Given the backdrop of continued uncertainty over just about everything from the Presidential election to the situation in the Middle East, investors should expect a choppy week in both debt and equity markets.

Saying that the stock market is trending downward and that investment grade debt is trading about five basis points wider in relation to Treasuries than it had been a week ago would be true enough, but you’d be telling only part of the story.

The same can be said for other events that normally move markets.

Fed Hamstrung

The Federal Reserve’s Open Market Committee took no action on rates. The panel also left unchanged its bias toward tightening.

But the Fed was in a “damned if you do and damned if you don’t” position.

For months, Fed watchers had assumed that Wednesday would be Greenspan & Co.’s first chance to make a policy call unfettered by electoral politics. Until this month, the FOMC had to be acutely aware that any action or statement that coincided with a major market downturn could have been given a political spin.

Even an easing (which nobody would have predicted) or a positive shift in bias could have been interpreted as an attempt to shore up markets and only add to worries that the election mess is spooking financial markets.

Also, the fact that the Consumer Price Index (CPI) met expectations and rose by 0.2 percent in October, after a 0.5 percent gain in September, was overshadowed. Core CPI, which excludes volatile food and energy prices, also rose by an expected 0.2 percent following a 0.3 percent increase in September.

The real jolts came from specific business news announcements:

Financials Hit

Tuesday’s announcements by both First Union and Bank of America showing increasing loan losses caused heavy hits to the financial sector. This was exacerbated later in the week by the publication of decreased earnings estimates from these companies and others such as Bank of New York.

On the equity front, reports indicate a definite impact: the Phlx Bank Index was down about 6.7 percent for the week, while the Amex Securities Broker/Dealer Index was off by some 1.9 percent.

Bond traders report sketchy results at this point, but issues in this sector are definitely underperforming.

In addition, word that Armstrong Holding’s may file for bankruptcy had a sharper albeit more narrowly defined impact. The stock for the Lancaster, PA-based building products firm hit a 52-week low after it was reported in a local paper that the firm might file because of its estimated $1.4 billion in asbestos liabilities.

As the news spread, the debt of firms with significant exposure to asbestos lawsuits spiraled down the tube.

To cite one example, Georgia Pacific has seen its debt widen by 100 basis points in relation to Treasuries. The paper is rated Baa3 by Moody’s Investors Service and triple-B-minus by Standard & Poor’s.

Looking ahead, market professionals have every reason to be thankful that a holiday is coming up next week.

Debt markets in the United States will hold full sessions on only Monday and Tuesday, with early closes slated for Wednesday and Friday. The stock market will also close early on Friday.

This will undoubtedly mean lower volumes during the coming week. Following this, a number of financial firms will be trimming positions by Nov. 30, in an effort to show decreased securities exposure before their year-end statements.

Debt markets will also be affected by a significant and somewhat unexpected increase in new supply in that sector you love to hate, telecoms.

British Telecommunications, which has been trying to borrow as much as $10 billion since this summer, will unveil a $6 billion to $8 billion multi-tranche global starting next week.

But concern over the shaky status of the firm has forced the issuer to sweeten the pot with a “step-up coupon” provision that ensures investors get paid more interest in the event of downgrades. Click here for details.

Leave a Reply

Your email address will not be published. Required fields are marked *