(March 13): The spike in oil prices and growing concerns around private credit are causing market activity to resemble the lead-up to the global financial crisis, according to Bank of America’s Michael Hartnett.
The strategist flagged how oil doubled to US$140 a barrel by August 2008 from US$70 in July 2007, accompanied by the start of the “subprime tremors” that engulfed the likes of Northern Rock and Bear Stearns. The Iran war that erupted Feb 28 has pushed oil prices more than 60% higher this year.
“Asset performance in 2026 is more ominously close to price action seen from mid’07 to mid’08,” Hartnett said in a note. Wall Street is “ominously trading ‘07-’08 analog,” he added.
Worries are increasing around banks’ exposure to private credit, an asset class grappling with fund redemptions, scrutiny of underwriting standards and the impact of artificial intelligence on some borrowers. At the same time, soaring energy costs caused by the Iran war are driving fears of stagflation, where increasing price pressures force central banks to raise interest rates, just as economic growth stalls.
The Middle East conflict and its impact on inflation risk pushing the European Central Bank to raise interest rates sooner than anticipated, Governing Council member Peter Kazimir said earlier this week.
Hartnett noted that an ECB rate hike in July 2008, on the same day oil prices peaked, turned out to be “one of the greatest policy mistakes of all time.” The ECB was then “forced” to cut by 325 basis points 74 days later as “credit trumped oil,” with the collapse of Lehman Brothers and oil’s plunge to US$40 a barrel.
See also: Asian stocks track US declines with oil in focus
For the moment, the market consensus is still pricing a conflict in Iran that won’t be long and that the issues in private credit aren’t systemic, according to Hartnett. This is encouraging continued bullish positioning as investors bank on their view that “policymakers always ride to Wall Street rescue.”
The bigger risk to stocks from climbing oil prices and tightening financial conditions lies in earnings, rather than inflation, according to Hartnett. He recommended selling oil above US$100 per barrel, 30-year Treasuries above 5% and the dollar when the index spot is above 100, and the S&P 500 under 6,600. The 30-year yield was at 4.89% on Friday, while the dollar gauge was at 100.18, the highest since November and the S&P 500 closed last at 6,673.
Separately, BofA’s Sebastian Raedler told Bloomberg Television that he sees “a lot of rumblings in the credit sector, which I would say, there are some parallels to 2007.”
Uploaded by Magessan Varatharaja
