Energy Stocks May Be In Focus As Oil Rises After OPEC+ Doesn't Agree On Output Increases

Now that the fireworks have fired and the flags are furled, it’s time to get back to the business of business and markets.

As this post-Independence Day week dawns, it’s looking like crude oil and energy stocks may be a prominent feature of today’s trading. The U.S. benchmark hit a six-year high above $76 per barrel after OPEC and its oil-producing allies couldn’t agree on production increases at a time when the global economy is getting back on its feet.

If the rise in oil prices is sustained, that could raise gasoline prices during the summer driving season here at home, putting further upward pressure on inflation and pressuring business margins and household budgets. That wouldn’t be good for Consumer Discretionary stocks like retailers, and of course, rising oil prices won’t be welcomed by heavy fuel-using companies like airlines, manufacturers, and parcel delivery services.

But the higher oil prices are good for oil producers, and energy stocks including ConocoPhillips COP, Occidental Petroleum OXY, and APA Corp. APA were seeing decent gains even as futures were indicating the major indices might open close to unchanged.

In other commodity news, gold prices rose back above $1,800 as a weakening dollar helped the precious metal. News from the World Gold Council that central bank gold purchases in May were 43% above their year-to-date monthly average also helped gold regain the $1,800 level.

Although it’s a short week, now that the holiday is behind us investors may start putting on their summer positions this week. Without a lot in the way of guidance from economic data, they may see now as a good time to position themselves for how they see the global economy playing out and what they think corporate earnings might do over the coming weeks.

As we head into a more realistic trading environment, compared with the pre-holiday market, you may want to keep an eye on the Cboe Volatility Index (VIX). It’s up a tad this morning but still under 16.

Jobs Numbers Before A Holiday

Last week ended on a high note with a better-than-forecast employment situation report that showed 850,000 new jobs in June, a solid sign of economic growth continuing as the U.S. reopens.

But with unemployment at a high-ish 5.9% and initial weekly unemployment figures still on the worrisome side, it seems investors and traders are banking that the Fed will keep its ultra-accommodative stance for a while longer, complete with asset purchases and a low policy interest rate.

This kind of harkens back to the Goldilocks scenario of yore. Back then, we were talking about solid economic growth and low inflation. Now we’re talking about solid economic recovery, inflation the Fed expects to be transitory, and a central bank that’s being quite helpful to equities.

With expectations of an accommodative Fed, yields on the 10-year Treasury note and the 30-year Treasury bond dipped on Friday. That put some slight pressure on the Financials sector even as the lower inflation expectations reflected in those yields helped boost mega-cap growth stocks. Information Technology shares led the way higher, followed by Consumer Discretionary names and the Communication Services sector. 

The Week Ahead

This week is pretty light on the economic front. Probably the biggest event of the week comes tomorrow with Fed minutes from its last meeting. 

Last time, the Fed threw a bit of a curveball when it talked about possibly getting more hawkish. The minutes could give us more of a behind-the-scenes look at what Fed officials discussed. 

In earnings news, it may be worth your while to tune in when Levi Strauss LEVI, a reopening play, opens its books on Thursday after the close. The denim jeans maker is far from distressed these days. Shares are up more than 26% so far this year as of Friday when they closed at $27.46, well above the pre-pandemic 2020 high. 

Last time around, the company raised its fiscal first half 2021 reported net revenues outlook to 24%–25% growth vs. the first half of 2020. So investors may have high expectations for this week as the retail company recovers along with the global economy. 

It could be interesting to see how the company continues to manage its e-commerce business, as retailers who do better with direct-to-consumer sales may stand a better chance as brick-and-mortar wanes, a trend that seems likely to continue well into the post-pandemic “new normal.” 

CHART OF THE DAY: Although they have been creeping up lately, gold futures (/GC) are markedly off from where they started the year. The market for the precious metal may be reflecting the view that inflation we’re seeing now will be transitory. See more on gold below. Data source: CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Gold Loses Luster Despite Inflation: Amid all the inflation talk as the prices for raw materials like lumber, iron ore, oil, and copper rise, there’s at least one commodity that has been noticeably absent from the rally—gold. Old-school investors might find this surprising as gold historically has been considered a hedge against inflation, the thinking being that it will hold its value better than other assets over time.

But after starting the year above $1,900 per ounce, the precious metal is now trading around $1,800. In the big scheme of things, that’s not a huge drop in gold prices, which can be quite volatile. But with the inflation background, it is something of a head-scratcher. “Perhaps gold is struggling because the market sees inflation as transitory,” Peak Capital Management said in a note. “Likewise, investors might be favoring other assets like bitcoin or commodities in high demand (metals, oil) to hedge inflation.”

Factory Orders Upbeat: With economic news on Friday dominated by the stronger-than-forecast jobs report, you could be forgiven for missing the factory orders report. While it’s generally a lower-priority affair in terms of trading importance, the report last week showed another sign of an improving economy. May orders for manufactured goods rose 1.7%, in line with a Briefing.com consensus expectation. It represented a strong turnaround from the previous month’s decline of an upwardly revised 0.1%.

“The key takeaway from the report is that orders for manufactured goods bounced back quickly following a small decline in April that was the first decline in 12 months, implying that the April dip was a normal slowdown after a hot streak and that manufacturing activity is still running at a good recovery clip,” Briefing.com said.

Higher Times For Cannabis: Although cannabis stocks are still doing pretty well overall this year, they were much higher toward the beginning of 2021. At that time, it seems that investors thought there was more momentum for federal legalization than they’re thinking at the moment. Still, the New Cannabis Ventures Global Cannabis Stock Index is up nearly 30% year to date, and the cannabis news and information provider said in a note that market drivers remain robust. Those include expanded access to capital, new public companies, accelerating mergers and acquisitions, a bigger pool of investors, market share gains for state-legal markets versus the illicit market, more states legalizing through the legislative process, progress at the federal level, an improving Canadian market, and an increasing focus beyond North America.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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