Originally published by Rivkin
Alcoa Inc (NYSE:AA) kicked off the third quarter earnings season in the U.S. with a disappointing update as both earnings per share and revenue were lower than anticipated. Shares fell -11.42% shown on the first chart below as quarterly profit excluding one-time items was 32 US cents per share against estimates for 34 US cents per share. Revenue was also lower than expected at US$5.2 billion with forecasts for US$5.33. Analyst forecasts are for approximately a -1.6% decline in earnings this quarter, extending declines to a sixth straight quarter. Historically companies have a track record of generally exceeding these expectations but that is not a certainty by any means.
Investors will focus on corporate earnings and the outlook provided by companies over the next six weeks as the Fed also prepares the market for what looks to be a likely interest rate hike in December, provided recent data continues to improve. At the same time there are key risk events including the U.S. presidential election, and Italian referendum and concerns around what a hard Brexit will mean. All of this provides multiple factors that have the ability to increase volatility over the coming months, but that’s not to say the outlook is particularly negative. The FOMC will only justify a rate hike if the U.S. economy is improving, which following eight years of sluggish growth globally would be a welcomed sign.
At the same time the projected path of rate hikes is being continuously lowered, down from three to just two in 2017 meaning the hiking cycle will be shallower and slower than historically. While the U.S. dollar is likely to appreciate further in the short-term, over the medium term gains should be fairly limited given the projected path of interest rates. Overall this should continue to be relatively supportive of risk assets, although you may see a shift from more defensive high dividend paying stocks in the U.S. such as utilities & telecommunications into more cyclical sectors such as technology & financials.
The key focus tonight will be the release of the FOMC meeting minutes from the September 20-21st meeting. Money managers will look for further confirmation of momentum shifting towards the hawkish camp following three dissenting votes at the meeting and recent rhetoric by Fed speakers.
U.S. equity markets were lower on Tuesday, both the S&P 500 & Nasdaq 100 declining -1.24% & -1.47%, all ten sectors of the S&P500 finished lower for the day with declines led by healthcare (-2.54%), basic materials (-1.66%) and utilities (-1.18%). The yield on government debt increased as a rate hike probability in December is now around 70% implied by Fed Fund futures, the yield on two-year debt increased +2.4 basis points to (+0.8704%) as did the yield on ten-year securities up +3 basis points to (+1.7656%).
In Europe it was a fairly quiet night for data, the only notable release being the German & Euro-zone ZEW survey of economic sentiment (MoM Oct). Both surveys showed improvement, in Germany the reading increased to 6.2 from 0.5 previously and estimates of 4 while the Euro-zone survey increased to 12.3 from 5.4 previously. The results suggest an improved consensus of the economic outlook among financial experts throughout Europe.
Despite this equity markets were generally lower as the political situation over Brexit negotiations continues to dominate sentiment. Both the Euro Stoxx 600 & DAX declined -0.53% & -0.44% along with the EUR/USD which fell -0.77% against the U.S. dollar. In the U.K. bond rallied with both two & ten-year yields falling -4 & -5 basis points respectively having risen over the past fortnight. Despite this decline in yields the Pound continued to weaken against the U.S. dollar down -1.93%, also declining -1.19% against the Euro. Equities were mixed, the FTSE100 finished -0.38% weaker while the FTSE250 closed +0.52% higher.
Oil prices pulled back following recent gains as comments from the head of Russian oil producer Rosneft Igor Sechin said his company will not curb production as part of any agreement with OPEC. Russia is currently producing around 11.1 million barrels per day, with 40% of the output attributed to Rosneft so these comments are significant. Both Crude Oil & Brent crude fell -1.05% & -1.24% respectively which weighed on commodity prices more broadly with the Thomson Reuters CRB index down -1.16% for the day.
Interestingly these comments conflict with Vladimir Putin on Monday who said that Russia was ready to join an output limit by OPEC members, so comments by Sechin send a mixed message to the markets, although I’m not entirely sure I would be betting against what Putin wants.
The second chart below shows the South African Rand (inverse) which tumbled over 4% against the U.S. dollar overnight as prosecutors ordered Finance Minister Pravin Gordhan to appear in court on November 2nd to hear charges of fraud against him as well as accusations of setting up an illegal surveillance unit at the tax department. It is extremely difficult to gauge the exact impact when political situations weigh on a currency, the one thing that is extremely likely though is further volatility as this story unfolds over the next three weeks.
Locally the S&P/ASX 200 reversed early gains to finished relatively unchanged, up just +0.08% and we can expected a decisively weaker open this morning with ASX SPI200 futures down 45 points in overnight trading.
Data releases:
- Australian Westpac Consumer Confidence (MoM Oct) 10:30am AEDT
- Euro-zone Industrial Production (YoY Aug) 5:00pm AEDT
- Fed’s William Dudley Speaks On U.S. Economy 11:00pm AEDT
- FOMC Minutes (Sep 20-21st) 5:00am AEDT