By Geoffrey Smith
Investing.com -- This is starting to become a pattern.
Every positive announcement about vaccine development is triggering a surge in optimism and a rotation into cyclical, ‘value’ names, which immediately – if only partially – unwinds the minute that everyone remembers how grim the current situation still is.
Europe’s stock markets were all trading lower on Tuesday, realizing again that the announcement of a drug’s effectiveness against Covid-19 is not the same as having that drug manufactured, distributed and administered at such scale that the pandemic can be declared over.
By 5:15 AM ET (1015 GMT), the benchmark Stoxx 600 was down 0.2% at 389.16. Most of the big national indices were down in line.
The good news is that the market’s momentum is still intact: both the Stoxx 600 and the Euro Stoxx 50 hit their highest levels since February on Monday, building on the breakout from the summer box that they made in reaction to the Pfizer/Biontech announcement last week. Anyone looking at the charts can still justifiably call that announcement a game changer.
This being the case, it seems only reasonable to assume that further gains will be made when the pharma industry reaches the next key milestones, with requests for and the granting of regulatory approval in the U.S. and EU. Every milestone reached allows the discount for various risks to be eroded.
For easyJet (LON:EZJ), which was Europe’s second-biggest airline going into the pandemic, any cry of victory would still be premature, however. The group said on Tuesday is set to burn through more cash between now and December, flying at only 20% of its capacity due to the current wave of lockdowns, down from 38% in the three months through September. That's despite radical cost-cutting measures that included thousands of job cuts the sale and leaseback of much of its fleet. It paid no dividend for the past fiscal year, and gave no guidance for the one just started.
How much money it will burn by New Year depends on that crucial question of whether and how hard European governments will fight to keep their societies open at Christmas. As yet, there is no single answer to that question: French Health Minister Olivier Veran told BFM TV on Tuesday that bars and restaurants, which have already been closed for two weeks, are unlikely to reopen next month, even though it’s still the government’s aim to reopen non-essential shops on Dec. 1. German Chancellor Angela Merkel's plans to tighten restrictions in order to allow a loosening by Christmas were rebuffed strongly by regional governors at a meeting Monday. They'll meet again next week to set a course for Europe's largest economy.
EasyJet shares fell 1.7% by mid-morning in London, underperforming the broader index. But like other companies that depend on people regaining the confidence to travel, it’s holding on to the vast bulk of its gains since the Pfizer (NYSE:PFE) news. The stock is up 61% on the month as is IAG (LON:ICAG), the owner of British Airways and Iberia. Air France-KLM is up 46%, while Ryanair, which fell less than most airlines in the sector is now up 2% year-to-date.
With the light at the end of the tunnel getting bigger, the key task for airlines in particular seems to be to remove the tail risk of bankruptcy in the short term. SAS, with its latest capital increase, may have managed that – it was up 3.2% by mid-morning in Europe and up 45% in the week since it announced the measure – but its local low-cost rival Norwegian Air Shuttle seems ever less likely to make it to the end of the tunnel: it fell another 7.7% on Tuesday to a new all-time low. With a remaining market value of only $180 million, it’s all but out of runway.