Hurrican Sandy Swamps Markets
- It has been an extraordinary week on Wall Street thanks to Hurricane Sandy's assault on New York City. With the exception of some futures markets on Monday morning, US bond and equity trading was shut in on Monday and Tuesday, marking the first time that the NYSE was closed by weather for two consecutive days since 1888. Markets opened again on Wednesday, with pent-up demand driving higher trading volumes. In US data, the focus was on the October jobs report on Friday. Both non-farm and private payrolls numbers, +171K and +184K, respectively, widely beat expectations, while the unemployment rate edged up one-tenth of a point to 7.9% amid continued labor force expansion. The benchmark 10-year note eked out tiny price gain for the week, climbing to 1.726% as investors defer big moves until the outcome of the presidential election next Tuesday is clear. In Europe, manufacturing PMI data for October was flat or slightly higher than September's recessionary levels, and China PMI returned above the 50 expansion threshold. For the week the DJIA was down 0.1%, the S&P500 declined 0.2%, and the tech-heavy Nasdaq lost 0.2% as major tech names reported weak earnings.
- Crude prices declined to three-month lows below $85 through the end of the week. Late-week dollar strength was seen as one culprit, thanks improved US labor data, ongoing turmoil in the eurozone, yen softness after the BoJ move and the flight-to-safety market sentiment on Friday. In addition, there was another round of SPR release rumors late in the week. The declines in the WTI front-month contract meant little to the citizens of the New York metro area, where refinery shutdowns, gasoline shortages and frozen public transport created lines at gas stations the likes of which have not been seen since the oil embargos of the 1970s.
- Oil majors Shell, Chevron and Exxon saw declining production in their third quarters, however their fiscal results diverged. Exxon's results were well above expectations thanks to the refining business: profits from refining more than doubled to $3.2B while exploration and production's profit fell nearly 30% to $5.97 billion. Shell's upstream and downstream profits fell from last year. Chevron missed earnings expectations as net income dropped sharply on a y/y basis, with the downstream operation seeing elevated costs for maintenance plus a big negative impact from the outage at its Richmond refinery. Chesapeake Energy met earnings expectations in its Q3, however it reported a net loss after write downs of the value of some natural gas assets. Production was up nearly 25% y/y.
- With Sandy's heavy impact front-and-center in the media, insurance names were very much in the spotlight. In earnings, MetLife and Allstate widely beat expectations, Allstate by a wide margin. Analysts believe that Allstate has a huge exposure to overall damages from Hurricane Sandy that are said to be running at around $15B. On the earnings conference call, the CEO said it was too early to say what the impact of the storm would be on the company, although he had commented to CNBC earlier that the catastrophe would not have a "material impact" on Allstate's "overall financial condition." AIG did very well in Q3, with profits up sharply on a y/y basis, beating expectations. Despite the quarterly results, traders sold some names on presumed exposure to damages from the storm. Allstate was down 6% on the week, Travellers was down 5% and Ace was down 3%, while other property and casualty insurers were more or less unchanged.
- October same-store sales reports by and large continued the slow-growth picture seen in the September reports. However, Hurricane Sandy's impact cast a shadow over many retail names facing store closures and lost sales. Costco, Nordstrom and Rite Aid all said November sales would suffer because of store closures. Analysts pointed out that the course of sales in the month of November is mostly dictated by holiday sales, especially black Friday. Note that Limited Brands saw a rare SSS miss, with comps up 3% compared to expectations for +5%.
- In FX trading, EUR/USD broke out to eight-week lows through Friday afternoon. Earlier in the week the pair was contained within a tight range between 1.29 and 1.30. Dealers were a bit jittery ahead of Eurogroup conference call on Greece mid-week as the coalition government in Athens began splintering while deputies threatened to defect rather than vote for the new package of austerity needed to obtain the next tranche of funding. There were also concerns about a proposal to cut the country's public debt via a bond buyback, which raised questions about whether banks holding Greek debt would need to be recapitalized. Disappointing manufacturing PMI data from Spain highlighted the extent of the economic contraction in the country. - In Japan, the BoJ expanded its asset purchase program by ¥11T to ¥91T, roughly in line with the amount speculated by the press in a leak late last week. This marks an unprecedented second consecutive month of expanded QE out of Japan's central bank, which is increasingly intent to douse JGB markets with liquidity amid the escalating budget standoff between the Noda administration and the opposition seeking a prompt national election date. The BoJ also cut its economic assessment yet again, noting the global slowdown is more evident in falling exports and industrial production. Japanese yen weakened across the board, as USD/JPY topped the ¥80 handle once again, rising to a 6-month high above ¥80.65 on Friday following better than expected US jobs report. Out of China, the official October Manufacturing PMI returned to expansion territory at 50.2 after two months of contraction. Improving data out of Beijing combined with higher than expected CPI data from Australia last week helped send AUD/USD back above the $1.04 handle this week, and should make the anticipated RBA rate cut on tap for Monday a much closer call.