RGE’s Wednesday Note – Will GOP Gains Mean Ethanol Producer Losses?

Following the Republican Party’s capture of the House of Representatives in the midterm elections, U.S. policy on the use of biofuels for transportation could be about to change. Current policy is based on the use of “blender credits” to encourage the mixing of biofuels with gasoline and a US$0.54/gallon tariff levied on imports of ethanol, the most widely used biofuel. These policies are due to expire at the end of this year, and Republican deficit hawks do not want them renewed, though the ethanol industry generated US$2 billion-3 billion in tax revenues (net of subsidies) in 2009. In “Ethanol Subsidies: Adding Fuel to the Fire?“—available exclusively to clients—we examine the possible consequences of repealing this legislation.

What’s the Outlook for U.S. Ethanol Subsidies?

With the Republican Party now holding a majority in the House, deficit hawks may get the upper hand, allowing existing ethanol subsidies to expire as the focus shifts to whether or not to extend the Bush tax cuts. A scenario in which minority Democrats and corn belt Republicans exert pressure to extend lower ethanol subsidies is possible. In the current climate, one in which job creation is a priority, it is highly unlikely that the ethanol import tariff would be dropped, with the prospect of a flood of cheap ethanol imports from Brazil too great. Nevertheless, a discussion on import tariffs would likely include a discussion on subsidies. The mandated annual increase in the volume of biofuels to be used for transportation will drive demand for ethanol with or without ethanol subsidies.

U.S. Market Snapshot: Stocks Rise on Better than Forecasted Consumer Sentiment and Home Prices

The Conference Board reported that consumer confidence rose to 53.5 in August from a revised 51 in the prior month, beating economists’ expectations of 50.7. The S&P/Case-Shiller home prices also rose 0.28% m/m on a seasonally adjusted basis in August, more than economists surveyed by Bloomberg expected (expectations were for an increase of 0.2% m/m SA). The release of the Fed meeting initially sent markets lower however they later pared back their losses to close slightly up. (See RGE critical issue: U.S. Home Prices: Any Signs of an Impending Double Dip?).

European Market Snapshot: Most Markets Close Higher on Better Than Forecasted U.S. Consumer Sentiment and Home Prices

European markets opened significantly lower and traded around that range before quickly paring back their earlier losses after U.S. consumer sentiment rose more than forecasted.

The Conference Board reported that consumer confidence rose to 53.5 in August from a revised 51 in the prior month, beating economists’ expectations of 50.7. The S&P/Case-Shiller home prices also rose 0.28 % m/m on a seasonal adjusted basis in August, more than economists surveyed by Bloomberg expected (expectations were for an increase of 0.2% m/m SA). 

Asian Market Snapshot: Stocks Fall on Anticipation of Today’s U.S. Economic Data

Yesterday, after Asian markets closed, the Dallas Fed manufacturing index fell 13.5% in August, worse than the 10% decline economists expected. Personal income growth was 0.2% m/m lower than the 0.3% growth economists forecasted. Personal spending, however, grew at 0.4% m/m in July versus expectations of 0.3%. Consequently, today investors are speculating on more evidence of further weakness. Economists in the Bloomberg survey expect consumer confidence to remain slightly flat at 50.7 from 50.4 in the prior month. Markets opened and traded lower all throughout the day.  

U.S. Market Snapshot: Stocks Fall on Smaller Than Expected Personal Income Growth

U.S. equity markets opened lower and traded lower all throughout the trading day on concern the recovery may slow further. The Dallas Fed manufacturing index fell 13.5% in August, worse than the 10% decline economists expected. Personal income growth was 0.2% m/m, lower than the 0.3% growth economists forecasted. Personal spending, however, grew at 0.4% m/m in July versus expectations of 0.3%. 

The Dow fell 1.4% to 10010 with all sectors in the red. Consumer services (down 1.54%), industrials (down 1.79%) and financials (down 2.15%) led the broader decline.

The S&P 500 declined 1.47% to 1049 with all ten sectors in negative territory. Consumer services (down 1.57%), industrials (down 1.63%), and financials (down 2.2%) led the broader advance.

European Market Snapshot: Most Markets Close Lower as Declines in Germany and France Offset Gains in Switzerland and Greece

European markets opened higher and traded in positive territory for most of the trading day before declining to their intraday lows after the Dallas Fed manufacturing index declined more than expected. The Dallas Fed manufacturing index fell 13.5% in August, worse than the 10% decline economists expected. Personal income growth was 0.2% m/m while personal spending growth was 0.4% m/m in July versus expectations of 0.3% for both. Eurozone business climate was slightly weaker than expected while consumer confidence, economic confidence and services confidence were slightly better.

The Stoxx Europe 600 declined 0.03% to 251 led by industrials (down 0.5%) and telecom (down 0.49%).

Asian Market Snapshot: Stocks Gain on Speculation Japan and U.S. Governments Will Support Growth

Asian markets traded higher after the BoJ expanded its JPY 20 trillion bank loan facility to JPY 30 billion as a strengthening yen threatens the recovery. (See RGE critical issue: Is Yen Intervention in the Offing?). Markets, however, pared back some of their gains as the size of the increase disappointed. 

The MSCI Asia Pacific Index rose 0.2% to 117 led by material producers, while the MSCI ASIA APEX 50 rose 0.9% to 740.

In Japan, stocks advanced as the central bank increased the size of its liquidity facility. The Nikkei 225 gained 1.8% to 9,149. Technology (up 2.64%) and industrials (up 1.94%) led the gains. Canon rose 2.4% while Honda gained 1.6%.

U.S. Market Snapshot: Stocks Up on Bernanke’s Comments but Down for the Week

U.S. stocks fluctuated today and finished higher as investors left assured after Bernanke’s speech that the policy makers will take further action to keep the economy afloat. In earlier trading investors got a dose of hope after the US Q2 GDP revised down number came in slightly above market consensus:  1.6% q/q annualized vs. expectations for 1.4%. For the breakdown of the GDP release see RGE analysis “U.S. Economy Slowing to a Stall.” 

European Market Snapshot: Stocks Rise on Stronger than Expected U.S. Growth Data and Final Positive Read of Bernanke’s Speech

In a highly volatile trading day European markets opened lower and traded lower before surging to positive territory when U.S. GDP data came in stronger than expected, only to collapse by over 1.4% in a matter of a ½ hour to the intraday lows and then rallied back into positive territory toward the closing hours. U.S. Q2 GDP growth was revised down to 1.6% amid a wider trade deficit and lower inventory contribution. The revised number, however, beat economists’ estimates of 1.4% in the Bloomberg survey. (See RGE Critical Issue: U.S. Q2 2010 GDP Growth Revised Down to 1.6%; Final Sales Weaker at 1%). This better than expected growth number gave a boost to European markets right before Chairman Ben Bernanke’s speech, which initially sent markets tumbling over a 1% in a matter of a ½ hour as the markets initially read his tone as negative. However, ultimately stocks managed to close higher on optimism about the Chairman’s speech. 

The Stoxx Europe 600 rose 0.64% to 251 for a weekly loss of 0.4%. Telecom (up 2.38%) and consumer services (up 1.44%) led the gains.

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