Daily Brief - Fueling the Fire

TLDR: Yesterday's brief highlighted how a third consecutive month of elevated inflation could be bad news for this market. Now we add rising oil prices to the mix.

West Texas Intermediate (WTI) is witnessing a notable increase, jumping above $86 a barrel on Wednesday. This surge is a part of a larger trend, with oil prices ascending approximately 22% in 2024, largely influenced by the mounting geopolitical risks in the Middle East.

Before this uptick, WTI was trading relatively stable at around $85 a barrel, with a stronger US dollar and growing US stockpiles exerting downward pressure on oil prices. However, the recent geopolitical events have shifted market dynamics, pushing prices upward.

Moreover, the oil market's dynamics have been influenced by OPEC+ supply cuts, adding another layer of complexity to the price movements. The forthcoming monthly reports from OPEC and the International Energy Agency are highly anticipated, as they are expected to provide a comprehensive view of the market outlook and further guide investors and traders.

The surge in oil prices is not just a matter of energy markets but also has broader economic implications. Notably, it further complicates the Federal Reserve's decision-making process, as higher oil prices can stoke inflationary pressures, posing yet another challenge to monetary policy adjustments.

Scenario Spotlight: Impact of high yields and oil prices on SPX

The chart above shows the historical 1 week response from the S&P 500, in the past 2 episodes when oil prices have been above $86/barrel and the US 10Y yield has been above 4.5%. Yikes!

Market Movers: When oil prices and yields are high

Here are the historically best and worst performing US sectors:

The top 3 performing assets on a 1-month horizon:

1. S&P Media: 3.71%
2. S&P Utilities: 1.71%
3. S&P Software: 1.57%

The bottom 3 performing assets on a 1-month horizon:

1. S&P Autos & Components: -11.03%
2. S&P Semi Select Industry Index: -9.30%
3. S&P Oil Equipment: -7.82%

Asset Spotlight: Utility Sector Idea: DTE Energy

Valuations indicators for DTE Energy are at a recent low and historically, this led to a median increase in the stock's price over the following 6 months, based on 9 similar occasions.

DTE Energy, based in Detroit, Michigan, is a diversified energy company engaged in the generation, distribution, and sale of electricity and natural gas.