Ebola and market pressures

October 16, 2014

There’s a glut of various stresses operating in the markets right now: Europe’s inability to get out of its own way, the sharp fall in oil prices that probably says more about supply issues and lackluster demand in Asian markets than the United States, the uncertain path of the Federal Reserve and a nagging concern that weak inflation figures show the economy really isn’t healing all that much.

But make no mistake about it – Ebola is a pressure point for markets at this moment, and one only need look at the “scare” moments in markets to really see it.

The S&P 500 has given up about 8 percent from an all-time high reached about a month ago. Valuations were arguably a bit expensive, and if the Fed recedes and volatility normalizes (somewhere below where we are now on the VIX), the expectation would be that a correction of 10 percent or so wasn’t out of the norm of possibilities, or even a meandering market that lasts for more than a few months.

The labor market still appears to be improving, with jobless claims falling, seemingly, on a weekly basis, and while sentiment figures are a bit less robust, they’re also fickle when spending real dollars matters more.

All that is well and good, but doesn’t explain the mass gyrations the market has experienced in recent days, and again, Ebola fears can be tied directly to them:

* On Oct. 8, shares of Chimerix fell more than 18 percent in 40 minutes after news of the death of Thomas Eric Duncan, the first person diagnosed with Ebola in the United States. Duncan had, in the late stages of his illness, been given a drug developed by Chimerix. At the same time, shares of Tekmira Pharmaceuticals, said to be further along in developing a treatment, saw their shares soar about 13 percent.

* On Oct. 13, a massive, rapid selloff of futures contracts occurred at about 3:35 p.m. EDT (1935 GMT), with more than 100,000 S&P e-mini futures contracts trading in five minutes, a volume not matched even by the minutes just before the close of trading – and that, like, never happens. Reports of a plane held on the tarmac in Boston due to a scare related to the outbreak was cited as the catalyst for the declines. The market was already vulnerable, but this sent futures over the edge as volume exploded in little known names like Lakeland Industries, maker of hazmat protective wear, and Ibio, which saw 16 million shares traded – on that day an unprecedented level of trading for this tiny stock.

It may be a stretch to suggest there’s a “short the market and go long Ebola” trade going on, even though some options-market activity is geared around capitalizing on news of these names (most people are too genteel to admit to such a blatant strategy), but the unknown is driving investor action for sure.

* Wednesday saw similar activity in the morning, with another massive selloff in futures around 7:30 a.m. on little to no news at all, with the exception of vague rumors related to Ebola and the possible spread of the disease in Spain. The market fell through the rest of the morning, affected in part by worries about global growth and deflation after weak figures on retail sales and the producer price index, and continued to sag through the session. Once again, Ebola-related names rallied on various other fears, though.

Steve Sosnick, equity risk manager at Timber Hill/Interactive Brokers, summed it up in a comment: “The reaction struck me as very similar to the moves that we saw in the wake of the 2001 terror attacks. In those dark days, the market was hypersensitive to stories about terrorists, anthrax and a variety of societal woes and there was a climate of underlying fear that took a long time to dissipate.”

That says it well. At the moment, when there’s an unknown and a growing concern about the transmission of the disease and ominous statements about its potential spread from the World Health Organization, the effect it can have on the daily habits of people – which extends to spending and travel and all those other things that affect economies – would tend to be a trigger for risk aversion.

Ultimately, barring a zombie apocalypse, oil prices and Europe’s ineptitude will be bigger factors on a broader, longer-term basis. But that doesn’t mean people won’t stop selling the SPX and buying Tekmira at the next headline. It will keep investors on their toes for some time.

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