Hurricane Sandy effects on market likely to be shrugged off – opens up Brent-Nymex pairs trade opportunity again

The much awaited and feared hurricane Sandy looks to have blown away now after being being downgraded to a tropical storm. When it came ashore in New York City last night it had winds of up to 90 mph and a record 13 foot of storm surge. As a precaution, millions of people were moved to shelters and relocated, schools were closed, transportation was shut down, airports closed, and even the New York Stock Exchange had to close for two days – an event that has not happened for decades (at least due to a weather-related problem). The total damage may hit $35 billion or more, a big headache for insurers and probably an opportunity for some retailers and home builders. Investors have been working thesmelves into a mini frenzy in recent days with the possible effects deriving from the hurricane. Should they care however?

History tells us that hurricanes aren’t harmful for equities. In fact, equities are of course driven by more global events rather than a localised hurricane. According to CNBC, of the 13 worst hurricanes in US history, only Ike in August 2008 and Hugo in 1989 led to negative stock performance after a three and a six-month period interval afterwards. Truth is, that it is difficult to evaluate and isolate the hurricane effects. August 2008 was a period when there was much more to worry about in the markets than just a hurricane. It was in fact the peak of the financial crisis of course and is likely to be more of an explanation as to why the stock market was lower in 2008.

Insurers of course are usually punished at first, as investors evaluate the impact of the hurricane on the bottom line of those companies but, any material sell offs are typically soon reversed as investors come the realisation that the impact isn’t as large as initially feared. We would see any drop of 6% – 10% in an insurer with sound financials as a buying opportunity in the hurricane aftermath. Some home building companies are likelyto be boosted through the consequent reconstruction too but in the US, homebuilding stocks have been on something of a tear in recent months and in fact any further rallies of 5-10% are probably good swing short opportunities. 

The most interesting effect from the hurricane, in oyr view, is on the oil market. So far this year, particularly with the US Nymex contratc, oil prices have been in decline. Investors thought the hurricane would push prices higher but yesterday, in a stark illustration of how conventional wisdom in the markets doesn’t always work, oil prices fell. According to the initial reports, power was shut down in many cities along the US East Coast and this will continue this way for days in some cases. With no power, demand for crude oil and fuel products will be lower. This will put an additional pressure in US oil prices and this has widened the spread again between brent crude and the nymex contract from $20 last week to $23. We cover this opportunity in depth in the latest edition of our magazine (page 19) – http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v10_generic

At the time of writing, it seems that the markets have taken matters in their stride. Volumes are lighter as the US main markets remain closed. Investors will be more focused on Friday’s non-farm payrolls report to get any clues as to whether they should buy equities after the recent drop.  Tthe European Union’s latest developments, US corporate earnings and this weeks raft of economic reports to be released will be much more important in driving markets than Sandy.