Market Overview

21 April 2021

Global Indexes Are Down on Asian Covid Worries

Asian markets' decline was followed by both the U.S. and European major indexes on Tuesday. Technically, a downward correction at some point seemed to become a reasonable consequence after the continuous updating of new records on Wall Street. Especially since the initial targets of the recent upward movement near the 4150-4200 range for the U.S. S&P500 broad market index were called by many experts as the nearest possible reference area where the market could take a breath. The 4000 points round-figure landmark for the Euro Stoxx 50 composite index could also serve as a good place for eating some snacks and partial profit-taking. 

As for the particular excuses for correction, they may always be available or found. Renewed coronavirus cases in some Asian countries called into question the expected strength of global recovery. So that, it weighed on both commodities and average stock prices. Supply, production, and demand in our world are interdependent. And India, which is the second most populous country and the third energy consumer is now mostly under a strict lockdown again after the officials there reported the worst national daily cases and death toll this week. 

The total number of Indian cases confirmed climbed above 15.6 million on Tuesday, which means that India has now surpassed Brazil and occupied the second place after the United States. The country recorded more than 294,000 new infections and 2,020 deaths on Tuesday alone, casting doubts about the activity of its more than 1.4 billion people. Vinod Scaria, a scientist at a large Indian CSIR-Institute of Genomics & Integrative Biology, tweeted, they investigated "a new lineage of SARS-CoV-2 predominantly found in India and characterized by a distinct set of genetic variants including E484K, a major immune escape variant", while the proportions of this virus strain "has been growing significantly in the recent months in the state of West Bengal". 

Together with neighbouring Pakistan, where outbreaks have also been reported, the two countries account for a fifth of the global population. The outbreak in Japan is not so serious now as it was in the very beginning of the year, but Japan also tightened its corona rules on test certificates needed to be submitted by all air passengers. Those failing to meet required conditions would not be allowed to enter the country at all on arrival. The Japanese and Indian governments have decided to postpone for pandemic reasons their foreign and defence offline talks, which were originally scheduled last weekend in Tokyo. 

Only time will tell whether the impact of this news flow would be temporary and very limited or medium-term, and whether the market correction may last just for days or weeks. Such factors as the rapid U.S. economy recovery, where most restrictions are expected to be lifted by the Independence Day, July 4, and the gradual move beyond lockdowns launched in Europe, as well as the trillions of dollars in stimulating infrastructure incentives from the current U.S. government plus the New Generation EU plan and the subsidies already issued to the population and businesses recently, may well outweigh the negative tendencies outside reach and developed countries. At the same time, based on expectations of future recovery, the market indices have passed a long way up to the hill since the beginning of November, when it just became known about the appearance of effective vaccines. 

Many cyclical or overvalued stocks suffered first while some companies even gained because of their own internal corporate news, since the beginning of the week. Coca-Cola stock rose above $54 per share after the soft drinks giant beat the previous average revenue figures for the last two quarters, with more than $9 billions after $8.65 billion, and also with a more solid profit of 55 cents per share (EPS) after just 47 cents in Q4 2020. March sales volume was back to 2019 levels, and the strong performance was clearly helped by the reopening of restaurants and cinema theatres following accelerated vaccine rollout. The company declined to improve its full-year guidance, citing continued uncertainty over the pandemic. Coca-Cola CEOs also expect foreign exchange factors to add between 1% and 2% to per share earnings before the end of the current fiscal year, as against 2% to 3% earlier. Yet, Coca-Cola said it's going to deliver comparable EPS growth of around 10% versus $1.95 only in 2020. 

McDonald's shares, which are also included in the Dow Jones index, broke their historical record above $234, as the world's largest fast food chain showed excellent stability during lockdowns thanks to drive-through service. Harley-Davidson stock rose almost 8.5% after the famous motorcycle maker reported about 10% rise in its Q1 2021 revenue and raised its full-year forecast for sales growth, supported by stronger demand for its profitable touring bikes. 

At the same time, some other shares of large issuers went down, but each of them did it for its own reasons. An electrical problem led to dozens of Boeing 737 MAX jets being suspended from service, it was related with grounding faults in a backup power control unit situated in the cockpit on some recently built airplanes. Suspected grounding problems have been found in two other places on the flight deck. The glitch does not look critical but it affects about a fifth of the troubled but most-sold MAX jets model in the market. The only consolation now is that it is not related to previous problems that contributed to a 20-month worldwide safety ban in the wake of two fatal crashes. Boeing is expected to draw up bulletins advising airlines how to fix the problems with grounding, and regulators must first approve the bulletins. Nearly all the affected jets were built before deliveries of the MAX resumed in December. But Boeing stocks have somehow fallen below $230 from earlier peaks of almost $260 a share reached just a couple of weeks ago. 

However, Boeing shares may only become more attractive for long-term investment after a while after the current decline. Boeing has said it plans to raise production of the 737 MAX gradually from an unspecified current "low rate" to a target of 31 jets a month by early 2022. Industry sources estimate it is currently producing around four jets a month. The situation for Tesla looks less tense as Tesla sells more than 500,000 electric cars a year, and the whole problem for Elon Musk's brainchild is connected with the recent accident when only one of Tesla cars was involved, as well as with an isolated scandalous case at an auto show in China. 

Elon Musk tweeted, preliminary data collected by the company suggested that its Autopilot software was not engaged at the time of the crash. Tesla had also been the subject of a rather strange protest by a lone woman alleging quality defects at an auto show in China. Then the video of the protest became viral in Chinese social media, while some interpreters said it would not be possible without the top authorities' influence in the communist country. Anyway, Tesla stocks lost about 5% of its value for several hours but were quickly re-bought by investors, so that the price already recovered by half. Some analysts including Citigroup also downgraded Nike stocks due to the risk of a negative reaction to the company's stance on the alleged human rights abuses in Xinjiang. Nike was ostracized on Chinese social media for distancing itself from allegations of slave labour in this region, and that is probably the main reason why the popular company with very strong last year's financial reports has lost a part of its price. 

Netflix streaming service was 9% lower at Wednesday's pre-market as it missed expectations for paid subscriber additions. The company said on Tuesday eve it has added 3.98 million paid subscribers in the quarter ended March 31, as Reuters analysts had averagely expected in polls it may add 6.25 million, according to IBES data from Refinitive. Despite Netflix's revenue rose to a fantastic $7.16 billion from $5.77 billion in Q1 2020, and net income jumped to $1.71 billion, or $3.75 per share, from $709 million, or $1.57 per share, a year earlier, the shares' price slumped crucially. "We believe paid membership growth slowed due to the big Covid-19 pull forward in 2020 and a lighter content slate in the first half of this year, due to Covid-19 production delays," the company said, adding that it still expects a strong second half with new seasons of its hits and solid films. But it is not planning to improve the subscribers number too much in Q2, forecasting just 1 million net subscriber adds, but more income from the current loyal customers. 

All of these examples confirm that perhaps the current market volatility is still closely related to the reporting season and various individual corporate situations, and not necessarily to the increase in COVID incidence globally. Selective treatment of companies seems to be a priority for investors now. But how much the starting attempt of decline or the continued growth would eventually affect the general market may become more clear only as things develop.

 

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Lysakov Sergey
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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