Get The Ticker Tape delivered right to your inbox.

X

North Korean Missile Launch Rattles Markets; Rhetoric Might Rule Rest of Day

Print
August 29, 2017

(Tuesday Market Open) Investors might be switching gears today. Monday’s composed day of trading amid Tropical Storm Harvey’s devastation in southeast Texas appears to be giving way to disconcerted trading today as investors and the world’s largest nations digest and assess North Korea’s bold move to launch ballistic missiles over Japan.

In the early going, U.S. stocks were on a downward trajectory that started late Monday, shortly after news of the North Korean missile launch broke. Stock markets across Asia and Europe were marked by selling activity, though sharply lower starts appeared to moderate as the trading day wore on. We were seeing some of that in the U.S. as the pre-market declines mitigated somewhat ahead of the open. But how the rest of the day pans out might well depend on the rhetoric—and actions, if any—from world leaders.

So far, the White House has denounced the launch, noting that “all options are on the table.”

As is typical in a time of uncertainty, investors have been flocking to safe-haven assets like gold, which climbed 1% to hit its highest level since last September. Right ahead of the open, the Dow Jones Industrials was off nearly 118 points, while the S&P 500 was lower by 15 points and the Nasdaq Composite gave back 50 points, off deeper drops earlier.  

Yesterday, the markets barely budged as the rain continued to deluge southeast Texas with forecasts for more in the offing. Volume was unusually low too, as the Dow fell only 5.27 points, led by drops in shares of property-insurance companies. The S&P 500 managed to edge up 1.19 points despite a pullback in energy stocks while the Nasdaq Composite tacked on 17.37 points.

There are plenty of predictions of how Tropical Storm Harvey will ultimately affect impacted regions in Texas and Louisiana, not to mention the nation’s economy. But, yesterday’s muted response might be an indication that investors are waiting to see light peek out from behind those dark clouds before making any big moves tied to Harvey.

The CBOE Volatility Index (VIX), that so-called fear gauge, actually slipped slightly yesterday to close at a neutral 11.32, indicating that market risks appear low. It’s a different story today, with the VIX jumping above 14.

As of early today, the Bureau of Safety and Environmental Enforcement (BSEE) estimated that 18.94% of the current oil production, or 331,370 barrels of oil a day in the Gulf of Mexico has been shut in. On the natural gas production side, BSEE projected that 18.12%, or 583.39 million cubic feet per day in the Gulf was shut in too.

That appeared to push gasoline and oil futures, but crude and Brent crude prices were little changed. Crude oil inventories come out every Wednesday, but we’re not likely to see the brunt of the damage until next week or the week after.

The Houston Shipping Channel is still closed, so even if refiners were able to come back on line, they wouldn’t be able to move product. Gas prices at the pump are climbing, but not terribly so. At least not yet. Prices at the pump nudged up marginally early today to $2.392 cents a gallon, up a 1.6 cents from Monday, and higher by 5.1 cents from a week ago, according to GasBuddy.com.

Gasoline Futures

FIGURE 1: HARVEY'S HAVOC?

Supply-line disruptions related to Hurricane Harvey pushed gasoline futures to two-year highs, but also pressured crude oil futures (purple line). Data source: CME Group. Chart source: Thethinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

Auto Industry Boomerang: The videos coming out of the Houston area are littered with images of the tops of cars, both stranded and parked in long, well-ordered lines at auto dealerships. Many are totally immersed in the floods brought on by Tropical Storm Harvey, and are now rendered junk. “Thousands upon thousands of vehicles are going to have to be scrapped,” said Mike Jackson, Autonation chief executive, on CNBC this morning.

Auto industry analysts say investors are likely to see the first big dent in car sales as soon as Friday’s August numbers are reported. Citi analyst Itay Michaeli already cut his estimate, noting that Harvey is affecting 125 counties throughout the state, accounting for some 60% of Texas’ total auto sales, according to CNBC.  He reduced his August sales estimate to the low-$16 million range from the mid-$16 million range.

But apparently there’s a boomerang effect to this: Once the damage has been assessed and Texans are back on their feet, auto sales are expected to ramp up swiftly as drivers look for another set of wheels. “I expect a significant snapback in Houston,” which is home to more than 5,000 auto dealers, Jackson said.  

Will GDP Rise after Harvey? It appears likely that economic measures will be distorted for better and for worse in coming weeks, and even months. But when the water has retreated and the true costs of the damage are known, its impact is likely to be mostly concentrated, particularly in and around Houston, the nation’s fourth-largest city.

The losses will be mounting in property damage, but the economy is likely to gain during the new building with a bump in Gross Domestic Product (GDP), as seen after other major storms. The GDP doesn’t tally property damage, but it does rebuilding, so be sure to account for that bounce in coming quarters.

Seizure in September? Sam Stovall, chief investment strategist at CFRA and somewhat of a market-numbers history buff, reminds us that September is not known for its happy endings. “When it comes to average monthly market performances, September has the worst track record, as it posted the deepest average decline and fell in price nearly 60% of the time,” he said in a recent note.

“While history shows that the market’s trajectory is typically not blown off course by even the mightiest of storms, investors remain vigilant to that elusive pullback or correction in prices,” which, he said, may be triggered by lingering debt-ceiling issues in Washington, D.C., not to mention other outside forces. “As a result, investors may start singing a different tune as we approach the new month…(a) ‘Seizure in September?’”

Good Trading,
JJ
@TDAJJKinahan

Economic Calendar
Scroll to Top