Goldman Says the Risk Rally Is On

(Bloomberg) -- The rebound in risk appetite can continue, according to Goldman Sachs Group Inc.

“The market is once again pricing a data-dependent Fed, the U.S. midterm elections are behind us, and we see early signs of a China-driven stabilization of EM growth,” Goldman strategists James Weldon, Matthieu Droumaguet and Charles Himmelberg wrote in a note Thursday. There’s scope for each of those factors to continue boosting investor demand for riskier assets, they said.

Goldman Says the Risk Rally Is On

Market concerns about Fed tightening have stabilized in the past two weeks, and the realization that the central bank remains data-dependent should make signs of further hawkishness easier to digest, Goldman said. If growth continues to disappoint in line with the recent repricing, the Fed will still have room to adjust the pace of hikes, the strategists added. That’s in addition to the passage of the midterm elections and corresponding removal of uncertainty, which are widely seen as positive for markets.

The Fed is expected to hold steady when it issues its interest rate decision Thursday.

In September through late October, the S&P 500 Index fell 10 percent from its record high amid concerns about Fed tightening and the pace of growth. From Oct. 29 through Wednesday, it gained much of that back, rallying about 6.5 percent. The gauge was off 0.2 percent as of 9:45 a.m. Thursday.

The U.S. isn’t the only country giving Goldman reason to see gains ahead.

Goldman Says the Risk Rally Is On

“Recent actions suggest that the Chinese government is serious about the ‘policy put,’ and our macro factor model shows early signs of a rebound in markets’ expectations for EM growth,” the strategists wrote.

They cited further loosening signals from Beijing, as well as a meeting between President Xi Jinping and a group of private-sector entrepreneurs that boosted corporate sentiment, as helping markets. President Donald Trump’s comments last week about a potential U.S.-China trade deal may be encouraging EM investors, they added.

Furthermore, the bullish narrative on commodities remains intact, according to the report. Brent crude is now oversold and there’s too much pessimism in metals given that Chinese demand remains relatively strong, the strategists wrote.

©2018 Bloomberg L.P.