Daily Agenda: What Low Oil Prices Mean for the Rest of the Market

Japanese Prime Minister Abe calls for an election; U.K. inflation edges higher; Chinese home prices contract.


Daniel Acker

In advance of next week’s meeting of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna, analysts are busy debating whether a cut in production is on the table. Already, with WTI crude levels down by 30 percent from highs this summer, the concern among many major oil producers is palpable as Saudi Arabia continues to keep shipments at a brisk pace and North American supplies swell. The big question on the minds of many securities investors is what lower oil prices may mean for the underlying global economy and corporations outside the energy sector. Despite bearish analysis in some circles, Gluskin Sheff chief strategist David Rosenberg sees a net silver lining in lower crude costs. “To be sure, there are winners and losers but anyone who claims that lower commodity prices — while bad for Iran, Venezuela, Russia and Brazil — are bad for the U.S., should take a deeper dive into the input-output table,” he wrote in a client note yesterday.

Abe calls for an election. After the release yesterday of gross domestic product data that confirmed Japan has slipped into recession, today’s announcement of a delay a second round of consumption tax hikes is hardly a surprise. What does come as bit of a shock to observers is Prime Minister Shinzo Abe’s call for an early election. The Japanese leader is wagering on a victory for his Liberal Democratic Party that will allow him to remain in office until 2018 and continue his stimulus programs in concert with Bank of Japan easing measures.

U.K. reports uptick in inflation. U.K. Office for National Statistics data show consumer inflation index levels for September rising more than forecast. At an annualized 1.3 percent versus 1.2 percent the previous month, this announcement stands in contrast to the concerns over deflationary pressure discussed during the Bank of England’s Monetary Policy Committee meeting last month. Bank governor Mark Carney indicated last week that U.K. inflation could slip below 1 percent during the next six months.

Home prices slip further in China. The National Bureau of Statistics of China today released home price index data for October with 69 of the 70 individual cities tracked registering a contraction for the month and 67 declining compared to the same period last year. The move in late September to allow second mortgages for those home owners who are not currently indebted was a signal that the People’s Bank of China and other state entities are attempting to provide a soft landing for property prices even as credit excesses are worked out of the system. Separately, data issued today indicated foreign direct investment into China contracted by 1.2 percent year-over-year in October.

German confidence is back on the upswing. ZEW Center for European Economic Research headline investor sentiment index levels for Germany released registered a leap from –3.6 in October to 11.5 for November, far exceeding consensus forecasts.

U.S. macro indicators are on deck. In the U.S. producer price index (PPI) data is forecast to register a marginal contraction for October on the back of softer energy prices. Analysts will parse September TIC data from the Department of Treasury for any signs of impact from a rising dollar.


Manchester United reports earnings. U.K. soccer team Manchester United reported fiscal first-quarter results, registering profits of £8.9 million ($13.9 million) on total revenues of £88.7 million. Company management pointed to the ten-year, £750 million sponsorship contract with Adidas as a major boost for the franchise.

Portfolio Perspective: Corporate Revenue ExpectationsNicholas Colas, ConvergEx Group

Forget about U.S. corporate revenue growth for the fourth quarter of 2014. We’ll be lucky to post flat sales comparisons to last year. That’s the message from our monthly review of analysts’ financial models for the 30 companies of the Dow Jones Industrial Average. The primary culprit: declining sales expectations for energy companies, with analysts now publishing average revenue estimates of 13 percent lower than last year for ExxonMobil and Chevron. Lower commodity prices drive that, of course. Just last month, analysts still had flat revenue comparisons for the energy names in the Dow. Now, not so much. What a difference a month and $20/barrel shifts in price can make.

Even excluding the energy names, however, analysts have just 0.8 percent sales growth baked into their numbers for the quarter. Last month, that figure was 1.5 percent. Looking forward to 2015, analysts now expect the Dow 30 to print an average 2.4 percent revenue growth rate, down from the 4 percent they were expecting as recently as July. The bottom line: remember that we are in the heart of budgeting season for large U.S. companies. For how much incremental capital expenditure and hiring will large businesses plan in 2015, now that Wall Street thinks they won’t grow revenues faster than GDP?

Brokerage analysts are growing quite cautious on fourth-quarter 2014 revenue expectations for the 30 companies in the Dow Jones Industrial Average. They now expect average year over year sales comparisons to drop 0.1 percent. Excluding the financial stocks, they peg the average decline at 0.3 percent. Last month their expectations were a bit braver: 1.5 percent and 1.6 percent, less the financial names. Back in August the analysts were showing clients financial models that featured 3 percent year-on-year growth for fourth-quarter 2014. Ah, the good old days.

Even outside the oil companies, the analysts who cover the other 28 Dow names aren’t feeling much optimism. Only seven of the 30 Dow names show positive revenue momentum. The other 23 are flat or lower compared to last month. How much of this is just the stronger dollar? At this point, it’s hard to say. Analysts in some sectors have been cutting their numbers while their counterparts in other groups seem fine with what they have out there.

Nicholas Colas is chief market strategist at ConvergEx Group, a New York–based global brokerage firm whose clientele includes institutional investors and financial intermediaries.