Thursday: Jobless Claims in Focus as Spill Spooks Markets

BP's troubles have now spilled across the broader market, as investors move to price in worst-case scenarios for the petroleum giant and other companies involved in the Gulf of Mexico rig disaster.

A brown pelican stained with oil takes flight while a bird rescue team tries to capture it for cleaning June 5, 2010 in Grand Isle, Louisiana.
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A brown pelican stained with oil takes flight while a bird rescue team tries to capture it for cleaning June 5, 2010 in Grand Isle, Louisiana.

The oil sector will stay in focus Thursday, but the market will also fixate on the 8:30 a.m. release of the first weekly jobless claims report since last Friday's disappointing May employment report. Chinese data overnight and meetings of the European Central Bank and the Bank of England will also be watched ahead of the Wall Street open. U.S. international trade data is also released at 8:30 a.m.

Against the backdrop of a flurry of Congressional hearings Wednesday, BP stock plummeted, taking with it Transocean, Anadarko and Halliburtonas well as other companies not involved in the 51-day-old Gulf oil spill.

The heavy hand of Washington weighed on the group, as Congress discussed the possibility of extending liability caps on BP and others. BP was trading at a 14-year low, and has now lost half its value since the April 20 disaster. Traders said speculation focused on the possibility of a BP bankruptcy but also the idea it might soon eliminate its dividend.

"The risk of government lifting liability caps and taking a run at these companies is considerable, but I'm not sure you're supposed to view that as a big systemic market phenomena. It may be more stock specific. It's not great for the energy sector, but turning it into a great macro event is kind of an overreach," said Barry Knapp, head of U.S. equities portfolio strategy at Barclays Capital.

"You've got this regulatory overhang that's going to keep a cloud on the industry even though, to me, the group looks pretty good right's at the right stage of the cycle right now," he said. "...I would start getting involved in the group, but I would do it through the big integrated companies. It's kind of a chicken way, but I think it's the right way."

Exxon, for example, is nearly a percent higher on the week while BP is down 21 percent. Year-to-date, Exxon has lost 12 percent, while BP has lost 50 percent. The energy sector as a whole has lost 10.4 percent. Chevronis down just 8 percent year-to-date. Brazil's Petrobras is down 21 percent on the year, but it's up 4.2 percent so far this week.

There are more House and Senate committee meetings on the Deepwater Horizon spill Thursday. Also, President Obama meets with the families of workers killed when the rig exploded.

At 10 a.m., Treasury Secretary Tim Geithner testifies on the U.S. economic relationship with China before the Senate Finance Committee.

Knapp thinks the market could also turn its focus to the U.S. data this week. "I think the risk reward going into jobless claims tomorrow and retail sales on Friday is pretty favorable. If we drop to 445,000 claims the market expects or even a little below, the market will act very favorably. The tone in the beige book about consumer spending was very favorable," said Knapp.

Stocks ended lower Wednesday despite trading higher early in the day. The morning rally was fanned by calming words from Fed Chairman Ben Bernanke, who continued his tone of cautious optimism about the economy in testimony before a House panel. But it was China Wednesday that had initially sent world stock markets higher, after an unnamed official told Reuters that exports grew 50 percent in May. The data was due to be released Thursday.

The Dow finished down 40 at 9899, while the S&P 500was down 6 at 1055. The two sectors leading the market lower were energy, off 1.3 percent, on concerns about the spill-related companies' ability to pay for the Gulf damage and new regulations. Financials, down nearly 1 percent, were the second worst performers, and it is not coincidentally another industry facing stricter regulation. On Thursday, House and Senate conferees hold their first meeting in an effort to come up with compromise legislation combining House and Senate financial regulatory reform bills. (Track U.S. pre-market futures here)

Crude oil rose 3.3 percent to $74.38 per barrel as inventory data showed supplies fell for a second week in a row.

BP = Bad Paper?

As its stock tanked, spreads blew out on British Petroleum bonds and credit default swaps rose sharply, as investors paid up to hedge against default. BP CDS were trading at 368 on Wednesday, costing investors $36,800 to insure against default on $10 million worth of 5-year bonds. A 3-year bond saw yields shoot above 8 percent.

Joel Levington, managing director of corporate credit at Brookfield Investment Management, said that BP generates plenty of cash flow and that bondholders have the more than $90 billion in market cap in front of them. "It's very easy for politicians to make some strong words...Never underestimate a company that can generate $20 billion a year.," he said.

"This is a company that has tremendous flexibility," he said.

But Chris Towle, who is director of high yield and convertible securities at Lord Abbett, said he doesn't really follow BP but he doesn't like the looks of it despite the yield. "The longer it takes (to stop the spill), the higher the liability, the worse it gets with undersea plumes. You could talk about what it cost for one of the world's great fisheries to be impaired. Is it permanent? Is it 10 years, 20 years? No one knows. It's hard to make a decision...but just because it yields 6 percent now doesn't mean it's good value. It's just too much headline risk," he said.

Towle said, in an interview at midday Wednesday, that the high yield market was beginning to tighten up slightly after reaching the widest spreads of the European debt crisis Tuesday. He said the spreads on the Merrill Lynch High Yield Master widened to 727 bps from 540 bps in the third week of April.

Thomson Reuters IFR reported a smattering of high yield and investment grade deals this week, but its data shows June issuance sorely lagging. So far in June about $5.2 billion in investment grade corporates have come to market. In May, the total was $25.4 billion and in April, it was $35.6 billion. This week, the total was $2.05 billion and last week's was $3.15 billion. In the high-yield market, the numbers are even worse. There was $750 million of high-yield issuance so far in June, compared to a total $6.8 billion in May and $29.2 billion in April.

Issuers have been standing down unless they believe the market will show a big reception for their paper, said Levington. The slow down comes as markets worry about the European sovereign debt situation, but Levington said it's also because there was a rush of corporates to market earlier in the year. "If you look at investment grade companies, there's not a burning need for cash right now..if you look at the last six months, they've gone after their 2012 and 2011 debt," he said, noting many companies have now locked in lower rates on longer duration securities.

"I think what you'll see is the next activity will be around acquisition activity," he said.

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