The last week has been an interesting week for the markets and around the world.
I will speak about some of the most important events in this article.
The First Week Of June, the V-Shape Rebound
Despite the unemployment rate, all the business that have closed, companies that have filled in for bankruptcy and indexes that have suffered major drops, June has started with a V-Shape rebound that made speculator’s eyes shine.
Meanwhile, a considerable part of the analysts still believes that there should be a major drop of the S&P 500 given it’s Price to Earnings Ratio.
However, listening to many of those analysts isn’t always sensible as I pointed out here after the Nasdaq hit a record.
Most countries in the European Union have already opened their borders both for domestic and international arrivals, Asia and the US are seeking to open their borders by July.
The equities that have benefitted the most this week belong to the logistics, manufacturing, oil and tourism industries that for months have suffered a sharp in their sellings. This is especially encouraging thinking that COVID hit especially these industries.
As the demand in oil is growing at a steady pace we can suppose that many businesses are now reopening. Some countries still face strict lockdowns but a major decrease seems plausible within months.
The take-off of the airline, cruising and logistic industries
In January 2020 there were almost 170.000 flights tracked every day by Flighradar24 of which 110.000 commercial flights and 60.000 commercial. Warren Buffet did make a mistake by selling his airline stocks as, by now, he would have recovered almost all his losses.
Flightradar24 tracked less than 28.000 commercial flights from April to May. By the 7th of June, it reached 40.000 and every day 700 more aircraft are taking off. If this trend continues for three months at the same pace, airlines will be back on track like nothing happened.
Airline and cruising shares rallied for 3 days in a row. American Airlines climbed 41% on the 3rd of June and was climbing 40% more during the after-hours of the 4th of June.
The NYSE Arca Airline Index which tracks 16 airline companies mostly from the USA is up 50% during this first week of June and it is the biggest gain in all history.
Airlines announced detailed plans for increased summer flying an the reopening of international routes to cater the passengers travelling again as the peak vacation season gets underway.
Airlines like Southwest (LUV), American (AAL) and United (UAL) are adding service as demand rebounds from six-decade lows.
Delta Airlines, United Airlines and most European airline companies scored similar results boosted by the fact that by the first week of July some major international routes could be reopened for tourists to come.
Carnival and cruise lines saw a 20% uptick as the confidence has risen despite the Trump administration refusing to bail it out.
The bounceback started earlier than expected. Sectors hit hardest by the coronavirus are the ones seeing the largest bounceback in employment.
Oil is becoming expensive, bounce from the abyss
Demand is returning as big oil-consuming economies emerge from the pandemic lockdowns. Prices can be expected to soar during the following weeks. Oil futures are rising and so are ETFs and equities such as PMO.
It is expected that the WTI and Brent crude oil will start with an intensive boost at the beginning of the next week thanks to the new OPEC production cuts extension. Russia is cutting its crude oil production by 500 million tonnes this year and it has already cut 570 million tonnes the last year.
Most major OPEC countries agreed with Russia to extend oil production cuts until the end of July. The US has cut its oil production by 2 million barrels a day.
Energy companies evacuated 10% of their platforms and 30% of the offshore oil output pushing gasoline prices higher. Operators evacuated 65 offshore facilities on Friday moving 7 drill rigs out of the way of the Tropical Storm Cristobal that entered the US Gulf of Mexico.
This resulted in a 540.000 barrels per day and 600 million cubic feet of natural gas production cut. The Tropical Storm Cristobal is already driving up gasoline prices and could push them higher.
This will depend on whether the storm hits the US and whether it makes any dent in the energy production facilities. The US Gulf of Mexico water account for 15% of the total US production.
The unemployment rate is now decreasing again worldwide
In April 2020 the unemployment rate in the US skyrocketed reaching 14.7%. It was estimated a depression-style surge in unemployment but the economy is signalling that is picking up faster than anticipated from the COVID recession amid reopenings and government stimulus.
Payrolls surged by 2.5 Million trouncing forecasts for a sharp decline following a 21 million tumble the prior month. According to the Labor Department data, the jobless rate fell down from 15% to 13%.
The unemployment rate, arguing to the U.S. Labour Department says that unemployment has not been reported correctly and that some data is lacking, therefore there could be a hidden 3% more unemployment that has not been taking into account.
While the overall picture improved, there are still 21 million jobless Americans with an unemployment rate higher than during the Second World War. A full recovery could still take months to come.
US stocks soared after this report. The figures were so astonishing that President Donald Trump held a news conference saying that the report had ‘’outstanding’’ figures and predicted further improvement.
Canadian employment rose 300.000 in May compared with a 500.000 forecasted slump and overall in all Europe and Asia employment is now quickly rising to normal levels,
At the same time the lack of an effective treatment for Covid19, which has already killed almost 400.000 people worldwide and over 100.000 in the US, means that infections could still possibly surge in a second wave, with the potential to further shake the labour market and extend or bend already existing economic weaknesses.
In Europe, especially Italy, Spain, Germany and France lockdowns have been partially or almost completely eased. Starting from May, Italians were allowed to go outside and from June there was no mask requirement which seems a contradiction considering that most of these countries still have active cases.
China grants Hong Kong security law
The Chinese National Congress approved a new law which would establish state organs of security in the autonomous city of Hong Kong. Despite China being bound by an international treaty signed with the UK, officials insisted saying that the matter is internal only and that it has been done to guarantee the city’s rights.
This leads to more measures from the U.S. against China as the U.S. states that this would inherently condemn the autonomy of the city. The Hang Seng index suffered a 1% loss, the Chinese RMB on the contrary resisted.
Trade tensions between the West and China continue to bash violently as a Canadian court approved the extradition of Huawei chief financial officer for trial in the US.
China is also expected to further trade restrictions especially to Australian products of import with more tariffs and higher importing fees. Considering that Australia’s most important import and export partner is China, this could lead to a big shot to the Australian economy.
This could have significant implications for the Hong Kong markets and demand for second residencies and passports with some local Hong Kong people looking for alternative arrangements.
Dollar depreciates against the main currencies
During the height of the crisis, the USD gained in much the same way it did during 2008-2009.
As the crisis has abated, the USD has given up some of those big gains.
The dollar keeps depreciating fueled by optimism over the reopening of Western economies and the expectations of further stimulus. The Euro could be back on track for its winning streak against the dollar since 2013.
Despite the dollar’s colossal rally during March’s market volatility, the euro has almost returned to the dollar value seen at the beginning of the year. As of Thursday afternoon, the euro was at $1.135 an 12-week high as the dollar continues to depreciate against most currencies given the risk-on sentiment of the investors.
The dollar depreciation is both fueled by the overall optimism over the reopening of Western countries following the prolonged lockdowns and expectations of further stimulus measures from central banks.
Despite all the certainties surrounding tensions between the West and China, stock markets continued rallying as proof that investors are willing to invest long term over the short term noise the market is making.
The appreciation of the euro also comes from the announcement that the European Commission is planning to pump €750 billion euros to help the eurozone mitigate the damage caused by the lockdown, 500 billion in grants and 250 billion in loans.
If the recovery fund finds support among EU member countries this could represent a huge step towards greater fiscally policy and organization in the continent.
Meanwhile economic data from the ECB indicates that contractions in activity still persist, the worst of the crisis may have passed. The purchasing managers’ index of the Eurozone improved in May denoting an expansion rather than a contraction in the EU economies.
On Friday, before the market closed, the USD eased the current situation and managed to gain 2 cents against the EUR. Given the fact that the COVID active cases are on a downtrend, it is possible that the USD will push the EUR further down as lockdowns in the US are mitigated.
Will Gold climb higher than $1,800?
Due to the pandemic Gold became $300 an ounce more expensive. But is it going to break over the $1,750 resistance and overpass the $1,800 dollars?
Either way, gold is a poor long-term investment and not even a safe heaven.
Is Zoom a symbol of the current evolution of the labour market?
The teleconferencing company has become the symbol of the structural changes that now are happening in the labour market. More and more companies understood their weaknesses not being able to continue their work from home.
Many companies realised that in order to prevent a situation like this they have to push towards a new era, the smart working era where you do not have to wake up and prepare to go to work but you can do everything from home.
The investors were right to be highly optimistic as ZM reported a revenue rise of 170% from the previous year with a $30 million profit rather than just $2 million expected. Its customers rose more than 90% while paying customers rose 4 times.
Margins fell considerably from 80% to under 70% considering the costs for all the data it needs. The estimated value of the company is now $59 billion after the company rose another 25% during this week.
We can attribute Zoom stock’s gain to continued investors enthusiasm. Zoom has been hit hard by hackers worldwide but it managed to protect its customers diligently against them adopting new protective software.
ZM’s growth prospects remain powerful in the future ahead. The pandemic has accelerated the remote work trend and it will surely be a feature of the future.
Pharmaceutical companies, Novavax, Moderna, Merck, Pfizer, Johnson&Johnson the race for a vaccine
Novavax’s 30-day average trading volume has skyrocketed over the last 12 months over 1000%. The number of Google searches is staggering, but why is the stock falling?
Novavax has been the leader in the race to develop a vaccine for the novel coronavirus. The company announced the initiation of a phase ½ clinical trial to investigate the efficacy of its vaccine. The first test will be conducted on 130 healthy adult volunteers in Australia to taste the safety and its immunogenicity.
The results of phase 1 are expected to be released in July while phase 2 will be held in the US and several other countries. The 2 phase will measure its safety, immune response in a wide pool of participants.
Despite all its effort, the NVAX stock dropped 20% already without any news released from the company. This could be related to Dr Anthony Fauci’s opinion on the nature of the novel coronavirus.
Considering that coronaviruses cause the common cold, the reports in the scientific literature state that the durability of the immunity ranges from 3 to 6 months or always less than a year, therefore this vaccine could provide only a short term immunity against the virus.
One more negative thing to take into account is that no company has developed a vaccine yet that is proven to be safe and effective, but several are receiving a push from the Trump administration, one that did not has been Novavax. But why didn’t Novavax make Trump’s top 5 vaccine list?
The New York Times reported that the Trump administration selected a list of top 5 pharmaceutical and biotechnological companies that could have the most potential to develop an effective vaccine.
Each of these drugmakers is now receiving federal money plus assistance in their clinical studies and manufacturing process. Why though wasn’t Novavax part of this top 5 list?
The top drugmaker seems to be Moderna who already passed the first phase and it’s now conducting phase two with brilliant phase 1 results.
The second contender is AstraZeneca from the University of Oxford that is currently evaluating 20 potential vaccines in phase 2 clinical study.
The third is Pfizer, a company cooperating with the biotech BioNTech company developing an RNA COVID vaccine.
Johnson&Johnson and Merck were also added to the list despite that they haven’t advanced any COVID vaccine yet. Johnson&Johnson will start its testing in September while Merck announced that it will partner with non-profit organizations to cooperate to the vaccine development.
Though Novavax won’t receive any funding from the US government, its CEPI funding should enable the company to advance its vaccine through late-stage clinical studies. In the end, only an effective vaccine will determine who is the real winner.
The V-Shape recovery of This Week
Along with the Energy sector, also the Financial sector is now growing quickly. Interests are still low and banks are earning tight margins but it could probably change quickly and also in the short-term.
- The V-Shape rebounce was fostered majorly because almost no analyst thought that the employment rate could recover so briefly. Everyone is expecting a 20% unemployment rate and yet it was only 13.3%.
- This was enhanced also by the Paycheck Protection Program, which is a program for small and medium-sized companies. If a company doesn’t manage to pay a check, the State comes in help and bills it.
- The second most important news the OPEC+ cuts of 10.000.000 barrels of oil until July to higher oil prices. The price is still under 40$ a barrel and could rise even more as it is still too low for the US to make any profit.
- Airline companies announced a rise in demand and international routes are opening in July.
- NASDAQ is at a new highest, probably because the FED bought millions and millions of shares to lower the convenience to buy it.
Nobody can know if we are in for a v-shaped stock market recovery , or indeed economic recovery.
Optimism is growing but nobody can predict the future.