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Daily Agenda: Markets Still Not Convinced of Imminent Fed Hike

Despite Fed Chair Yellen’s comments, futures markets doubt pace of tightening; Alcoa announces a split; separatist parties score victory in Catalonia.

Global debt and currency markets will continue to receive more anecdotal input from Federal Reserve officials this week with public appearances by voting Federal Open Market Committee members President William Dudley of the New York Fed, President John Williams of San Francisco, Fed Governor Lael Brainard, Vice Chair Stanley Fischer and, on Wednesday, Chair Janet Yellen herself. It remains to be seen how much store financial markets will place in this commentary. Current futures markets pricing suggests a benchmark rate below 75 basis points at year-end 2016, less than half current guidance from policymakers. Meanwhile, despite assurances from Yellen last week that deflationary pressures spilling over from commodity markets were temporary in nature, price forecasts remain at multi-year lows. For now, markets seem to indicate a divide between investors’ perceptions of what Fed leaders say and what they will do.

Alcoa to split into two companies. On Monday, global aluminum giant Alcoa announced that it will divide itself into two separate public companies, with one retaining the name and focusing on mining and metal fabrication and the second consisting of the higher tech segments of the existing business. The transition is expected to be completed within the first half of 2016.

Profits plunge at Chinese factories. Industrial profit data published by China’s National Bureau of Statistics registered the largest single-month annualized drop since 2011 in August. At a decline of 8.8 percent versus the same month in 2014, the figures were far worse than consensus forecasts, with rising costs and lower yield on investment compounding the drag of lower demand.

More woe for Glencore. While the mining and metals sectors have been hit particularly hard in recent months, few have suffered as much as Baar, Switzerland–based Glencore which, after an intra-day decline of over 15 percent today to reach an all-time low, has seen more than two thirds of its market capitalization disappear in 2015. Despite moves to shore up its balance sheet through the sale of assets, some analysts now doubt the mining giant, ranked the tenth-largest company on earth in 2014, can preserve investment-grade status for its debt. On Monday, London-based, Brazil-focused Horizonte Minerals announced the acquisition of the Araguaia nickel project in Brazil from Glencore in a deal valued at only $8 million despite more than $75 million spent developing the site.

Catalan election favors breakaway. Pro-Independence parties secured 72 of 135 parliamentary seats in elections in Catalonia over the weekend, setting the stage for a showdown with Madrid. Catalan President Artur Mas characterized the election results as a victory for secession despite the fact that Spain’s constitution does not allow for an autonomous community, which includes Barcelona, to withdraw from federal rule.

Volkswagen’s new leader faces immense challenges. Newly installed Volkswagen CEO Matthias Mueller has presented a plan of reorganization to the automaker’s board of directors as the emissions scandal engulfing the company continues to expand. The Wolfsburg, Germany–based company has already set aside an initial 6.5 billion euros ($7.26 billion) against anticipated fines and legal costs, with expectations that that amount will expand.

Comcast buys control in Japanese theme parks. The Philadelphia-based U.S. cable operator Comcast today announced the acquisition of a majority interest in USJ Co., the holding company for Universal Studios Japan, a Japanese amusement park operator, in a deal valued at $1.5 billion. The acquisition of 51 percent of the Osaka-headquartered firm will leave private equity investors, including Goldman Sachs Group, retaining a significant share in the company as Comcast integrates it into its NBCUniversal theme park unit.

Tarullo calls for higher capital requirements for insurers. In remarks published in advance of a speech on Monday, Federal Reserve Governor Daniel Tarullo outlined the case for increased capital requirements for large insurers. In 2010, the Dodd-Frank act gave the central bank oversight over insurers deemed systemically important and in subsequent years the industry and its lobbyists have argued for retaining the current status quo while the Fed has drafted new regulations. The commentary, prepared for an event sponsored by the Bank of France later today, suggests the Fed may be considering a far-higher bar.

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