WTI trades above USD 50/bbl for the first time in a month.
Hawkish BoE statement issued after its September meeting triggers a GBP rally and selloff in UK equities.
Recovery in oil prices continues
After reaching a level as low as USD 46/bbl at the end of August, WTI continued to recover and traded at levels last seen in May. While oil demand from refineries seems to be less affected by the hurricane season than initially feared, yesterday also brought a positive revision to demand estimates by both the International Energy Agency and OPEC.
These new demand estimates appear to partly explain the latest move higher in oil prices. In addition to the healthy demand backdrop, prices also received support from a report that OPEC members are considering extending their supply cuts past the currently agreed deadline of March 2018. We continue to believe that within commodities the energy sector will outperform. One sector which continued to suffer in the commodity complex is industrial metals. Copper prices have now lost 5% in the past five days, and weaker-than-expected activity data in China did not help sentiment yesterday.
One beneficiary of the move in the oil price is the energy sector. It was the best performing sector, both in Europe and in the USA. We believe that energy equities have the potential to further outperform global equities. In addition to better revenue, companies have been cutting costs aggressively, which should ultimately improve earnings.
A hawkish BoE impacts the GBP and UK equities
While the Bank of England (BoE) kept its interest rate unchanged with a split vote of 7–2, the bank also mentioned in its statement that some withdrawal of monetary stimulus might be appropriate over the coming months. This hawkish statement saw the GBP rise more than 1% against most other currencies. It also triggered a selloff in UK equities. While other equity markets in Europe were mostly unchanged, the UK lost more than 1% on Thursday. As about 80% of FTSE 100 company revenues are generated abroad, a stronger GBP has a negative impact on earnings.
The Credit Suisse Investment Committee took a negative view on UK equities last Thursday, specifically due to the prospect of a more hawkish BoE statement as well as the higher risk of a softer Brexit. Elsewhere in the forex markets, the SEK appreciated as a large drop in the unemployment rate underlined the strength of the Swedish economy. We continue to expect the SEK to appreciate.