Novum Alpha - Weekend Edition 14-15 November 2020 (8-Minute Read)
Bitcoin Falls Below US$16k, U.S. Stocks Up, Asian Stocks Close Down - What are airlines selling if not seats?
In brief (TL:DR)
In today's issue...
What a week it's been!
Markets were up for the most part, then sharply down on coronavirus fears and then ended the week up again.
And that's with a prospective Biden presidency! But expect even more volatility in the coming weeks, because frankly, we've seen this all before.
While there is massive progress in our hunt for a coronavirus vaccine cure and with Pfizer and BioNTEech offering the most promising results so far, the world is still a long way off from effectively returning back to normal.
If history is any reference, sans any vaccine, the world will have to find a way to either socially-distance indefinitely, wear a mask perpetually or the pandemic will never truly disappear.
Asian stocks ended the week down mostly down, with Tokyo's Nikkei 225 (-0.53%), Sydney’s ASX 200 (-0.20%) and Hong Kong's Hang Seng Index (-0.05%) all down, while Seoul’s KOSPI (+0.74%) managed to close in the green.
1. Stocks Are Hot Property
Ask anyone you meet these days about investing and chances are the number one word on the tip of their tongues is “stocks.”
Ever since the coronavirus pandemic left most of the world stuck at home, additional free time and zero fee trading apps like Robinhood and SoFi have made investors of us all, with hardly anyone these days not having some opinion about equities.
And in the days after Pfizer (+2.85%) and BioNTech (+4.30%) unveiled their coronavirus breakthrough, more money was poured into the stock market than at any point in almost two decades.
Funds that buy stocks recorded some US$44.5 billion of inflows in the week to Wednesday, including some US$32 billion that was invested in U.S. stock funds, according to data provider EPFR Global.
That massive tsunami of funds helped to lift global stock markets to new records this week as investors bet that the vaccine from Pfizer and BioNTech could provide a path to a speedy global economic recovery.
But it wasn’t just the prospect of a vaccine that had investors in a bullish mood, as a Biden win for the White House provides investors with a return to more predictable policymaking as well as economic stimulus.
According to one institutional investor from Hong Kong, describing investing during the Trump administration,
“It could be that you’re having a serious conversation and Trump would be the guy who would be walking past and throwing a grenade in the room just to see what happens.”
But Trump still has some grenades to throw and there are still some weeks before he finally leaves office.
Yet investors are increasingly looking further away from the immediate term, towards the longer-term recovery of the global economy.
And the prospect of a divided U.S. government, with the Republicans likely to maintain their control over the Senate, mean that expectations of dramatic regulatory or tax changes under Biden are also less likely, which could boost stocks further.
2. Airlines Are Selling Everything But Seats
Timothy Huang is seated in his plush leather Business Class seat, enjoying a glass of champagne, but no, he’s not on his way to an important business meeting in London, Paris or New York.
Instead, Huang and his wife have shelled out some US$400 to enjoy a meal on a Singapore Airlines (-2.79%) Airbus A380 that is sitting on the tarmac.
As the coronavirus pandemic has hit the global aviation industry hard, airlines have had to do everything they can to survive and these days, that has meant selling practically anything, except seats on flying airliners.
Last week, as news of a potentially effective coronavirus vaccine was announced, shares of airlines ticked up.
But with traffic down 73% from a year earlier in September, and international flights at just 12% of their levels a year ago, the usual path for companies to bring in cash by eking out a margin on their revenue has been blocked.
And that could well be the case into next year, given the likely bottlenecks to producing and distributing any coronavirus vaccine in sufficient quantities to reopen international travel.
These days, airlines can be found selling anything other than seats, and so far their hottest product has been IOUs.
This year airlines have issued some US$88 billion worth of bonds, more than half of the US$153 billion in bond issuances that the industry has sold over the past forty years put together.
In aggregate, all new debt and equity sold by the world’s airlines this year amounts to almost two-thirds of the US$241 billion that the International Air Transport Association expects the industry to collect in passenger revenue through the whole year.
Typically, airlines should see cash outflows from finance and investing, offset with an inflow from operating activities.
But since the coronavirus pandemic is hardly under control globally, only Chinese airlines, which have returned to some semblance of normality in recent months, have managed to achieve that.
Elsewhere however, for airlines with no domestic market, like several Middle East and Asian carriers, working their balance sheets has often been bringing in more money than selling transport services.
But with a likely miserable third quarter for most global carriers on the cards, a grim winter is increasingly expected for airlines with high odds that a wave of bankruptcies, consolidations and restructurings will sweep the industry.
And getting the airline industry as a whole out from under its pandemic-induced debt load could take the better part of a decade.
While demand for tickets and passengers is a more or less inexhaustible resource once people get flying again, there are only so many assets that an airline can sell and lease back in the meantime before they run out.
And at some point, the cavalcade of bond and stock issuances this year by airlines will lead to sharply diminishing appetites among both creditors and shareholders.
While there may be some novelty to having a meal on a seated airliner, there’s a limit to how many times that will still be enjoyable.
3. European Flavored Digital Currency
According to legend, when Marco Polo first set foot into China in the late 13th century, he first tasted noodles and was so enamored of their wonderous flavor and texture, that he brought it back home to Venice which eventually blossomed into what became pasta.
Today, pasta is enjoyed the world over and even the Chinese, who despite having invented noodles, have a seemingly insatiable appetite for the Italian version of their noodles as well.
Fast forward to the present and it increasingly appears that Europe may be taking a leaf out of China’s playbook as a it follows in the Chinese lead to issue its own digital currency.
Whereas most central banks have taken a relatively slow walk towards a digital currency, China took on the task with an almost single-minded focus and has now successfully rolled-out a digital yuan pilot in four major cities.
The European Union looks set to do the same.
Speaking at a virtual panel discussion hosted by the European Central Bank (ECB), its President, Christine Lagarde signaled that her institution could create a digital currency within years in what would be a dramatic change to the Eurozone’s financial sector.
“My hunch is that it will come. If it’s cheaper, faster, more secure for the users then we should explore it. If it’s going to contribute to a better monetary sovereignty, a better autonomy for the euro areas, I think we should explore it.”
Lagarde is no stranger to digital currencies and has long held an interest in cryptocurrencies and tracked the development of Bitcoin and other cryptocurrencies closely from early on.
Facebook’s (+0.68%) abortive Libra cryptocurrency project was perhaps a catalyst in the European Central Bank’s embrace of potentially issuing its own digital currency, but it could also be China’s successful roll out of a digital currency in the midst of a global pandemic that might have hastened the process as well.
According to Lagarde, the ECB might be some two to four years before the project launches as it balances concerns over money laundering against the need for privacy and the technology involved.
Because Beijing has lesser issues with privacy concerns, the rollout of the digital yuan, like so many other things in China, was unimpeded and conducted with almost clinical efficiency.
Nonetheless, Lagarde’s projected timeline for the ECB’s digital euro is like a bullet train (or TGV if you will) compared to its peers.
Both the United Kingdom and the United States have been far slower to consider the issuance of their own digital currencies, with their respective central banks still in the very early exploratory stages of any such project.
The ECB took major steps last month towards making the digital euro a reality by launching a public consultation which will run till the middle of January next year and policymakers have committed to deciding by mid-2021 whether or not to initiate a full-fledged digital euro project while preparing for possible launch.
Marco Polo would be pleased.
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Nov 15, 2020