Energy Stocks Outperformed Last Quarter

US stock indices made new highs last night with the Dow working its way towards 23,000. The 78% chance of a rate hike in December (according to CME Fed Watch) hasn’t spooked markets which continue their relentless upward climb. The ASX 200 gave back some of Monday’s gains yesterday although it is still slightly up for the week. The weakness yesterday was fairly broad based with only the telecommunications sector making a positive return. Although energy was the weakest sector yesterday it was the strongest over the third quarter with a three month return of 7.79%. It was closely followed by materials which had a 7.15% gain. This is a turnaround from the second quarter where industrials and health care were the best performing sectors. Telecommunications suffered as Telstra (TLS) announced a dividend cut in order to reinvest more of its earnings back into the business. The market didn’t like this as TLS’s incredibly stable dividend had been a hallmark of the company.   

The rise in energy stocks has come on the back of increases in the oil price as well as increased optimism that the oil market is beginning to rebalance. Compliance with the OPEC production cuts was over 100% in August (meaning members produced less than their quotas, on average) and US oil inventories have been declining for several months now. On the other hand, the number of active drilling rigs in the US increased last week highlighting the fact that higher oil prices will inevitably lead to more production from US shale. These factors have kept WTI oil in a relatively tight trading range for several months now.

The Reserve Bank of Australia (RBA) kept rates on hold at 1.5% yesterday, as expected. Based on moves in the Aussie dollar, the market took the accompanying statement as more dovish (sentiment for lower rates) than expected although the AUD USD has since rallied back up to $0.783 after falling just below $0.78 following the RBA announcement.

Data Releases:

–    US ADP Non-farm Employment Change 11:15pm AEDT

To view the Rivkin economic calendar and Local Markets matrix, members can click here.

This article was written by William O’Loughlin – Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via william.oloughlin@rivkin.com.au or by phoning +612 8302 3633.