From Steven Vannelli, CFA: We expect momentum in the energy sector and resource-related currencies to continue into 2018. In this mid-quarter update to investors, we analyze what this means for the market.
In summary, Oil prices are testing resistance, and if they can break out, there is significant upside. Note that oil prices do well when the US Dollar declines. As a result, traders are bullish on crude. Now higher US production is occurring alongside falling inventories. US producers appear to be winning the shale war.
As inventories normalize, prices should rise. Rising oil prices are detrimental for the relative performance of certain geographies and sectors.
Specifically, Rising oil prices are good for both developed and emerging market energy companies, causing stock prices to rise. Globally, the energy sector outperforms the broader equity market when crude prices are rising. This explains why the relative performance of the energy sector globally is flat to up since June.
There are numerous names in both the developed and emerging markets where the relative performance is over 80% correlated to oil prices and relative prices are not making new lows.
Across the world, there are numerous currencies that have a correlation of greater than 80% with oil prices. Thus, we expect momentum in the energy sector and resource-related currencies to continue into 2018.
Download the complete set of slides here: Special Report on the Energy Sector.
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The Energy Select Sector SPDR ETF (XLE) was unchanged in premarket trading Friday. Year-to-date, XLE has declined -6.88%, versus a 19.95% rise in the benchmark S&P 500 index during the same period.
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