Equity markets have shifted back toward a greater sensitivity to interest-rate expectations and fluctuations in energy prices, according to strategists at Barclays. The bank argues that the Federal Reserve’s path and developments in oil and gas markets are likely to be the dominant influences on market direction during a September notable for multiple potential catalysts.
Oil has risen amid ongoing tensions between the U.S. and Iran, while European natural gas prices have climbed to levels not seen since early 2023, though they remain significantly below the surges recorded during the 2022 energy shock tied to Russia’s invasion of Ukraine. Barclays’ team, led by Emmanuel Cau, says persistent and higher energy prices are reinforcing upward pressure on inflation and, by extension, interest rates.
The strategists note that, in the wake of hawkish commentary such as Kevin Warsh’s remarks at Jackson Hole, markets are pricing roughly a two-thirds chance of a Fed rate increase in September. Barclays’ own economics team has adjusted its projection to call for two additional rate hikes this year, penciled in for September and December.
European policy is moving in a similar direction: the European Central Bank is expected to deliver another hike this month. Barclays warns, however, that there are upside risks to that path if energy prices remain elevated and stagflation worries intensify. At the same time, the bank observes that a considerable measure of hawkishness already appears to be reflected in prices, citing emerging signs of softer activity in the U.S. and identifying the upcoming payrolls report and the following week’s consumer-price index release as important tests of that view.
Strong corporate profits have so far provided a counterweight to tighter financial conditions, the strategists say, but that cushioning effect is losing force. Barclays writes that the Q2 earnings tailwind is largely behind the market and macroeconomic variables are regaining influence. As a result, equities have become more responsive to movements in rates and oil volatility than they were during the earnings-driven stretch earlier in the summer.
Looking ahead, Barclays highlights a crowded autumn agenda that could increase market volatility: further central bank decisions, the U.S. midterm elections, prospective talks between Xi and Trump, and persistent geopolitical tensions. Given that environment, the strategists recommend that investors consider hedging and perhaps modestly trimming beta exposure as a tactical measure, even while the broader end-of-year outlook stays supportive if both rates and energy prices stabilize.
On the specific subject of the Russia-Ukraine conflict, Barclays points out that the recent spike in gas prices has interrupted Europe’s equity broadening trade. The bank says any credible progress toward a truce - even if it falls short of a final settlement - would likely be greeted positively by European markets. In that scenario, cyclical sectors would probably benefit initially, with Autos, Materials and other energy-intensive industries improving as energy-cost dynamics ease. Infrastructure and Industrial names could also gain from rising expectations around eventual reconstruction in Ukraine. Conversely, Energy, Utilities and other defensive sectors might lag in such an environment.
Contextual note: The bank’s analysis frames rates and energy as the principal levers for market direction in the near term, with earnings support weakening and a cluster of macro and political events poised to test investor positioning.