Oil prices are soaring and there’s a shadow banking crisis—is the current situation more like the period before the 2008 financial crisis?

Oil prices are soaring and there’s a shadow banking crisis—is the current situation more like the period before the 2008 financial crisis?

Wall Street is trading on an unsettling macro scenario: The ghosts of 2007-2008 are returning.

According to Chase Wind Trading Desk, Bank of America Chief Strategist Michael Hartnett's latest "The Flow Show" research report points out that the current surge in oil prices and the lurking credit crisis in shadow banking are perfectly replicating asset movements on the eve of the global financial crisis: oil prices have soared 69.2% this year, commodities are up 40.8%, and major bank stocks have broken support levels.

Meanwhile, as rising oil prices tighten financial conditions, the probability of a Fed rate cut in June has plummeted from 100% to 25%, making monetary policy highly uncertain.

For investors, this means that the greatest risk has shifted from inflation to corporate earnings and the stability of the financial system. The current Bank of America Bull & Bear Indicator has fallen from a high of 9.2 to 8.7, sending out a clear "sell" signal. Investors should be alert to capital flight from financial stocks and high-yield bonds. In asset allocation, if conflict continues and triggers stagflation, commodities and high-quality bonds will outperform; but once policy shifts or a ceasefire is reached, U.S. Treasuries, Chinese equities, and small-cap stocks will be prime buy opportunities.

The Ghosts of 07-08 Return: The Deadly Combination of Surging Oil Prices and Credit Crisis

The current macro market backdrop is eerily similar to August 2007 – July 2008.

Back then, oil prices jumped from $70/barrel to $140/barrel, while the subprime crisis (BNP Paribas/Northern Rock/Bear Stearns) began to shake the markets. On July 3, 2008, oil prices peaked, and on the same day, the ECB hiked rates by 25 basis points—widely considered one of the biggest policy mistakes in history. Seventy-four days later, Lehman Brothers collapsed, and the credit crisis overwhelmed oil prices (which tumbled to $40/barrel).

Now, Wall Street is ominously trading this "07-08 simulation."

Year-to-date (as of March 2026), oil prices have jumped 69.2%, commodities are up 40.8%, while Bitcoin has dropped 20.0%. Rising oil prices are tightening financial conditions, squeezing Fed rate cut expectations out of the market. Major banks, serving as a link between Wall Street and the real economy, are seeing their stock prices break down (KBW Bank Index falling below 150), which means cyclical stocks lose support when the banking system is stressed.

Fund Flows Reveal Panic: Record Selling of Financial Stocks, Bull & Bear Indicator Peaking

Fund flow data is confirming underlying cracks in the market. Despite $13.2 billion net inflow to stocks and $3.4 billion to bonds in the past week, drastic rotation is taking place within risk assets:

  • Financial stocks see record selling: $3.7 billion capital outflows.
  • Credit market flashing red: Bank loan outflows of $2.4 billion (largest since April 2025); high-yield (HY) bond outflows of $5.0 billion (largest since April 2025).
  • Emerging market debt: $3.1 billion outflow, the largest in nearly two months.
  • Asian equities attract capital: South Korea saw a record $8.9 billion inflow; Japanese equities took in $6.3 billion, the largest since May 2013.

Due to fund outflows from tech stocks, healthcare stocks, high-yield bonds, and emerging market debt, Bank of America’s Bull & Bear Indicator dropped from 9.2 to 8.7, remaining in the "extremely bullish" zone but starting to fall, triggering a contrarian "sell" signal.

The Market's "Extreme Price": Finding Triggers for Contrarian Trades

Facing the current extreme market, Bank of America provided clear trading levels and asset allocation advice:

1. Fading strategy

Reverse trades are advised at the following key levels, as these levels will force policymakers (regarding war, oil, Fed, or tariffs) to react to save the real economy:

  • Oil price > $100/barrel
  • USD Index (DXY) > 100
  • 30-year U.S. Treasury yield > 5%
  • S&P 500 < 6600 points

 Risk-hedging and Reversal: Best “Ceasefire” Buying Targets

Bank of America believes once extreme positions and macro/financial risks force a policy reversal or bring about a ceasefire, the following assets will be the best investment choices:

  • U.S. Treasuries: 30-year yield hitting 5% is highly attractive and can hedge against recession/credit events.
  • Chinese equities: As Chinese inflation rebounds (core CPI at 1.8%, the highest since 2019), fiscal spending increases (target deficit ratio at 4%), and bond yields rise, Chinese stocks will structurally outperform bonds.
  • Consumer staples and small-cap stocks: Post-war policy will actively address cost-of-living issues, benefiting non-discretionary consumer stocks (especially those at the bottom of "K-shaped recovery") and small businesses.

Be Cautious: Script for Prolonged War and Stagflation

Currently, though the broader environment hasn't yet experienced the "bear market panic" ideal for contrarian bottom-fishing, the underlying framework is already starting to shake.

Hartnett believes investors should closely track BOA's upcoming Global Fund Manager Survey (FMS) indicators. If FMS shows cash levels exceeding 4%, economic growth expectations turning negative, and equity overweight ratios falling from 48% to below 20%, this will be the first sentiment indicator for a market bottom.

More importantly, current FMS indicators—credit default risk, counterparty risk, and liquidity conditions—are showing early deterioration reminiscent of mid-2007 (just before the full-blown crisis of 2008). Clouds of a credit storm are gathering above Wall Street.

If Middle East conflict becomes prolonged and private credit crisis fully erupts, Hartnett says asset allocation should fully follow the 07-08 stagflation playbook: Overweight commodities (oil, gold) rather than financial assets; overweight bonds rather than stocks; overweight high-quality government/investment-grade bonds rather than high-yield bonds; overweight emerging market stocks rather than U.S. equities; and use a barbell strategy of going long energy/consumer staples and shorting banks and tech stocks.

 

 

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The above content is from Chase Wind Trading Desk.

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Risk Warning & DisclaimerThe market involves risks, and investment must be cautious. This article does not constitute personal investment advice and does not take into account individual users' specific investment goals, financial conditions, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are appropriate for their particular circumstances. Investment is at your own risk.