Travel and oil stocks are leading FTSE (^FTSE) gains on Tuesday as markets continue to rejoice over news of a COVID-19 vaccine.
The moves come after early findings show that a vaccine developed by Pfizer (PFE) and BioNTech SE is 90% effective in protecting people from transmission of the virus in global trials.
“Vaccine means ‘back to normal’ – it’s all about the velocity of people getting back to 2019 levels sooner which means more demand for travel, more demand for oil products (gasoline, jet fuel),” said Neil Wilson, chief markets analyst at Markets.com.
Rolls Royce (RR.L) was among the most dramatic gainers on the London index, up around 19.5% at around 11:30am in the UK. IAG was also up 9.1%.
“You have also got to remember just how badly beaten down these sectors were and how they are very cheap relative to the market and relative to growth, so we are seeing a major rotation back into value stocks. In some cases too there are short squeezes going on with lots of hedgies caught the wrong side of this news,” Wilson added.
In September, International Airlines Group (IAG.L) announced more cuts to flights as it adjusted to the collapse in demand for air travel. It dropped its capacity by 60% below of its 2019 levels, adding that it didn’t see a return to 2019 levels until 2023. It was also aiming to cut up to 13,000 jobs amid a bitter dispute with its union Unite over redundancies and pay cuts for cabin crews.
According to a recent Morgan Stanley note, Lufthansa (LHA.DE), IAG, and EasyJet (EZJ.L) still face a strong cash burn rate and will be close to their minimum cash levels by 2Q20, which suggests they may need to access more liquidity resources by 2021.
“With the elastic band stretched so far to the downside it makes sense that these stocks (also heavily shorted) will be big winners on the way up,” said Chris Beauchamp, chief market analyst at IG.
“Of course there’s a long way to go, but the change in sentiment should spark a more extended move to the upside as investors keep piling in in the hope of picking up some bargains, just as holidaymakers try to get some winter sun bargains for 2021. Oil [is] a similar story, hope of a return to stronger demand earlier than expected, which would help support cash flow and reduce the risk of further dividend cuts.”
Both firms have been hard hit by COVID-19, with Shell planning to cut up to 9,000 jobs — up to 10% of its workforce — as it plans a major corporate strategic overhaul to keep pace with the global transition to clean energy. BP is also planning to make around 7,500 compulsory redundancies after roughly 2,500 staff - or just over one in ten of those eligible - applied for voluntary severance, according to an internal memo seen by Reuters and company sources.
In the near-term, the market will benefit from demand rising in China but also be limited by Europe and the US as both markets still face new virus restrictions. With prices hovering around $40 a barrel, the Organization of Petroleum Exporting Countries (OPEC) and its allies (known as OPEC+) are expected to continue complying with their agreement to curb output through the fourth quarter of 2020 and into the first quarter of next year, rather than increase production in January, according to research note from Citi published on Monday.
As a result, oil prices will gain and related industry stocks will benefit from an upswing in demand.
“Our oil price view is based on the most plausible pathway in which we have anticipated a vaccine in 2021 but recognised it's not the only pathway,” said Jon Rigby, chartered financial analyst at UBS.
“We forecast 4Q20e at $44.25/bbl (Brent), $50/bbl in 2021e and a medium-term view of $60/bbl as and when markets properly normalise,” said Rigby. “We acknowledge that with all the normal risks of the oil market plus Covid-19 and energy transition, visibility on that recovery remains low.”
Watch: Pfizer says COVID-19 vaccine is 90% effective in early analysis