Unhealthy market fixations, Cineworld’s time to die?

Morning Note

There has been a lot of column inches written, and much ink spilled, over Donald Trump testing positive for the coronavirus. There were, I fear, a few too many quick to sound the alarm and say this would see stocks ‘tumble’, etc.

True, US stock markets fell on Friday, with the S&P 500 down 1%. But this was 25pts above the lows of the day and likely just as much about a tepid September jobs report from the US as anything else; the broad market finished the week up by 1.5% in the end. Hopes of stimulus persist and Nancy Pelosi said on Sunday that lawmakers are making progress.

Traders should still be on alert for updates on Trump’s status, but unless things go very bad it should just be a lot of noise. The President could be discharged from hospital today.

European markets rose in early trade but pared gains as PMIs crossed to show lacklustre recovery in the Eurozone. US stock futures indicated a bounce when Wall Street opens later. One market that has seemingly been brought back from the brink is the bond market, which looked to all intents and purposes like it had been completely killed by the Fed.

Treasury yields moved higher on hopes of stimulus with the US 10-year showing some vital signs at last and nudging up to 0.7%.

US labour market recovery slows

The US labour market is not in good health, with the economy creating 661k jobs in September vs the 800k expected. This was also a marked decline from the 1.371m created in August. The unemployment rate declined for a fifth straight month to 7.9%, but it remains at historically high levels.

The US economy has recovered about half the jobs lost at the peak of the pandemic. The problem remains the same as we have been saying for months now – the reopening rebound was the easy part. The hard slog lies ahead, and it could take years to fully recover all the lost jobs. The UK seems to be in a similar position.

Cineworld stock tumbles as chain shuts UK and US theatres

Time to die? Cineworld is closing all its cinemas in the UK and US amid a collapse in demand due to the pandemic. Shares plunged 50% on the news this morning. The delay to the next James Bond film was the straw that broke the camel’s back, but Cineworld was a little bloated before the pandemic struck.

Net debt of over $8bn – thanks mainly to two large leveraged acquisitions in recent years – and a market cap of $540m by the close on Friday left Cineworld in a difficult position to refinance if punters were not coming through the doors; without the Bond franchise to draw people in there was little option – closing its theatres at least gives it a chance to preserve cash and wait for things to improve. Refinancing by some sort of rights issue seems inevitable.

However, I fear there have been permanent behavioural shifts in consumers that will mean the market is forever smaller. It is hard to gauge right now what permanent damage is done to cinemas, but the closure of Cineworld, however temporary, is a plain indicator that it could be significant and lasting.

The advance of over-the-top streaming services, especially Netflix with its vast Hollywood budgets and ability to make feature films, has been a critical blow to the industry and Covid has vastly compounded the problem by keeping viewers away. In its interim results last month, the company warned that a worsening of the pandemic could leave it unable to survive; today’s announcement confirms that it is on the brink.

Demand uncertainty hits Tesla

Tesla shares fell 7% on Friday after the company failed to quell longer-term demand concerns despite delivering a record number of cars in the third quarter. The company delivered 139,300 vehicles, compared with expectations of 137,000 vehicles.

It looks to be a bit of an unusually bad reaction to very impressive numbers. As the Shanghai factory ramps production Tesla should be able to steadily increase volumes despite the pandemic, albeit Elon Musk’s target of 500k this year looks out of reach for now.

Monetary policy in focus this week

It’s going to be a busy week for central bank jawboning – the Fed’s Powell, Kaplan (the hawk), Harker, Williams, Kashkari, Barkin and Evans are all due on the wires in the coming days. Also watch for the FOMC minutes from the September meeting for more granular detail about how policymakers view the shift to average inflation targeting, and to what extent the consensus is strained.

The ECB latest meeting minutes are also due on Thursday and similarly there is a slew of speakers slated for the week, including Lagarde, Lane, Guindos and Mersch.

Meanwhile the Reserve Bank of Australia could cut rates to 0% when it meets this week. Futures markets have indicated odds of a rate cut at about 50%. However we could well see the RBA cut from 0.25% to 0.1%, or it could delay until November 3rd.

Deputy governor Guy Debelle recently outlined policy tools the RBA is considering to help it meet its twin mandates on employment and inflation, including foreign exchange intervention and negative interest rates.

Chart: Gold continues to slide down the channel – watch the 21-day SMA at the top and 100-day offering support underneath as potential pivots