Markets are pricing in Goldilocks. Deutsche Bank asks what could go wrong

Deutsche Bank issued a note to clients on Monday, cautioning that current market pricing rests on an optimistic set of assumptions. Macro strategist Henry Allen warned that the balance leaves virtually no margin for error. Risk assets are soaring, with global equities hitting new records, and financial markets anticipate central banks will soon complete their rate hikes. Commodity markets also view supply shocks as contained, according to Allen.

The investment bank painted two scenarios. If growth remains robust, financial conditions are expected to ease further, putting pressure on central banks to raise interest rates more aggressively. Bloomberg's index of U.S. financial conditions has recently reached its most accommodative level since 1996, while most major economies still have headline and core inflation above target. Markets are pricing in just a single Fed hike, a scenario that has historically been rare.

However, if growth slows, the support for risk assets would fade, Allen noted. Deutsche Bank stated that this doesn't necessarily imply a recession, pointing to past episodes where slowdowns alone triggered market repricing, such as the corrections in 2015-16 and the 2022 bear market. The bank emphasized that supply shocks only exacerbate the issue, with oil prices currently below recent peaks and the futures curve sloping lower despite the Strait of Hormuz remaining blocked. A fresh shock could potentially hit equities and bonds simultaneously, according to Deutsche Bank.