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Brief Analysis by Monika Rosen, Chief Analyst at Bank Austria Private Banking:
US stock exchange needs to weather the storm

  • The US equity market now needs to prove that it can withstand the storm:
    o First negative quarter in three years: Quarterly earnings so far are below the level seen in the same quarter of 2011.
    o In addition, the final labour market figures before the US election on 6 November will come out this Friday.
    o As if that weren't enough, Hurricane Sandy threatens to hit a number of large cities along the East Coast, from Washington, D.C., to New York and Boston.
  • Nevertheless, we are confirming our overweighting of US equities: The US stock exchanges continue to face myriad challenges, but the market is still in good shape.

The potential damages of Hurricane Sandy are so huge because – unlike most hurricanes – it is expected to make landfall not in the Gulf of Mexico but on the East Coast, and pretty far north at that, where it is wreaking havoc on some of the big cities. The Financial District in lower Manhattan is particularly at risk. If Sandy causes massive flooding there, it could affect important power lines and cause outages. The segments directly affected by the storm include the insurance and oil industries. The area affected by Sandy contains five refineries that account for roughly 8 per cent of the refinery capacities in the US. An outage could cause petrol prices to rise temporarily. Initial estimates of the insured damages that Sandy may cause reach into the single-digit billions. This would put it in the same category as Irene last year.

Retail is also deeply affected. Most retailers have 10 per cent of their branches in the area threatened by Sandy, where several days of closure could have quite an impact. Other segments are profiting from the storm, including home improvement stores and supermarkets. It is important to remember that a hurricane leads to an increase in sales not just beforehand (batteries, generators, water, food supplies), but also directly afterwards (cleaning supplies to clear away the effects of the storm). Once Sandy has passed, retailers will see what effects the storm will have on this year's Christmas sales.  There may well be consumers who have to cut back on Christmas purchases after having spent more in the aftermath of the storm.

Aside from the hurricane, lots of companies are of course presenting their quarterly results. So far, earnings in the S&P 500 for the third quarter are 1.2 per cent below those from the same quarter of 2011. That is the first negative quarter in three years. A relatively large number of companies are seeing disappointing turnover and have a rather conservative outlook for the current quarter.

Amidst all these events, the presidential election is pretty much taking a back seat. However, starting in the middle of next week, the election could have a positive effect on the US equity market once (hopefully) a winner is announced, which would clear up an element of uncertainty. At the same time, the “fiscal cliff” – the automatic budget cuts that will go into effect if Congress does not approve of a new budget before the end of the year – may then take centre stage.

Summary: The US stock exchanges continue to face myriad challenges, but the market is still in good shape. We are confirming our overweighting of US equities.

Enquiries: Monika Rosen
Chief Analyst at Bank Austria Private Banking
 Tel. +43 (0) 50505 - 40104
  E-mail: monika.rosen@unicreditgroup.at

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