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Why Oil Price Spike Is Helping Stock Prices Rebound

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May. 11 2018, Published 7:10 a.m. ET

Oil price spike is helping global market rebound

Global markets (ACWI) seem to be ignoring the Iran deal exit for now despite the possibility of risk escalation in the Middle East. Iranian President Hassan Rouhani was reported to have said that Iran doesn’t in any way welcome new tensions in the region. This statement could have provided some relief to anxious investors who were worried about an increase of risk aversion in the global markets.

The only negative outcome so far was the sudden spike in crude oil prices, which shot up to a 3.5-year high of $77.00 on the day the US announced it would exit the deal. This increase in crude prices had a positive impact on energy stocks. On Thursday, Bank of America released a report projecting that oil would reach $100 per barrel in the next year. We could see similar projections and energy sector growth in the upcoming months.

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Energy stocks leading markets higher

The uptick in energy stock prices helped the rebound in global indexes with the MSCI World equity index (IXUS) moving into positive territory after the slump in February and March. The MSCI world equity index’s (ACWV) rebound was fueled by the increase in energy company stock prices around the world. The SPDR S&P 500 (SPY) ETF is now in positive territory with a year-to-date return of 1.9% with help from rising energy stock prices. The SPDR S&P 500 Energy Select Sector ETF (XLE) has appreciated 14.9% in the last three months.

An additional boost from US economic data

The US indexes received a further boost on Thursday, as US April inflation rose less than expected at a monthly rate of 0.2%, which brought the annual growth rate to 2.4%. This lower CPI print coupled with weaker payroll and average hourly earnings data last week reduced the odds for a faster rate hike pace, giving some respite to rate hike fears. All these factors gave equity market investors sufficient reasons to pile on risk. In the next part of this series, we’ll analyze how the US bond markets reacted to the Iran deal exit by the US.

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