Yesterday’s sharp sell-off in U.S. equity markets caught the attention of investors. But today, all eyes are squarely on Europe in the lead up to European Central Bank president Mario Draghi’s commentary following the central bank’s monthly announcement, which kept interest rates unchanged. There has been increased pressure on the ECB to take further action in light of this past week’s discouraging inflation and purchasing managers’ index (PMI) data, as well as disappointing euro zone August producer price index (PPI) levels for the euro zone, released today. On top of all of this, the euro has slipped to its lowest level against the U.S. dollar in nearly two years, hitting $1.26 yesterday for the first time since September 2012.
Saudi bank to go public. National Commercial Bank, announced an initial public offering on the Tadawul, the Saudi Stock Exchange, to take place before November 2. Saudi’s biggest lender in terms of assets, NCB is expected to raise roughly $6 billion in an offering closed to foreign investors. NCB is the last major nonpublicly traded bank in the Gulf state. Saudi’s King Abdullah announced in July that the exchange will be open to foreign investors starting in the first half of 2015.
U.S. initial jobless claims data on deck. Weekly initial jobless claims data for the week, to be released at 8:30 U.S. Eastern will be closely watched in the run-up to tomorrow’s employment situation report. Last week the number of new unemployment insurance filings went up 12,000 after a sharp contraction in the prior reading, with the four-week moving average continuing to trend downward.
Aussie trade deficit narrows. Australian trade data for August released today show a narrowing of more than 25 percent in the country’s trade deficit to A$787 million ($685.7 million) with imports contracting more sharply than exports compared to July. With the Australian dollar at multimonth lows versus other major currencies, most analysts expect the trade gap will continue to shrink as imported goods become more expensive.
Unrest deepens in Hong Kong. Law enforcement officials in Hong Kong announced that they will not allow protesters to occupy public buildings today as increasingly radicalized student leaders called for sit-ins. Some analysts estimate the total number of students who took part in protests last night in excess of 200,000.
China institutes debt caps. China’s State Council announced a new limit to the amount of debt that municipal and regional governments can accrue. The statement, issued today, also indicated that the central government will not guarantee these new debts. The move will allow local governments to issues bonds directly to market rather than use opaque corporate structures to finance infrastructure projects. Massive local government debts held in China’s lightly regulated development company sector, so-called shadow banking, has been a top concern for regulators and economists.
Commodities prices decline. Commodities markets are showing pressure today. WTI crude futures fell below $90 in electronic trading this morning, bringing year-to-date decline to over 9 percent as domestic supply data continues to improve rapidly due to the boom in shale production. Copper trading in London saw three-month forward contracts vacillate between gains and losses to close down on the session as a strong dollar and concerns over demand from China continue to weigh on that market.
Portfolio Perspective: Energy Renaissance Fueling MLP Growth — Robert White, Market Street Trust Co.
Strategically investing in master limited partnerships (MLPs) is a way to benefit from the energy renaissance underway. MLPs are tax-advantaged publicly traded partnerships that exist to develop and maintain energy infrastructure, from pipelines to storage facilities to processing plants. The so-called shale revolution has resulted in oil and gas production in newly tapped regions such as North Dakota and Pennsylvania that do not yet have the infrastructure to transport the oil and gas to where the demand is. Population growth in North Dakota is three times the national average, and unemployment is at an enviable 2.7 percent.
The required build-out of energy infrastructure is massive and will largely be undertaken by MLPs. It is conservatively estimated that more than $600 billion in capital expenditures will be required over the next 20 years. The income distribution growth that this opportunity will generate will provide MLP investors with attractive double-digit returns as well as protection against rising interest rates.
An investment in MLPs can provide both strong capital returns as well as significant dividend growth, though the quality of individual MLPs varies enormously. We generally seek opportunities in MLP funds with experienced management teams. We believe the best funds focus on selecting MLPs with a solid track record of consistent growth through organic expansion and accretive acquisitions coupled with a high-quality management team. Through the end of August, the actively managed concentrated fund we invested with returned 78 percent over the past two years, compared to the Alerian MLP Index return of 50 percent. This highlights both the benefit of active management in MLPs and the need to select and access the best managers.
Robert White is an investment manager with Market Street Trust Co., a multifamily office based in Corning, New York.
