Weekly Recap; Volume & Volatility reach EPIC Levels 3rd week of October

We had a HUGE week of Volume,
Volatility, and Trading opportunities the 3rd week of October!  Oil plunges, stocks go bananas and the Bond Market, you had to SEE to believe!  If you
missed the action, here’s your last chance to catch up!

Market volatility reached epic
levels this week!

By Wednesday afternoon, the
S&P500 had given up than 4% on the week after a series of unfortunate
events hammered risk assets, drove liquidation and raised fear the dreaded
correction had arrived. However most of the gap was filled in the second half
of the week as the soothing possibility of more central bank easing emerged.

On Wednesday, the withdrawal of
Ireland’s exotic tax avoidance laws, which inspired AbbVie to cancel its $54
billion merger with Shire, slammed many US hedge funds that were long Shire in
an arbitrage trade. 

Commenting on Wednesday’s market
action, Goldman Sachs’ CFO said investors were “shooting first and asking
questions later.” Then on Thursday, the ECB said it would adjust haircuts
on bonds used as collateral for loans to Greek banks and Fed Governor Bullard
said the FOMC should consider delaying the end of the QE taper this month to
help stem the slide in inflation expectations. Both announcements helped propel
a move higher, aided by some better US data late in the week and a round of
mostly solid earnings reports.

For the week, the DJIA dropped 1%, the S&P500 fell 1% and
the Nasdaq lost 0.4%.

The Nasdaq briefly entered
correction territory on Wednesday, joined by the Japanese Nikkei Index on
Friday, while the S&P500 reached 9.5% off of September’s high before
rebounding. The market stampede was even more jarring in the bond market, as
the US 10-year dove 43 basis points between last Friday’s close and the height
of the fear on Wednesday before closing back at the key 2.20% level on Friday.

The data out on Wednesday suggested the global slowdown may be
finally catching up with the US economy. September US retail sales were negative (-0.3% v
-0.1%e; Control Group: -0.2% v +0.4%e), with the key control group, which is
used to help calculate GDP, way off expectations. That was the first negative
reading for the series since January, when severe winter storms depressed the
series temporarily. September PPI producer prices were softer than expected,
teeing up a soft CPI reading. The New York Fed’s Empire manufacturing index was
well under expectations, with the new orders component turning negative.

In Europe, markets tested Mario Draghi’s “whatever it
takes” position after developments in Greece provided an opportunity for
attack. Peripheral bonds sold off hard late on Tuesday and into Wednesday after
a poll in Greece showed the anti-bailout, anti-euro party Syriza with a 6.5%
lead over the governing New Democracy party, well ahead of the 1.4% lead seen
in the last round of polls. There is a presidential election in Greece in
February, which could be followed by early parliamentary elections. Greece’s
bailout is officially over in little more than a year, but PM Samaras would
like to end it early in order to get ahead of his Syriza opponents, who talk
often about getting Greece out of the eurozone. The rush to end 1% bailout
government financing and jump into public markets, at a rate more around 7% (or
the prospect of Grexit) drove the stampede out of Greek debt and a big drop in
the stock market, both of which shocked wider European equities and sent
peripheral debt spiking higher.

The Irish government confirmed that it will eliminate its notorious “double
Irish” tax structure, just a few weeks after the US Treasury said it would
put up roadblocks to tax inversion deals.

The first victim of the changes
was the $54 billion AbbVie/Shire merger (Shire is headquartered in Ireland).
The implosion of the deal was cited as one of the factors deepening the
sell-off on Wednesday. Many hedge funds had long Shire/short AbbVie arb trades
riding on the merger and Shire shares lost over 20% as the deal unravelled,
pummeling the funds and forcing liquidation. Recall that back in July, AbbVie’s
CEO said the tax benefits were an advantage in the Shire acquisition but were
not the central rationale behind the deal. AbbVie will have to pay Shire $1.6
billion to break their engagement.

European governments are wrangling with 2015 budget planning and
the process is exposing many of the very stresses that have prevented the
Eurozone from escaping the long reach of its crisis. Budgets proposed by France and Italy both abandon
pledges to bring deficit-to-GDP ratios into compliance with the 3% treaty
limit. Last Friday S&P cut France’s sovereign outlook, and on Wednesday
Fitch put France’s AA+ sovereign rating on negative watch. German Chancellor
Merkel said there could be no exceptions to the EU deficit rules even as French
President Hollande demanded flexibility, setting up another axis of tension in
the EU.

The German government cut its GDP growth forecasts for 2014
(from 1.8% to 1.2%) and 2015 (from 2.0% to 1.3%), bowing to the reality of the
European economic slowdown. Berlin
insisted it would not change course on policy or austerity despite the worsening
outlook. Merkel said that the government would still pursue its balanced budget
goals.

The two cases of person-to-person Ebola transmission in the US
appeared in Dallas, Texas. Two nurses
who helped care for Thomas Duncan, the Liberian man who died last week, tested
positive for the disease. There was widespread consternation on reports that
the second nurse was cleared to travel to Ohio and back by air while also
beginning to feel certain symptoms, including fever, associated with the
disease. There was a cascade of Ebola scares in Ohio, San Diego, aboard a
Caribbean cruise ship and other locations from people who had unknowingly
travelled with the second nurse, although as of now there are still only two Ebola cases in
the US, the nurses.

The growing rift in OPEC pummeled oil prices this week, and
front-month WTI crude sank below $80 for the first time since June 2012.
Persian Gulf states were said to be targeting crude prices around $70 with the
aim of making US shale production uneconomical, and were
said to be opposing any OPEC production cuts at the November meeting due to
fears they could permanently lose market share. Non-Persian Gulf OPEC nations
plus Iran pushed for the organization to adopt a production ceiling of 30M bpd.
Venezuela called for an emergency OPEC meeting, but its demand largely fell on
deaf ears. The IEA Monthly Report trimmed global
oil demand growth forecasts for 2014 to their lowest level in five years and
also trimmed its 2015 demand forecast. The IEA said any more crude oil price
declines would require lower demand or supply cuts.

Wall Street banks had largely good news in their quarterly reports. Goldman
Sachs reported excellent third-quarter results and raised its dividend nearly
10%. Revenue was up 25% y/y and net income rose a whopping 60% y/y. Morgan
Stanley had similarly strong results. JPMorgan’s profits were slightly lower
than expected, but compared favorably with the loss seen a year ago. Bank of
America either reported income of $168 million or a small loss in its third
quarter, depending on how the bank’s massive $5.8B DoJ fine for mortgage issues
is counted. Shares of Citibank soared after the bank said it would exit
stagnant business in 11 countries and modestly topped expectations in its third
quarter.

Shares of railroad CSX gained after reports asserted that the company had
rebuffed a merger proposal from Canadian Pacific last week. If a deal were
reached, the companies would have a combined market value of $62 billion. Big
regulatory obstacles stand in the way of a merger – the US Surface
Transportation Board has a history of intervening in mergers over fears that
the industry would end up with just two North American transcontinental
railroad systems.

Overall volatility also whipped around currency trading this week, although
there appears to be a slight strengthening trend in the euro as the single
currency rises off the record lows seen in the first week of October. EUR/USD
came into the week around 1.2610 and after the excitement on Wednesday appeared
to be consolidating around the 1.2800 level. Meanwhile, the yen also
strengthened, with USD/JPY declining from highs of 107.70 to lows around 105.5
on Thursday, before closing out the week around 106.65.

The Shanghai Composite fell 1.4%, the biggest weekly decline in four months, as
the mainland index turned increasingly less immune to the global market rout
amid a set of mixed economic figures. September Trade Balance hit a 5-month low
of $31B, even though the y/y increase in imports and exports marked 7- and
19-month highs respectively. New Yuan Loans were also more encouraging at
CNY857B – a 3-month high and well above the CNY746B consensus. Inflation
indicators were still decidedly subdued however, as 1.6% CPI marked a near
5-year low while PPI of -1.8% was down on the year for the 31st consecutive
month. Monetary authorities are taking notice with further incremental
liquidity injection measures. On Tuesday, the PBoC lowered the offering yield
on its 14-day repo by another 10bps to 3.4%. On Friday, the PBoC also announced
an additional CNY200B injection directly into the banking system targeting 20
joint-stock Chinese banks. The balance of key China economic data for September
along with Q3 GDP will be released early next week, followed by the October HSBC
flash manufacturing PMI on tap for Thursday.