Global shares hover near record highs as rising COVID cases and a slew of economic data leaves investors cautious

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  • Global shares remained near record highs despite COVID-19 cases continuing to rise.
  • US inflation, Chinese quarterly economic data and Jerome Powell’s semi-annual testimony to Congress are in focus.
  • Growth in Japan’s machinery sector boosted Asian stocks as it indicated sustained economic recovery.
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Global shares were mixed on Monday, with economically sensitive sectors such as energy and banking under pressure, while more defensive parts of the market such as healthcare rose, as as COVID-19 cases linked to the delta variant continued to rise and bring renewed lockdowns.

Key data on US consumer inflation and regional manufacturing activity along with Chinese economic growth could provide a steer on how much the resurgence of COVID-19 is impacting the global recovery.

Federal Reserve Chairman Jerome Powell will also deliver his semi-annual testimony on the state of the economy to Congress this week, while the European Central Bank will revise its current monetary policies, which investors are expecting will provide them with guidance on growth and inflation in the eurozone.

US futures were a mixed bag, as Dow Jones futures dipped by 0.29% and S&P 500 futures were down 0.19%, while Nasdaq futures were up by 0.11% at 04:30 am E.T. on Monday.

“In the US, CPI data tomorrow will tell us whether we did indeed see the peak in inflation in May – our economists think we did, forecasting a slowdown in headline CPI from 5.0% to 4.8% in June, potentially putting a cap on Fed rate expectations for now.” ING analysts said.

The yield on the US Treasury 10-year note was last at 1.333%, down by 2.3 basis points, reflecting a degree of investor demand for so-called safe haven assets.

Rising COVID-19 cases linked to the Delta variant are also weighing on global markets as they signal a potential delay in post-pandemic economic recovery.

“We’re also seeing higher case counts in the UK, US and Europe, which could also add to the uncertainty,” Michael Hewson, chief market analyst at CMC markets said. “The lower vaccination rate in Europe could prove problematic in the days ahead,” he added.

European stocks dipped on Monday. Frankfurt’s DAX was last down 0.14%, while London’s FTSE 100 dipped by 0.56% and the EuroStoxx 50 index of top eurozone stocks was 0.25% lower.

The European Central Bank might announce revisions to its monetary policy at its meeting this week, but will not end its post-pandemic recovery program, ECB President Christine Lagarde said on Bloomberg TV.

Asian markets were boosted by Japanese machinery orders rising for the third consecutive month in May and the country posting higher than expected producer price index readings on Monday. The data releases boosted investor confidence in the economy recovering despite a rise in COVID-19 cases in the region.

Tokyo’s Nikkei 225 rose by 2.25% in response and pulled shares across the region up with it as the Shanghai Composite closed 0.67% higher and Hong Kong’s Hang Seng index rose by 0.65%.

The energy sector broadly declined on Monday. OPEC+ reached no agreement on production and abandoned a planned meeting last week, which has raised concern that the group could splinter and raise output at will. Brent crude futures were last down by 1.19%, trading for $74.65 per barrel, while WTI crude fell 1.17% to $73.69 a barrel. Natural gas was last trading 1.06% lower, while heating oil declined by 1.35%.

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Stock investors are poised to miss out on soaring oil prices with energy only making up 2% of portfolios, BofA says

FILE PHOTO: A section of the BP Eastern Trough Area Project (ETAP) oil platform is seen in the North Sea, around 100 miles east of Aberdeen in Scotland, Britain, February 24, 2014.    REUTERS/Andy Buchanan/Pool/File Photo
An oil platform stands in the North Sea in Scotland.

  • The energy sector has a low weighting in most long-only investment portfolios, according to Bank of America.
  • Low exposure to energy will mean many investors will lose out on potential gains to be made as oil prices rise.
  • The energy sector is up about 45% this year compared with the S&P 500’s roughly 13% gain.
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Oil prices are primed to push higher in the near term but many investors may miss out on building wealth from those moves because most portfolios have very low exposure to the energy sector, according to Bank of America.

Supply constraints and growing demand for oil as coronavirus vaccinations allow more people to return to work and travel are factors that will contribute to drawing up the commodity’s value and build on price gains of at least 40% this year for both Brent crude and West Texas Intermediate crude.

The impact of the upside risk, however, may bypass numerous investors as the energy sector has 2% of an average long-only portfolio manager’s weight. This “paltry” level is about half as much as the 4.2% exposure to tech-behemoth Facebook, said Savita Subramanian, head of US equity strategy and quantitative strategy at BofA Securities, in a note published Thursday.

“Not owning Energy wasn’t painful when the sector was <2% of the S&P 500,” she wrote. “But the astronomic 92% price return since October has bumped Energy’s weight to 3%; another big move in oil may be felt more acutely.”

The energy sector collapsed in 2020, losing nearly 40% as oil prices briefly dropped into negative territory in a market rocked by a plunge in demand due to the coronavirus pandemic. The sector, along with oil prices, managed to dig out of the red in part as OPEC and its allies cut production to address the buildup in oil stockpiles.

The energy sector this year has gained 45% compared with the S&P 500 index’s nearly 13% rise to record highs. Brent crude and WTI prices over the past 12 months have run up by nearly 90% and 95%, respectively, leaving Brent to fetch more than $72 a barrel, and WTI to trade above $70 a barrel.

“If Energy doubled again, and all other sectors saw average returns, investors with no Energy exposure would sacrifice a full 3 percentage points of alpha,” or returns above a compatible benchmark index, wrote Subramanian. Losing out on 3% would more than obliterate relative gains of 0.59% this year, she said.

Meanwhile, ESG funds centered on environmental, social, and governance issues such as clean energy stand to underperform even more given their 70% underweight in the sector, said the strategist.

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Oil stocks gain after OPEC production plans signal bullish outlook for global demand

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  • Shares of companies tied to the oil sector rose after OPEC + agreed to gradually ease production cuts, signaling a bullish outlook for global demand.
  • The energy sector fund XLE rose 3%, while some oil exploration & production companies rose as much as 12%.
  • Oil prices also neared two-year highs on Tuesday.
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Shares of companies tied to the oil industry rose on Tuesday after OPEC+ agreed to gradually ease production cuts and Saudia Arabia’s energy minister signaled a bullish tone about the global recovery.

At a meeting on Tuesday, the group confirmed its plan to continue to raise production only gradually over the coming two months, implying no change in their current policy.

“The demand picture has shown clear signs of improvement,” Saudi Energy Minister Prince Abdulaziz bin Salman said at the meeting, according to Bloomberg News.

The news that supply will only rise slowly pushed the Energy Select Sector SPDR Fund (XLE) over 3% Tuesday. Exxon Mobil rose as much as 3.9%. Exploration and production companies climbed, with Marathon Oil Corporation and Devon Energy Corporation both climbing over 12%. Pioneer Natural Resources gained 5%.

The energy sector has outperformed the S&P 500 and is the best performing sector in the last month and in all of 2021. XLE is up about 42.4% year-to-date, compared to the S&P 500’s gain of nearly 12%.

Bullish news from OPEC+ also lifted oil prices near two-year highs on Tuesday. Brent crude was trading around $70.17 per barrel at 12:51 p.m. E.T. Tuesday was the first time prices have risen above the $70 mark since March.

OPEC and its non-OPEC partners agreed to stick to the plan first made in April, where 2.1 million barrels per day of supply will be brought back to the market by July, Bloomberg said.

Fundstrat’s Tom Lee said the energy sector is his top sector pick, and one that is a “contrarian” group given widespread skepticism from Wall Street.

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