BP is back in the hot seat Thursday as its embattled CEO testifies before Congress on the Gulf of Mexico oil spill disaster, but market focus will likely move back to U.S. economic data and the path of the euro.
A disappointing earnings outlook form FedEx and a steep decline in housing starts combined Wednesday to hold stocks back, even as industrial production came in well above expectations. The Dow was 4 points higher at 10,409 and the S&P 500fell just about a point to 1,114.
BP was a major focus in the stock and bond markets, as its Chairman and CEO met with President Obama. Its stock and bonds were under pressure ahead of and during the meeting, but reversed losses on reports that BP agreed to set up a $20 billion escrow fund to handle claims from the oil spill. BP also told shareholders it would not be paying any more dividends this year. More than $1 billion face amount of BP bonds traded, and according to Bonds.com, BP was the most active issuer, making up over 10 percent of corporate bond volume.
In London, BP shares jumped.
"I think what you're seeing is a fever being broken" said Joel Levington, managing director of corporate credit research at Brookfield Investment Management. "I think what BP management is doing is prudent...If you listened to their conference call, they tried to maintain a conservative financial profile. Their long standing leverage target is 20 to 30 percent. They reiterated that on the call and got it toward the lower end, which is what they've historically done.
"To me, it just seems like they're playing the many levers they have to generate cash. They are eliminating the dividend in the near term. They are reducing capital expenditures, and they are looking to some asset sales. They expect to generate $30 billion in cash flow from operations," said Levington. The BP 2013 bond saw its yield rise to as high as 9.9 percent Wednesday morning, before sliding back about 2 percent late in the day.
"The president today said he wants to see BP remain a viable company.. Now I guess he has 20 billion reasons to want that," he said.
Ahead of the White House meeting, BP also saw its credit-default swaps rise to a record of nearly 630 bps, before falling back to a level of 582.1. The CDS, which insure bond holders against default, indicated at the peak that investors were pricing in a 39.5 percent chance of default or bankruptcy by BP within five years. By the end of the day, that number slid back to 36.72 percent. Prior to its reports of the spill, BP CDS were at 42.4 bps in mid April, and the chance of default was at 3.69 percent, according to CMA DataVision.
Steve Massocca, managing director at Wedbush Securities, said he thinks the tie between BP and the stock market's movement has come to an end. The stock market, however, did turn higher when the news of an agreement on the escrow fund was first reported at midday.
"For a couple of days there, if BP ticked down, the market ticked down. If BP ticked up, the market ticked up. The two intraday charts I was watching up until today was the euro and BP," he said.
He said the important number for the market Thursday is the 8:30 a.m. weekly jobless claims report, which has been disappointingly high in the past several weeks. "Certainly everybody's expecting it, and it's a big deal if it's outside of expectations. It needs to be an outlier number to have a real impact," he said. Economists expect to see 450,000 claims.
Traders are also watching the activity around the quadruple expiration of futures and options this Friday. Patrick Kernan, who trades S&P 500 options, said the activity around the expiration Wednesday was surprisingly quiet after the market's recent volatility.
"There was a decent size trade in the SPX that an investment bank was selling that implied less than a 1.5 percent move in the S and P before Friday morning," he said.
What Else to Watch
Consumer price inflation data and current account data are also reported at 8:30 a.m. The Philadelphia Fed survey is released at 10 a.m., as are leading indicators.
EU leaders meets Thursday in Brussels, along with representatives of the IMF. "My suspicion is they're not going to drop any bombshells on us, and they're going to try to prop up the euro," said Boris Schlossberg of GFT Forex.
On Wednesday, Lorenzo Bini Smaghi, a member of the European Central Bank executive board, told CNBC's Steve Liesman that the ECB will release results of individual banks' stress tests, something they had previously declined to do. Spain separately announced it would release its bank results.
"This is all part of the public relations campaign to soothe investors' worries and maintain the bid in the euro," said Schlossberg. The euro finished Wednesday at $1.2303.
BP CEO Tony Hayward testifies at 10 a.m. before the House Energy and Commerce Subcommittee on Oversight and Investigation on BP's role in the Deepwater Horizon rig disaster. Coast Guard Adm. Thad Allen briefs the Senate on the spill in a closed door session.
The joint House-Senate committee working on financial regulatory reform will focus on systemic risk regulation, resolution authority and payments, clearing and settlement in Thursday's session.
The FCC holds a 10:30 a.m. meeting on reclassifying the internet under telecom regulations, a change that would impact cable and telecom companies that offer broadband.
Earnings are expected from J.M. Smucker , Winnebago and Kroger .
Questions? Comments? Email us at marketinsider@cnbc.com
