As Oil Prices Jump, Energy Shares Help Fuel Market Rally

JJ Kinahan
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Without too much in the way of news on the U.S.-China trade front, higher crude prices and a rebound in chipmakers seem to be helping bring buying sentiment back to the market Thursday morning after yesterday’s tepid session.

Oil prices rose this morning on news that two oil tankers were damaged in suspected attacks in the Middle East. That helped boost shares of oil producers Exxon Mobil (NYSE: XOM) and Chevron Corporation (NYSE: CVX) in premarket trading. It may be worth monitoring the situation because if the ships were attacked, that could ratchet up tensions in the Middle East and end up weighing on stocks.

In addition to gains in the Energy sector, chipmakers are also having a good morning. Companies such as Nvidia Corporation (NASDAQ: NVDA), Applied Materials, Inc. (NASDAQ: AMAT) and Western Digital Corp (NASDAQ: WDC) took it on the chin yesterday, but an early lift could help stocks end in the green today.

Crude Oil: Inventory Overhang to Possible Supply Disruption

The move higher in oil prices is an about face from yesterday, when the Energy sector lost the most ground of the S&P 500’s (SPX) sectors, dropping 1.44% as oil prices came under pressure as weekly U.S. government crude stockpile data unexpectedly rose. Energy Information Administration data showed a jump of 2.2 million barrels. That comes a week after a 6.8 million-barrel build and a day after the EIA lowered its world demand growth forecast.

Although there are expectations that OPEC-led production limits will continue to help support crude prices somewhat, black gold has been under pressure amid worries about global demand as the U.S.-China trade war drags on.

When global growth stagnates, demand for oil can suffer as manufacturing slows down, transportation of goods dips, and people travel less for business. At the same time, everyday consumers can end up spending less at the pump and use the money for buying other things, providing a cushioning effect.

But a potential supply disruption could mean a change in the fundamental outlook for crude oil. This is something to keep an eye on in coming days.

Quiet Day on the Trade Dispute Front

On the China tariff front, President Trump said late Wednesday he didn’t have a deadline for putting additional tariffs on Chinese goods other than what is in his mind. The president may meet with Chinese President Xi Jinping later this month at the G-20 summit in Japan. The news flow about the trade situation between the world’s two largest economies could pick up around that time.

But other than that, there wasn’t much new on the China-tariff front. While the spat between the world’s two largest economies continues to be the biggest overhang casting a shadow on the market, investors are gearing up to focus on the Fed rate decision next week.

Financials Falter

Financials sector shares came under pressure Wednesday amid expectations for a softening in Fed monetary policy. Banks tend to do better when interest rates are higher, so the prospect of a rate cut seems to be pressuring the Financials sector.

Amid worries about the global and U.S. economies, investors have been increasingly expecting the central bank to cut interest rates this year. And economic data out Wednesday backed that up.

The May consumer price index (CPI) looked relatively benign, similar to producer prices the previous day. May CPI rose 0.1%, in line with Wall Street’s expectations. Core CPI, which strips out food and energy, also rose 0.1%, a bit below the average analyst estimate.

Neither of these data points would appear likely to stand in the way of a potential Fed rate cut. (See more on the Fed below.)

In economic news this morning, initial unemployment claims were slightly higher than expected. That comes a week after private sector employment figures were softer than expected and the government’s nonfarm payrolls report came in well below what was forecast. With that backdrop, investors might want to continue keeping an eye on jobless claims over the next couple weeks.


FIGURE 1: VOLAT-OIL. Oil prices fell 4% Wednesday as U.S. crude inventories rose. That came against a backdrop of the U.S government lowering its world demand growth forecast. But in the early hours of Thursday, reported explosions on two oil tankers in the Middle East sparked fear of a supply disruption, sending crude up 4% in early trading. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Flying Low: Boeing Co’s (NYSE: BA) troubled 737 Max program arguably has overshadowed the company’s status as a proxy for what’s going on with trade relations between the United States and China. One reason for this proxy status is that Boeing sells a significant number of planes to China. But it’s also exposed to shifting sentiment about the global economy in general. This week, BA said that net orders remained in negative territory, with a total of minus 125 net orders for the first five months of the year. While it wouldn’t be the only issue behind the low order count, it seems likely that some companies may be holding off on ordering new planes due to uncertainty surrounding the U.S.-China tariff situation. It’s notable that BA competitor Airbus only had one aircraft order in May, a possible indication that customers are keeping their powder dry until some clarity emerges on a possible trade deal.

Cisco on the Prowl?: Cisco Systems, Inc. (NASDAQ: CSCO) was in the news Wednesday after William Blair cut its rating on the multinational technology conglomerate, citing “signs of tightening demand” in information technology infrastructure. With this atmosphere of tightening demand against a backdrop of relatively low interest rates and Cisco’s more than $10 billion in cash and cash equivalents, it seems logical that the company might want to continue expanding with M&A activity, perhaps to boost its software business.

Fed Ahead: Looking ahead to next week, investors will probably be paying close attention to the Fed’s meeting. While most traders don’t expect the Fed to lower rates next week, there are expectations that the central bank may shift its wording to indicate a slightly more accommodative outlook. Still, the futures market does show about a 20% chance of a rate cut next week. “The outcome of the upcoming FOMC meeting could disappoint some should the Fed not cut rates but should offer the encouragement of a statement that implies a more accommodative stance,” according to investment research firm CFRA.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

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