By Our Correspondent

NEW YORK: Stocks will take their cues from the oil market next week as unrest rumbles through the Middle East. But so far, equity investors are sanguine, believing the economic recovery wins the day.

Reuters reported on Saturday that sentiment was driving large daily swings as traders vacillate between the fear that oil prices will hit consumers and derail the recovery and the euphoria that the United States labour market is turning a corner.

Reports of escalated fighting in Libya and protests in Bahrain, Yemen and top oil-exporter Saudi Arabia rattled investors on Friday: oil rose, equities fell.

“We are in such a sentiment-driven market right now and everyone is watching the equity market with one eye and oil and commodity markets with the other,” said a senior trader at Wedbush Morgan in Los Angeles, Michael James.

Some hedge funds are trading the inverse correlations between oil and equities that have grown in recent weeks, while other investors are shifting their exposure to oil stocks and paring back in overvalued areas of the market.

Through it all the Standard and Poor 500 is down less than two per cent from a near three year high hit in late February, which even bears concede is a remarkably robust performance. For the week stocks ended flat.

So far, the trade seems to be a reallocation of risk within equities rather than a move out of stocks altogether.

Zahid Siddique, a portfolio manager at the Gabelli Equity Trust, has used the turmoil as a chance to raise his exposure to energy stocks, which have surged with oil prices.

The S&P energy sector has risen by 10 per cent since the middle of January when troubles in the Arab world broke out. Since then, the wider market has crept up by just a fraction of that. Over the same period Brent crude oil rose by nearly 18 per cent to over $116 per barrel.

“These type of crises make you refresh your portfolio and just take another look,” said Siddique. “Near term we may have some volatility in the market although the markets could still trend higher within that,” he added.

In the energy sector Siddique has added to positions in Suncor Energy, Marathon Oil, and Exxon Mobil.

At the same time, he has taken the opportunity to pare back positions that he believes are starting to look over priced. Those include Deere and Company and Caterpillar Incorporated.

If oil prices spike higher, other areas of the market could start to look more vulnerable.

Barry Knapp, managing director of equity research at Barclays Capital in New York, recently downgraded the consumer discretionary sector, a move he partly attributes to risks posed by higher oil prices.

“If there is one sector that is particularly vulnerable, it would be the consumer discretionary sector,” Knapp said.

That sector is the only cyclical sector that Knapp has underweighted as he continues to believe the economy will strengthen.

“On balance, we do not think that this oil price supply shock is going to be strong enough to offset the economic momentum,” he said.

 

Source: Punch