U.S. equities rebounded from early losses on Tuesday as odds of a Federal Reserve interest rate hike later this month dimmed in light of disappointing economic data — including Friday’s weak non-farm payrolls report. In the end, the Dow Jones Industrial Average gained 0.3%, the S&P 500 gained 0.3%, the Nasdaq Composite gained 0.5% and the Russell 2000 gained 0.1%.
Treasury bonds were stronger, the dollar was weaker, gold gained 2.1% (silver gained 4% for its best gain since early July), and crude oil was mixed.
Energy stocks led the way higher today with a 1.5% gain, as heavyweights like Exxon Mobil Corporation (NYSE:XOM) look ready for a relief rally. Call options in XOM have been recommended to Edge Pro subscribers in anticipation. Industrials and financials were the laggards.
EOG Resources Inc (NYSE:EOG) gained 6.7% after announcing the acquisition of Yates Petroleum for $2.5 billion. 3D Systems Corporation (NYSE:DDD) gained 5.6% after announcing General Electric Company (NYSE:GE) announced the acquisition of two European 3D printing companies.
The so-called “FANG” stocks were also on fire, with Facebook Inc (NASDAQ:FB) up 2.5% and Amazon.com, Inc. (NASDAQ:AMZN) up 2.1%.
On the economic front, August’s non-manufacturing ISM activity report dropped to 51.4 — the 79th consecutive month of gains — but it was a sharp drop from the 55.5 reading seen in July. The month-over-month drop was the largest since 2008. And it pushed the index down to its lowest level since February 2010.
Following weakness in other measures of economic health, the Citigroup Economic Surprise Index is poised to fall back into negative territory as shown above. This reverses a short-lived period of economic data surprising to the upside in a way not seen since late 2014. As a result, the futures market odds of a September rate hike from the Federal Reserve have fallen to just 21%, while odds of at least a single hike by December have fallen below 50%.
Remember, the Fed’s official “dot plot” rate hike forecast — which will be updated after its September policy meeting — is still penciling in two quarter-point rate hikes before the end of the year. This looks increasingly unlikely based on what the economy is doing.
In addition to the prospect of interest rates staying lower for longer, investors are being encouraged by some very positive comments out of OPEC heading into a big production meeting later this month in Algiers. The hope, for the bulls, is that a supply freeze agreement — which has been hinted at since February — can actually come to fruition now that Iran’s output has returned more or less to pre-sanction levels.
Iraqi Prime Minister Al-Abadi said current prices are not acceptable and that his government would support an output freeze if it helps boost prices. Iranian president Rouhani reportedly supports measures for an oil price recovery. There are also reports that National Iranian Oil Company director Ghamsari has said Iran is closer to the idea of a production agreement than when OPEC ministers last met in June. And Iranian Oil Minister Zanganeh said he backs any measure aimed at stabilizing the global oil market after a meeting with OPEC’s Secretary General.
In response, crude oil and the entire energy sector looks ready for a bounce here.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
