Friday, June 5, 2020

Asia Times: American Airlines' stock surge 41.10% as flight demand shows signs of recovery

Tags
  • China
  • Dollar
  • Gold
  • Euro
  • Stocks
  • NonFarm Payrolls
  • Oil
  • European Central Bank

06052020a

Market Recap: American Airlines' stock surge 41.10% as flight demand shows signs of recovery

The S&P500 and Nasdaq inched lower on Thursday, snapping a four-day gaining streak for both indices while the Dow managed to eke out slight gains driven by the airline sector. The rally in the equities market eased on Thursday likely after continuing claims in the US rose for the week ended May 22nd. The number of people continuing to claim jobless benefits during the week ended May 22nd rose to 21.487 million from 21.052 million the week before, falling short of economists' expectations for a decrease to 20 million. The dataset likely dampened investor optimism slightly, resulting in pared gains over the broad market. The laggards among S&P500 sectors were mainly the utilities, real estate, technology and health care sectors however, highlighting that the shift from safer sectors amid the Covid-19 pandemic to more risky sectors such as financials and industrials is still continuing. This is further cemented by both small-cap indices, the Russell 2000 and S&P600 outperforming both the S&P500 and Nasdaq.

In industry news, the airline and travel related stocks surged after there were more positive news on flight demand. Reuters reported that the US will allow some incoming Chinese passenger flights to continue in the US, revising an order that the US announced earlier on Wednesday that it would ban Chinese airlines from entering the US from June 16. The news came as China said on Thursday that it would be easing its ban on foreign airlines entering China on June 8th. The news helped improve sentiment that demand for flights is likely to return as routes to China start to reopen. In addition, airline stocks in the US had a boost after American Airlines said that it expects to boost its flight capacity in July by 74% from its current schedule. The boost in capacity will bring July's figure to about 40% of capacity a year earlier, up from 30% in June. Investors took the news as a positive signal that flight demand was recovering much quicker than earlier anticipated. The companies' stock jumped 41.10% on Thursday as a result, its largest one-day rise since the stock started trading in 2013. United and Delta airlines also ended the day 16.20% and 13.73% higher.

While improvements to the industry's outlook is undeniable, the prospects for a full recovery for the sector still remains clouded. Even with stronger domestic demand, demand for international still remains low, with American Airlines expecting to fly less than 20% of last year's international schedule. For more perspective, domestic flight revenue contributed to 67.5% of overall revenue while international revenue contributed to 24.3% for American Airlines. In addition, it is also important to consider the social distancing impact on load factors (average share of seats filled per plane), which would imply that airlines are likely to experience greater costs in the short-term even with increasing demand since load factors are unlikely to be able to fully recover as long as Covid-19 is a concern. As a result, downside risks for airlines likely still remain high in the short-term especially after the sharp uptick on Thursday narrowed the gap between year-to-date returns from the S&P500 main index and S&P500 airline index to closer to -40% from about -60% in mid-to-late May.

Indexes Daily Change (%) Net Change Closing Price
Dow Jones +0.05% +11.93 26,281.82
S&P500 -0.34% -10.52 3,112.35
Nasdaq -0.69% -67.10 9,615.81
*Source: Bloomberg

Among major currencies, the euro was one of the top performers against the dollar after the European Central Bank (ECB) beat expectations in terms of expanding its balance sheet. The ECB increased its Pandemic Emergency Purchase Programme (PEPP) by 600 billion euros, bringing the total limit up to 1.35 trillion euros, beating economists' expectations for a 500 billion increase. The central bank also said that the PEPP will now last until at least June 2021 and downgraded its forecast for GDP for 2020 to contract by 8.7%, and inflation to be at 0.3%. The euro as a result, dipped on the announcement of the decision but recovered quickly and surged against the greenback after ECB President Christine Lagarde expressed some optimism on the state of the European economy. Lagarde said during an interview that she sees the impact of the crisis bottoming out at the current state, expecting economic activity to gradually pick up. The euro rose closed 105 pips higher, or 0.93% higher against the dollar on Thursday as a result.

The dollar extended losses for the sixth day in a row, likely thanks in part to the ECB besting estimates and as US-China tensions seemingly eased. But there were reports from Dow Jones that the US plans to add multiple Chinese media and publication firms to its Foreign-Mission List. The report did however say that the plan is not formalized and the outlets were under consideration last month, while no official statement from the White House has been made. It does signal that geopolitical risks are still present, which would put increasing risk on the greenback especially after the Dollar Index shed 2.41% over the last six sessions. There may be some upside potential for the dollar today however, as change in NonFarm payrolls is set to be released by the US Bureau of Labor Statistics (BLS) later today. Using continuing jobless claims as a proxy to the official dataset from the BLS, it may not be as positive as ADP's private employment report earlier this week, which could potentially put some upward pressure on the currency.

06052020b

Safe haven assets traded mostly lower on Thursday, extending the selloff in lower risk assets. Gold recovered however, trading back above 1,700. The Japanese yen continued to weaken against the dollar as risk aversion continues to ease. US Treasuries fell across the board again, pushing benchmark 10-year yields higher by 7.8bps to 0.82%.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.84% +14.34 1,714.01
Silver +0.33% +0.06 17.48
JPY -0.23% -0.25 109.15
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year +0.4 0.19%
10-Year +7.8 0.82%
30-Year +10.1 1.63%
*Source: Bloomberg

Oil futures traded relatively muted on Thursday as oil traders wait on more news regarding a potential OPEC+ deal to extend the current level of production limits. Bloomberg reported that OPEC+ is set to extend the current level of output limits after a breakthrough in negotiations. The report cited its source as an OPEC+ delegate and suggested that while the agreement is still yet to be ratified, it could be signed as soon as this weekend. The news should provide some upside for oil prices today as well as traders in Asia starts to return to the market. The potential of an agreement signals that energy markets may see more compliance from OPEC+ members as well, which could reduce the official output limit specified from the previous agreement closer to the 9.7 million barrels per day figure. But there is still a lack of details on the voluntary cuts made by a number of OPEC+ members after the initial deal was made. This does put downside risk for oil at mostly the same level before, which should imply that there may be some room for upside if a deal between OPEC+ members is finalised this weekend.

Oil Futures Daily Change (%) Net Change Closing Price
Brent Crude +0.50% +0.20 39.99
WTI Crude +0.32% +0.12 37.41
*Source: Bloomberg

Stocks in Asia were trading lower on Friday morning, likely tracking major indices in the US. Asian indices are still on track for strong gains this week, with the HSI and STI being among the best performers. There is likely to be some easing in gains over the past few days however, as investors are likely to take profits ahead of the weekend after a strong rally this week. The Nikkei, KOSPI and ASX200 were all trading lower in the first hour of Friday's trading session, but there is unlikely to be a strong sell off today in Asia, assuming there is no spike in geopolitical risk. Futures tracking major indices in the US were trading slightly higher however, as of 8.50am (GMT +8).

Asia Daily Change (%) Net Change Last Price As of (GMT +8)
Nikkei Index -0.46% -105.03 22,613.15 8:34:00 AM
KOSPI Index +0.02% +0.48 2,155.09 8:54:00 AM
ASX200 Index -0.25% -14.72 5,973.60 8:53:45 AM
*Source: Bloomberg
US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures +0.13% +35.00 26,271.00 8:50:17 AM
S&P500 Futures +0.16% +5.00 3,113.50 8:50:17 AM
Nasdaq Futures +0.10% +9.50 9,630.25 8:50:18 AM
*Source: Bloomberg

Economic data releases for the day ahead include (all timings in GMT +8):

  • Germany Apr Factory Orders (2pm)
  • US May Change in NonFarm Payrolls (8.30pm)