Middle East Trouble Could Steal Focus From Growth Concerns

A sudden bubbling up of oil prices has shifted market focus to the Middle East, heading into Wednesday’s session.

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Oil surged Tuesday, as worries about Syria and Iran trumped new concerns about a weaker global economy, after the International Monetary Fund slashed its growth forecast for 2012 and 2013. Turkey’s Prime Minister Tayyip Erdogan continued to make strong comments aimed at neighboring Syria. He said his country would not avoid war if it is forced to act. Syrian shells have landed in Turkish territory for six consecutive days, and NATO Tuesday said it drew up plans to defend Turkey if necessary.

Another catalyst for oil prices came as Israeli Prime Minister Benjamin Netanyahu Tuesday called for early elections. Netanyahu said he was forced to call a snap poll for early 2013, about eight months ahead of schedule, because his coalition could not agree on a budget.

Netanyahu is expected to win and his Likud Party is ahead of rivals, so traders viewed the announcement as a referendum on Netanyahu’s hard line towards Iran and its nuclear program. Meanwhile, a new assessment from nuclear experts and former United Nations inspectors said Iran was two to four months from being able to produce weapons-grade fuel.

West Texas Intermediate oil rose 3.4 percent to $92.39 per barrel, and Brent crude , the international benchmark, rose 2.4 percent to $114.50 per barrel. Natural gas, up 1.9 percent, rose to $3.4670 per million BTUs, in tandem with oil as traders focused on forecasts of colder weather that could drive demand.

“WTI was trading in the $88 to $92 range. Now that it’s broken that, we’ll see if there’s follow through,” said John Kilduff of Again Capital. Kilduff said supply is sufficient, and he expects oil to return to lower levels. He noted that Saudi Arabia’s oil minister Ali al-Naimi Tuesday reiterated a pledge to keep pumping higher levels of crude, and that Brent should be at $100 a barrel.

Art Cashin, director of floor operations at UBS, said stock traders were concerned about the sudden run up in oil prices. “It’s been a whipsaw for days now, and it was confusing this morning because it was geopolitical and you would have thought Brent would have moved up more than West Texas.”

Higher OPEC production and the promise that the White House could use the strategic petroleum reserves if prices get too high, has helped push oil prices lower in recent weeks. At the same time, a weaker global economy, apparent in the latest IMF forecast Tuesday, has also weighed on prices.

Gasoline futures also rose Tuesday, with RBOB up 2.3 percent at $2.9587 per gallon. California spot prices declined sharply but gasoline at the pump is still high — at a state average of $4.67 per gallon Tuesday. “Prices aren’t coming down at the retail pump like they should be. It’s not trickling through yet,” said Kilduff. California’s gasoline supply has been plagued by refinery problems, prompting Gov. Jerry Brown this weekend to allow early use of winter fuel, typically sold after Oct. 31.

Besides the energy markets, trader will be watching economic reports Wednesday. The data includes wholesale inventories and the job opening and labor turnover data from the Bureau of Labor Statistics, at 10 a.m. ET. The Fed’s beige book on the economy is released at 2 p.m., while the Treasury auctions 10-year notes at 1 p.m.

Happy Anniversary, Stocks

Stocks Tuesday slumped, with the Dow Jones Industrial Average down 110 to 13,473, on the fifth anniversary of its all-time high of 14,164.53. Tech led the selling, with the Nasdaq plunging 43 points to 3,065, and the S&P 500 down 13 to 1,441. The S&P 500 index is about 8 percent below its record of 1,565, also reached on Oct. 9, 2007.

“The tech wreck ruined the anniversary party, for sure,” Cashin said. “You’re going to have to come in and review what’s going on in Europe. Although we were a bigger driver of the bus late in the session than Europe.”

Energy stocks were fractionally higher Tuesday, with the sector the only group to finish with a gain. Exxon , finishing lower on the day, edged higher during the trading day to reach a high last seen in May, 2008.

Chevron , meanwhile, fell in the afterhours session, after warning that its third-quarter profits would be substantially lower, hit by the impact of Hurricane Isaac and the fire at its Richmond, Calif., refinery, one of the catalysts that sent California gasoline prices sharply higher.

Other Tuesday earnings news could also spill into morning trading. Yum was trading nearly four percent higher after the bell, after reporting stronger than expected earnings and boosting its full year per share target to reflect a growth rate of 13.4 percent. Alcoa was trading flattish after the close, after it reported better than expected earnings and revenues but a weaker outlook for aluminum demand.

Costco and Progressive report earnings ahead of the opening bell Wednesday. Ruby Tuesday reports after the close.

In the bond market, the IMF forecast for slowing growth sent prices higher Tuesday. The 10-year note was yielding 1.72 percent in late trading. The Treasury auctions $21 billion in reopened 10-year notes at 1 p.m. Wednesday, and holds a 30-year auction Thursday.

The Treasury’s auction Tuesday of $32 billion of 3-year notes was well received, with a high yield of 0.346 percent. Bidders offered to buy 3.96 times the amount of debt sold, reportedly the best demand in 26 years.

“They’ve been in a 16 basis points range since April, and we auctioned right in the middle of it. 10s and 30s will be a little more interesting to see if there’s demand for longer term paper. It’s the first one after QE forever,” said John Briggs, senior Treasury strategist at RBS, referring to the Fed’s latest quantitative easing program, announced last month. “I think they’ll go okay,” he said.

What Else to Watch

Greece and Spain remain top worries for markets.

French President Francois Hollande meets with Spanish Prime Minister Mariano Rajoy Wednesday.

German Chancellor Angela Merkel visited Greece Tuesday, offering words of support for Greek Prime Minister Antonis Samaras, as thousands marched in protest of severe budget cuts the country is being forced to make. Merkel’s visit came as the latest IMF forecasts revealed Greece will miss the five-year debt reduction target required as terms of its bailout. Greek Finance Minister Yannis Stournaras, after a meeting of euro zone finance ministers Monday, said that international lenders were considering giving Greece two more years to reach its budget deficit reduction targets.

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