News

Equity markets gain altitude as airline stocks hit two week highs

Europe

It has been another solid day of gains for European markets as optimism grows that Covid-19 infection and death rates have reached the peak of the crisis and are on their way back down across Europe, with the DAX and CAC40, over 20% up from their March lows.

The rising optimism may well have been tempered, as we head into the close, by the news that Spain saw an increase in its death and infection rate with the release of its latest numbers, while authorities in France warned that they still expected the number of deaths and infections to continue to rise in the coming days.

Nonetheless, despite today’s setback in Spain, investors appear to be looking at events through the lens of increased stimulus, and the prospect that we’re probably closer to the end of the outbreak than the beginning. Whether that proves to be correct, only time will tell, but it’s likely to be a bumpy ride along the way.

A recession still remains a given; but hopes are rising that it could well be manageable and not turn into a depression, and that is boosting airlines and travel shares, a sector that has so far borne the brunt of the huge sell off since February 21st.

EasyJet and British Airways owner International Consolidated Airlines are leading the gainers in the airline sector, with EasyJet up close to 20% though these gains need to be set in the context of declines in excess of 50% since late February.

The hotel sector has also risen today, in lockstep with the airlines, with French hotel chain rallying even as it announced that it would laying off 220k of its 300k staff as it struggles to maintain its cash position over the timeframe of the pandemic. CEO Sebastien Bazin insisted that he fully intends to rehire all of them once the crisis is over, as well as reopening every closed hotel. Accor also said they would be setting up a fund from 25% of its planned dividend to set up a special purpose vehicle to assist its employees while they are furloughed. Holiday Inn owner Intercontinental Hotel shares have also had a decent day.

Carnival is also higher after raising nearly $3bn in a combination of a share issue and notes offering, though they had to pay a high price to do it. The Saudi Public Investment Fund also took a sizeable stake in the business, according to a US regulatory filing giving it an 8.2% stake in the business.  

Cineworld shares have had a decent day, up nearly 50% after management announced they would be cutting the dividend. The directors also decided to defer payment of their full salaries and bonuses as they look to preserve the business in the face of challenging financial constraints. Today’s gains do need to be set in the context of a share price decline year to date of over 70%

Management made little mention of the Canadian Cineplex deal other than to say they would continue to monitor it; however, you have to ask if it’s a wise thing to go through with the deal, given their already high levels of debt, an overhang of the acquisition of Regal Entertainments, a couple of years ago.

It seems reckless in the extreme to go forward with a deal of this magnitude at a time when footfall for cinema is likely to take a great deal of time to recover, as consumers slowly recover the confidence that this lockdown has cost them in terms of job and spending security. 

US

US markets picked up from where they left off overnight, opening sharply higher on optimism that infection and death counts are plateauing, with the S&P500 breaking above last week’s peaks, and reach its highest levels in almost a month.

In the US oil giant Exxon Mobil has cut its capital budget by 30% to its lowest level since 2016, to $23bn, in response to the collapse in the oil price, with the biggest cuts in the Permian basin.

While other oil producers have cut back on share buybacks in recent weeks, Exxon has generally tended to favour investing in larger scale projects, unfortunately these have tended to have all been in fossil fuel projects. Other oil majors have dabbled in renewables, but its been on a pretty piecemeal basis, while Exxon has tended to avoid the renewables sector entirely. This could well change given the current circumstances, and is something that the company is well behind the curve on.

We’ve seen similar gains in US airline stocks, with American Airlines, United Continental and Delta all up strongly, along with restaurant chains like Darden Restaurants who own the Olive Garden brand.  

FX

The Australian dollar is amongst the best performers today, reflecting the better environment for risk with the RBA leaving rates unchanged. The health situation in China continues to improve with the country where the outbreak originated reporting no deaths from the virus for the first time since January.

The US dollar has continued to slide on the back of the more positive tone in financial markets as it loses the attraction of its haven status. This has helped push both the euro and the pound higher on the day with both currencies pulling back from one-week lows. The news that UK Prime Minister Johnson hasn’t been diagnosed with pneumonia is welcome and suggests that, bar any complications, he could be out of intensive care by the weekend. 

Commodities

Crude oil prices have started to rebound today after a big sell off last night as hopes rise that some form of output cut can be agreed on either Thursday or Friday. It still remains highly unlikely that the US will agree to be part of any agreement, however at some point a reduction in output will need to happen if storage capacity starts to run out.  

Gold prices have slipped back on the slightly better risk sentiment today, but still remain near the top end of their recent range. .  

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