Easy come, easy go when it comes to this week’s gains in stocks and oil.
Chicago Fed President Charles Evans may have ruined it for everyone in Sydney overnight where he made the following comments in a speech:
“A December move could be fine -- it depends on the ultimate strategy of whether or not we think, absolutely, beginning more renormalization is right. Sometimes I think we’d be well served if we were to wait a little bit longer and allow inflation to pick up more quickly.”
“I wouldn’t be surprised if I was agreeable to a December meeting.”
“One move isn’t that big of a deal either way. Even though I would like to wait and gather more information and have more confidence about inflation, I think one move would not seriously affect the continuing likelihood that inflation will move up. In that context, anything related to the election or other developments, I think it’s going to come down to how we view inflation and the progress of the labor market.”
Not entirely hawkish but not exactly dovish either and that helped push the dollar higher...
...and oil lower…
Of course crude is getting any hit by the usual doubts surrounding a supposed production cut which just yesterday had helped boost prices when Russian President Putin said a price cut as “the only right decision.”
Specifically, Goldman is out with some reservations. Here’s what the bank had to say on Monday:
“Beyond the uncertainty on this Saudi shift, the odds of a successful implementation remain low at this point of the oil market rebalancing. We see price-insensitive upside risks to global oil production from (1) the likely poor compliance from noncore OPEC producers, (2) the countries exempt from such a deal (Libya/Nigeria/Iran) which are currently producing 500 kb/d more than we expected, and (3) the wall of supply coming online outside of OPEC in 2017 with 40% more new projects than in 2016. Any of these three forces is sufficiently large in our view in 2017 to make the required cut in Saudi production too large to improve the current funding stress, making the shift in policy premature in our view.”
Goldman also opined on what the election means for the Fed:
“All this is consistent with a Fed hike before too long, as the committee signaled in September. In fact, we have revised up our subjective probability of a move this year from 65% to 75%, with meeting-by-meeting probabilities of 10% in November and 65% in December. The increase is due to a combination of the better growth data and the swing in the presidential election race toward Secretary Clinton. According to both betting markets and poll aggregators, the probability of a Trump victory has fallen from 30%-35% two weeks ago to 10%-20% now. This is important because market participants seem to view a Trump victory as a potential trigger for a significant tightening in financial conditions, which in turn could result in another delay for the FOMC.”
While we can debate whether or not Trump has by now set forth of coherent policy agenda, what Goldman is essentially saying there is that no one really knows what he’s going to do, which could cause virtually everyone to become more cautious on the economy and thus give the Fed yet another excuse to wait.
But they may get just the excuse they need from earnings season which kicked off with a miss from Alcoa. When you’ve got multiples where they are currently, you don’t want to start seeing a slew of earnings disappointments. If you do, your forward multiples pretty much have to start coming down and your hockey stick projections with them. Here’s the rather abysmal day Alcoa is having:
If you’re inclined to trade AA, Barclays has some ideas on the debt and CDS side of things:
“AA’s earnings were below consensus and management reduced guidance in several segments. Notably, the weakness was driven by the downstream businesses that will be forming the new Arconic, while the upstream segment performed relatively in line (higher aluminum prices offset by lower alumina results). With AA’s separation expected to occur on November 1, 2016, we anticipate a noisy 4Q16 earnings release as well, although investors may begin to reward the credit for what we think will be lower go-forward cash flow volatility. Overall, we do not think that AA’s earnings release materially alters the investment case for the company’s debt, but with AA cash spreads trading at a premium to the crossover index, we do not see attractive value in the bonds. Our rating remains Market Weight. We recommend swapping from AA 5.125% 2024s into Kinross (KCN) 2024s.”
“In 5y CDS, we continue to think that spreads can ultimately settle in a +200-225bp range, which would position AA in line with average BB CDS spreads.”
We’ll get the Fed minutes on Wednesday which should be interesting and give us a further window into what the committee is thinking headed into the election.
Oh, and remember what we said on Monday about rising correlations between stocks and bonds? Well…
Recent Comments