Equities in Roller Coaster, Ecuador Bonds Plunge, Cheap Lobster

Equities

Roller Coaster Week

It has been a tumultous week for stocks as coronavirus fears intensify with confirmed cases approaching 100,000 and deaths exceeding 3,300. The S&P 500 fell as much as 4% on Friday before a closing bell rally that pared losses by half. Major US indexes ended the week slightly positive with the S&P 500 up 0.61%, Dow Jones up 1.79%, and NASDAQ up 0.10%. The S&P/TSX, however, closed slightly down at -0.54%. The CBOE Volatility Index, or the VIX, a measure of market volatility, shot up and ended the week at 41.9, a level not seen since the flash crash in August 2015.

The VIX has remained above 30 for 6 consecutive sessions, the longest streak since 2011

China’s Rebound

While the US and the rest of the world grapple with violent price swings, Chinese shares have rebounded to levels above pre-coronavirus periods. Optism over the announced fiscal and monetary stimulus that include lowering corporate taxes and increased infrastructure spending contributed to this surge. Since the beginning of December 2019, the CSI 300, which replicates the performance of top 300 stocks traded in Shanghai and Shenzhen stock exchanges, is up 7.46% while the S&P 500 has fallen 3.91%.

Airlines Tumble

Shares of airlines and travel companies have been slammed due to cancelled trips. Since January 20 – the week that the first COVID 19 cases outside China including the first patient in the US – airlines shares are down roughly 30% with American Airlines falling by as much as 43.77%. American Airlines’s bonds are also trading near distressed levels as investors zoom in on the company’s credit risk.

Shares of Carnival Corp fell 16.3% after the Grand Princess ocean liner was barred from berthing at its home port of San Francisco as 21 people on board have been tested positive for the new coronavirus. The ship would be allowed to dock at a non-commercial port this weekend.

Fixed Income

Flight to Safety

Treasuries fell to all-time lows, with the 10-year treasury yield sliding to 0.676% at 9:46 AM ET on Friday. The flight to safety continues to be in full throttle despite the Fed chopping interest rates by 50bps from 1.75% to 1.25% on Tuesday.

Ecuador Bonds Plunge

The IMF, responsible for extending $4.2 billion to help Ecuador with its budget deficit, is delaying the disbursement of its next tranche as the global markets are in crisis mode. According to Bloomberg, Ecuador’s dollar-denominated debt due in 2028 dropped 4.5 cents on the dollar to 59.3 cents with notes maturing in 2022 and 2030 also marking new lows.

Commodities

Oil Collapses

Oil prices are down more than 30% YTD exacerbated by more than a 9% decline on Friday as Russia rejected OPEC’s plan to extend production cuts of 2.1 million barrels through the end of 2020 and further cuts of 1.5 million barrels per day thereafter. The pressure is growing for OPEC as the Saudi Arabia needs oil at $83 per barrel to balance its state budget, but Russia can breakeven at $42.

Cheap Lobster

The coronavirus is making lobster more affordable as demand from Asia plummets. Canada typically sends 1.5 million pounds of lobster to South Korea and Mainland China a week, but border controls and cancelled restaurant reservations have caused inventories to swell pushing down the price for New England halves – a whole lobster weighing 1.5 lbs – to $8.10, a 17% drop from Jan 20, the lowest price since 2016 according to Bloomberg. Companies are selling their goods at a loss or are releasing the shellfish back into the wild.

Corporate

Twitter & Elliott

Elliott Management Corp., the activist hedge fund, has taken a 4% stake in Twitter and plans to push for changes including replacing the CEO Jack Dorsey. Elliott has urged the social media company to find a full-time CEO given that Dorsey is also managing another company he co-founded, Square. Twitter is susceptible to activist attacks as the company has only one class of stock (unlike Alphabet, Facebook, and Snap whose founders have super-voting stocks). However, the company has a staggered board with only three of the eight board seats being eligible for re-election in any given year, making it impossible for an activist to seize a majority of board seats. Investors appear to welcome the news as shares traded up 8% after the announcement on Friday, Feb 28.

DoorDash Aims To IPO

DoorDash has confidentially filed to go public last week. With over 38% market share in the US and $13 billion in valuation, the company is growing rapidly but the path to profitability is still foggy. According to people with knowledge of the financials, the food delivery startup lost $450 million in 2019. Grubhub’s October 2019 letter to shareholders stated that it does not believe its logistic segment can generate significant profits even at scale but the DoorDash’s story is yet to be told.

Wrangler Can’t Catch A Break

Kontoor Brands Inc, which owns Lee and Wrangler, can’t seem to catch a break as its plans to introduce the Wrangler brand to China was upended by the coronavirus. Prior to this, the company faced the issue of tariff increases on Mexican-made goods that posed challenges on its US operations, given the company’s sizable production base in Mexico. Kontoor now has plans to launch in the fall after having had its eyes set on China for more than a year.

Sources: Bloomberg, CNBC, MarketWatch, TechCrunch, Financial Times