19 March 2020

This Stock is Showing Resilience as Markets Crash...


What’s happening: Amid intense volatility yesterday, US stocks triggered the fourth circuit breaker this month. Trading in US stocks were halted again, as the S&P 500 fell 7% below the previous session’s closing level. At the time of the circuit breaker, the Dow had tumbled more than 7% and the Nasdaq had lost over 5%.

A company that has shown resilience: While trillions of dollars in market cap have been erased over the past month, there are some companies that have held out and exhibited strength even amid panic selling on fears of a coronavirus-induced global economic slowdown. One such company is Tesla. However, some risks remain.

Details: Although this electric vehicle company’s shares have declined in recent days, its stock is still around 48% higher than what it was just six months back. Tesla’s shares experienced a colossal bull run in early February and gave back some of these gains amid the broader market sell-off. The pullback was not just understandable, it was expected. Even with that steep decline, the fact that a stock that was trading around $200 in September has remained north of $350, even as others have crumbled, is an incredible thing.

Balance sheet strength gives Tesla a shield against a near-term slowdown. It ended 2019 with $6.5 billion in cash and raised an additional $2.3 billion in a secondary offering of shares last month.

The automaker has already delivered its first Model Y, significantly ahead of schedule. Moreover, the company has captured 30% of the Chinese EV (electric vehicle) market and sold almost 4,000 vehicles in February, despite delays caused by coronavirus. This is particularly impressive, given that China has hundreds of EV manufacturers.

Risks remain: If the US economy spirals into a recession, Tesla’s sales and earnings will be hurt. While the automaker has a strong balance sheet to tide through tough times, it needs the economy to regain health fairly quickly to continue its growth.

The steep decline in oil prices from around $65 per barrel to an 18-year low of around $20 per barrel isn’t great news for the EV market. The decline erodes the value proposition of EVs, which is based on potential cost savings on high fuel prices.

The Markets Today


Investors will be keeping an eye on oil prices today, with the WTI crude oil dipping to its lowest level since February 2002.

Context: After declining 23% last week, oil has continued its downward momentum this week. Prices tumbled 24% to an 18-year low level on Wednesday. This commodity has been under pressure with a steep decline in demand, amid travel bans and many countries imposing lockdowns.

Details: Oil prices are hit by a devastating combination of higher supply and falling demand. The spread of the coronavirus has hurt demand with various nations imposing travel restrictions and some going into lockdowns. Several flights have been cancelled with no projection of when their services may be resumed. The global supply chain has been disrupted and the lower movement of goods has caused a dent in demand. Various production facilities, many of which are oil consumers, have been asked to remain closed.

On the other hand, Saudi Arabia and Russia are embroiled in a price war. This couldn’t have come at a worse time, when the market was depending on these two large oil-producing nations to work together to stabilise prices. Russia had long nurtured a resentment of being arm-twisted by the OPEC to curbing production and allowing Saudi Arabia to gain a larger share of the market. Russia refused the OPEC’s latest request for production cuts and Saudi Arabia retorted by lowering its prices. Both countries need higher oil prices but are in no mood to surrender. The meeting of the OPEC+ technical committee, which was scheduled for yesterday, was cancelled.

Oil prices moved lower despite US President Donald Trump’s announcement last week of purchasing oil for the SPR (Strategic Petroleum Reserve). Stimulus plans by the US and Europe also didn’t help lift investor sentiment.

Meanwhile, the US EIA (Energy Information Administration) reported an eighth consecutive week of increase in crude supplies, adding 2 million barrels in the week ending March 13. Although the API (American Petroleum Institute) late Tuesday reported a decline of 421,000 barrels for the week. It didn’t help the cause.

US WTI crude tumbled 24.4% to settle at $20.37 a barrel on Wednesday, while Brent crude dipped 13.4% to close at $24.88 per barrel. WTI crude climbed 8% this morning to trade at $22.00 per barrel during the Asian session at 4:30am GMT.

Why it matters: With so signs of an end to travel restrictions and lockdowns, the outlook for oil looks bleak. Goldman Sachs has projected oil demand to decline by 1.1 million bpd (barrels per day) in 2020, with demand expected to contract by 8 million barrels in March. Research firm Rystad Energy has projected a steeper decline of 2.8 million bpd for 2020, with April demand expected to tumble by 11 million bpd.

What to watch: Markets await announcements from the OPEC+ related to its effort at controlling the current freefall in oil prices. Investors are also looking forward to the US reporting a decline in oil inventories. Any positive news related to the economy could support the oil market.

Other Markets: Most European markets closed lower on Wednesday, with the FTSE 100, German 30 and French 40 down 4.05%, 5.56% and 5.94%, respectively.

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What else to watch today


Indonesia’s interest rate decision, Germany’s Ifo business climate index, Italy's construction output, Eurozone’s construction output, South Africa’s building permits and interest rate decision, Canada’s new housing price index and ADP employment change, Argentina’s consumer confidence as well as the US Philadelphia Fed manufacturing index, initial jobless claims, current account balance, CB leading index and natural gas stocks change.


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