MarketView for October 31

Summary

Thursday saw another down day on Wall Street as the Federal Reserve's statement the day before added to investors' anxiety about the timing of a pullback in its stimulus program. The said on Wednesday it will keep buying $85 billion of bonds per month, citing weaker economic signals, but it removed a phrase from a previous statement expressing worries about credit conditions, which some investors interpreted as a sign that the Fed could begin tapering earlier than expected.

While it was a second consecutive day of losses for the market, all three major indexes ended October with solid gains. Dragging on the Dow Jones Industrial Average and the S&P 500 indexes was Visa, which ended the day down 3.5 percent to $196.67 after the company reported a 28 percent decline in quarterly earnings.

The S&P 500 closed near its intraday low, with a wave of end-of-session selling marked by sell-order imbalances near the close. For the month the Dow gained 2.8 percent, the S&P 500 added 4.5 percent and the Nasdaq was up 3.9 percent. The S&P 500 is up 23.2 percent for the year so far.

Thursday's economic data was mixed. A gauge of business activity in the Midwest surged past expectations in October, while weekly initial jobless claims dipped in the latest week.

Among the day's gainers, Exxon Mobil ended the day up 0.9 percent to close at $89.62 after the company reported adjusted third-quarter earnings that exceeded expectations.

Expedia closed up 18 percent to $58.97 and ranked as the S&P 500's best percentage gainer, a day after reporting third-quarter earnings that exceeded expectations.

Facebook reported strong growth in its mobile advertising business late on Wednesday, though it said it didn't plan to boost the frequency of ads shown to users. Facebook's stock ended the day up 2.4 percent to close at $50.21.

With results in from 355 companies in the S&P 500, 68.2 percent have topped Wall Street's expectations, above both the 63 percent beat rate since 1994 and the 66 percent beat rate for the past four quarters, according to Thomson Reuters data.

Revenue performance has been weaker, however, with 53.6 percent of companies exceeding expectations, shy of the 61 percent beat rate since 2002, but above the 49 percent rate for the past four quarters.

Claims for Unemployment Insurance Fall

The number of Americans filing new claims for unemployment benefits declined largely as expected last week as the impact of a California computer glitch worked its way out of the report. Specifically, a report released Thursday morning by the Labor Department indicated that initial claims for state unemployment benefits declined by 10,000 claims to a seasonally adjusted 340,000 claims.

Claims for the prior week were not revised. A Labor Department analyst said California, which had been dealing with a backlog, reported no carryover in claims last week from previous weeks.

Technical problems as California converted to a new computer system have distorted the claims data since September, which had made it hard to get a clear read of labor market conditions. A 16-day partial shutdown of the federal government had also pushed up claims in recent weeks as furloughed workers applied for benefits, but this appeared to be diminishing.

Claims filed by federal employees fell by 29,713 claims in the week ended October 19 to 14,423.

Fannie Mae Going to Court

Fannie Mae has sued nine of the world's largest banks, accusing them of colluding to manipulate interest rates and seeking more than $800 million of damages. In a complaint filed in the U.S. District Court in Manhattan, the government-controlled mortgage company accused the banks of conspiring for many years to suppress Libor, or the London Interbank Offered Rate, including during the 2008 financial crisis.

Libor underpins hundreds of trillions of dollars of transactions, and is used to set interest rates on such things as credit cards, student loans and mortgages. However, according to Thursday's 71-page lawsuit, "defendants' promises and representations regarding the legitimacy of Libor were false," causing Fannie Mae to lose money on swaps, mortgages, mortgage securities and other transactions.

The lawsuit adds to the legal headaches over whether banks manipulated Libor and other rate benchmarks to boost profit or appear healthier than they actually were. Regulators in the United States, Europe and Asia have been investigating many banks over alleged manipulation of Libor and other rate benchmarks.

Four of the banks Barclays, Rabobank, Royal Bank of Scotland, and UBS AG have reached regulatory settlements that totaled $3.6 billion and included admissions of wrongdoing.

The scandal also cost the jobs of Barclays' and Rabobank's respective chief executives, Robert Diamond and Piet Moerland.

Other bank defendants in the Fannie Mae lawsuit are Bank of America, Citigroup, Credit Suisse, Deutsche Bank, and JPMorgan Chase.

All nine banks declined to comment. Freddie Mac, another government-controlled mortgage company, filed a similar lawsuit in March seeking unspecified damages from more than one dozen banks.

The Fannie Mae lawsuit describes emails and other communications that illustrate the alleged collusion.

According to the complaint, the banks' Libor submissions were "particularly striking" on days where they settled large swap positions with Fannie Mae. The company estimated that it lost $332 million on interest-rate swaps alone.

"Fannie Mae filed this action to recover losses it suffered as a result of the defendants' manipulation of Libor," a spokesman said. "We have a responsibility to be good stewards of our resources."

The government bailed out Fannie Mae and Freddie Mac in 2008. Both companies are now overseen by the Federal Housing Finance Agency, which tries to conserve and recover assets for the benefit of taxpayers. In 2011, the FHFA sued 18 banks and financial companies to recover losses that it said Fannie Mae and Freddie Mac suffered on about $200 billion of mortgage securities.

JPMorgan last week became the fourth defendant to settle in that litigation, agreeing to pay $4 billion.

The case is Federal National Mortgage Association v. Barclays Bank Plc et al, U.S. District Court, Southern District of New York, No. 13-07720.