works, the resolution of that. Have we resolved it, the kinds of things we've been talking about? I think the thing that those two other issues that you've mentioned are, if you'd asked me two, three weeks ago at the kind of height of the tension around this, I would have said they were just not in the conversation at all. But they've come pretty quickly back as we've started to see some recovery in markets. People are thinking more and I Would say there's a bit of a sequencing of those things. I think the private credit discussions are ongoing. They never really went away, but they fell into the background. But in terms of direct implications, I'm not sure we've learned a lot or seen a lot that is new.
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A
Right? In terms of private credit.
- [14:02]
B
Concerns about private credit, they're lingering. We continue to have people bring those on the table. We've had generally a somewhat more sanguine view of that, but that debate is still ongoing. What we have seen is that the AI theme, not just in terms of conversation, but in terms of what markets are actually doing, has come back very, very fast. So semiconductor stocks, which we had these big splits within the AI and tech universe with semis and some of the kind of memory stuff really well, software coming under pressure as people worried about this competition from the new AI applications that has come back again in force. We've had more pressure on software stocks even in this recovery period. You've had semiconductors make new highs through all the pre conflict highs. One of the parts of the market that has already made progress beyond where they were coming into it. And so that theme is back. And what we heard consistently from the franchise coming into this result consistent with that is that people liked the themes they had in their equity books and what they tried to do was protect their index exposure and their overall equity risk, but were pretty reluctant to actually move away from their core positions. And I think what we're finding is people have been pretty quick to go back to the stuff that they thought in that space was relevant. And that has been very striking.
- [15:13]
A
And so if we think about the weeks and potentially months ahead, how should investors then be navigating? Because this uncertainty is lingering. It doesn't feel like it's resolving. Maybe we're now in talks, but it's lingering. So do you expect more of the same?
- [15:28]
B
Yeah, look, I think these events are inherently complicated. We widened the distribution, we've probably narrowed it relative to where it was. But still, you know, unusually wide range of outcomes of things that can happen. In some ways, I think of it as a continuation of or a variant of what we've been saying, at least for the US coming into the year, which is you should have selective long risk and the things you like and you should be pretty aggressively hedged because there are these downside risks that are still very prominent and could easily unsettle things. And I would say as we move through this, that the approach we've had, which is easier to talk about and harder to do is that as the market moves backwards and forwards, you get an opportunity to add on one or other side of these things. If you've been relatively well hedged, as the market moves lower, those hedges start to perform for you. Start adding, thinking about adding some risk at lower prices to the things that you like. And as you move up and the market relaxes, you start thinking about whether you should add your hedges more aggressively. And so when I think of those two buckets as of now with this relaxation you said, do you think the risk is underestimated? The sense in which I think it is and what you should do about it is that I think now looking at deeper downside hedges in equities, in credit, I think that is worth doing and that people should not leave themselves unprotected against that tail. You can protect yourself against the properly bad outcomes. I think there's probably a zone where we're just going to be going up and down on negotiations, but I think there are real tail risks out there and the market has reduced its weight on those. Those are the times to be thinking about adding to those hedges and making sure you're properly protected. By the same token, I do think you have to have an eye on what happens if we're in this resolution path. I don't think giving up all of your positive risk views is the right thing to do. And as we have these sort of miniature pullbacks, then adding into things structurally that people like. You know, we've liked parts of the tech complex. We'd like some of the cyclical and commodity EM stuff, some of the, I would say places even like Japan and Korea that were doing well before and that we liked before that taking opportunity to add some of that risk back in I think is a good idea, but I would not do it if you're not also adding to that protection. I think you have to have an eye on that downside tail. And I think you have to be conscious of how whatever you own will perform if you got to that point.
- [17:44]
A
Thanks so much, Dom for giving us the update on this very fast moving situation.
- [17:48]
B
Thank you. I'm sure it'll all be different in a week or two.
- [17:50]
A
I'm sure it will too, but we'll get you back then.
- [17:53]
B
Thank you.
- [17:53]
A
And thank you all for listening to this episode of Goldman Sachs Exchanges which was recorded on April 13, 2026. I'm Alyson Nathan. If you enjoyed this show, we hope you'll follow us on Apple Podcasts, Spotify, YouTube or wherever you listen to your podcasts. And leave us a rating and a comment.
- [18:12]
C
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