Daily Agenda: Alcoa Earnings Sign of Industrial Health

Oil prices slide in advance of EIA data release; markets prepare for FOMC notes; Hong Kong protests wind down.


Daniel Acker

The online musings of political and economic leaders provide investors with candid insight into the thinking of influential players in the world economy. A blog post yesterday from IMF chief economist Olivier Blanchard focused on a series of risk factors facing the global economy. Beyond geopolitical factors that are difficult to predict, Blanchard zeroed in on increasingly risky positioning by yield-hungry investors in a zero-policy-rate environment, as well as the floundering economic situation in continental Europe. According to the report while fundamentals in the European Union appear to be improving, the risk of deflation there is still significant.

Alcoa announces earnings. After U.S. equity markets close this afternoon Alcoa will announce third-quarter earnings. Despite being dropped from the Dow Jones Industrial Average index last year, market watchers still perceive the aluminum producer’s reports as an important barometer for global industrial demand. After a 50 percent increase in share price year-to-date on rising aluminum costs, analysts note that expectations among investors are high. Sterne Agee and Nomura Securities have raised earnings estimates in advance of today’s release. Other large-cap equities reporting today include Costco Wholesale Corp. and Monsanto Co.

Oil prices still under pressure. The Energy Information Administration (EIA) will release crude oil stockpile data today at 10:30 am U.S. Eastern time. Robust supplies resulting from North American shale extraction continues to put bearish pressure on prices in oil markets. The most recent EIA release revealed a 5.1 million barrel expansion in inventories for the week ending October 3. Both WTI and Brent crude futures traded lower in sessions overnight, with Brent contracts reaching a new multiyear low.

Fed gives its thoughts. At 2 pm today U.S. Eastern time, the Federal Market Open Committee will publish the minutes of its September 16–17 meeting. As market narratives remain fixated on Fed policy, analysts’ ears will be perked up for any subtle shifts in the policy discourse. Consensus forecasts from economists are for a marginally hawkish tone in today’s report as the U.S. employment situation continues to improve.

Hong Kong protests dissipate. The number of Hong Kong prodemocracy protesters has fallen to the hundreds in advance of Friday’s negotiations sessions with Beijing. Student leaders have noted frustration that the government has refused to consider the central demand put forth: the free selection of candidates for the upcoming local elections in November. Should the meeting not result in changes that the activists deem to be satisfactory, student leaders have threatened a resurgence in demonstrations.

Portfolio Perspective: Oil Markets Set to StabilizeTed Harper, Frost Investment Advisors

Oil sold off sharply last week, with Brent falling nearly 5 percent. Recent reports indicate OPEC supply has jumped to a two-year high. There are rumors that Saudi Arabia has no interest in cutting output, but is more willing to compete on price. On the domestic front, U.S. production of crude hit a high of nearly 8.9 million barrels per day this past month, up from 5 million in 2008. Imports are expected to provide roughly 21 percent of domestic fuel consumption next year, down two-thirds from 2005 levels. Any continuing weakness in commodity prices positively impacts inflation and the strength of the U.S. dollar.

Per reports from Bloomberg, investors pulled some $1.05 billion from commodities-backed ETFs in September, the biggest monthly withdrawal since December, with outflows from precious metals and energy leading the charge. Money managers have cut their investments across 18 traded commodities for 13 straight weeks, the longest streak since the data series began in 2006, while last quarter, open interest in raw materials fell the most in two years. Combined net-long positions dropped 10 percent to 450,424 futures and options contracts in the week ending September 23 — their lowest level since August 2013, according to the Commodity Futures Trading Commission.

Investors have experienced at least one major bearish rout in the oil markets each year for the past four years. Helping investors understand that this is normal doesn’t do much to solve the angst that comes with the slide and volatility, however. At the end of the day, oil supply and demand fundamentals will eventually win out. Recently, we’ve seen the dollar/oil trade become a hot topi. Historically, there has been low correlation between the dollar and oil prices. When subprime mortgage markets became toxic in 2007, the market witnessed the evolution of a nearly perfect positive correlation between these two assets. Since then, though, we’ve seen the dollar and oil trade correlation bust with only periodically tight fits. We believe that global oil markets will stabilize, with Brent prices normalizing near $100 per barrel, with WTI at a slight discount to Brent.

Ted Harper is a fund manager and energy and commodities senior research analyst with San Antonio–based asset management firm Frost Investment Advisors.