July 2020 Market Recap

Strengths

• Chinese airlines were the winners among the Bloomberg World Airlines Index in the month of July. China Southern Airlines was up 5.28 percent while Air China was up 4.75 percent. China has seen a rebound in domestic travel as the world’s most populous country contained the outbreak of Covid-19.
• United announced it will boost flights in September as it resumes service on 25 international routes. Although the September schedule will amount to just 37 percent of that in 2019, it is a modest increase from the August schedule, representing an increase in leisure travel.
• Southwest Airlines CEO Gary Kelly said in a Bloomberg TV interview that it is safe to travel on commercial airlines now and that passengers should not worry about air quality. Airlines are taking extensive measures to protect travelers, including mandatory face masks, thorough cabin cleaning and middle seat booking bans.

Weaknesses

• Airlines began reporting second quarter earnings in July. Singapore Airlines reported its biggest quarterly loss ever, with a loss of $815 million. Cathway Pacific Airways warns of a $1.3 billion first half loss.
• Collapsed travel demand has hurt the already-troubled Boeing. Customers have cancelled 373 orders for the Boeing Max so far in 2020, with 60 in the month of June. Airlines are cutting back on new orders as demand shows no sign of a speedy recovery.
• Travel restrictions and strict quarantine rules remain in place globally. Many countries require that travelers from other countries quarantine for 14 days. In the U.S., New York State is mandating that travelers from a growing list of other states quarantine for two weeks. These restrictions are believed to hamper global travel and deter visitors.

Opportunities

• Richard Branson helped save his own Virgin Atlantic. The company announced a 1.2 billion pound ($1.5 billion) package that includes 170 million pounds from U.S. hedge fund Davidson Kempner Capital Management and 200 million pounds that Branson raised from diluting his stake in Virgin Galactic. Back in March, the U.K. government rejected an airline industry bailout. The carrier will adapt to the post-pandemic world by cutting more than 3,000 employees and focusing on long haul routes such as Europe to Israel and Europe to the Caribbean, reports Bloomberg.
• The pandemic woes for Airbus and Boeing could present an opportunity for state-owned Chinese aerospace company Comac. On July 10, an Air China flight used a Comac plane – the first time a major carrier has used one of its jets. As tensions rise between China and the West, Comac can supply jets to national airlines and reduce dependence on majors Airbus and Boeing. Comac delivered its ARJ21 jet to Air China, China Eastern Airlines and China Southern airlines in June and will deliver a total of 105 by 2024.
• Ryanair CEO Michael O’Leary is hopeful that the reopening of school in Europe in September will boost business travel. “To the extent they successfully manage the return to schools, we think there will be some return to some level of normality of business travel.”

Threats

• Moody’s Investors Service estimates that global airline passenger demand won’t recover to pre-coronavirus levels until the end of 2023, and only if an effective vaccine is available, reports Bloomberg. Air travel demand plummeted by more than 90 percent just weeks into the pandemic. A vaccine will likely not be available before mid-2021. The International Air Transport Association (IATA) updated its forecast and said the industry is unlikely to fully recover before 2024.

• What was once a dire pilot shortage has turned rapidly into a pilot surplus. Thousands of pilot jobs are at risk as airlines offer far fewer flights. United’s outlook said a third of pilot jobs are threatened. Delta has cut pilot hours by 15 percent to try and avoid layoffs, but that might not last long. Asiana Airlines is even flying empty Airbus A380s just to keep pilots certified by having enough fly time.
• Airline carrier jobs are at risk in the U.S. when restrictions tied to payroll aid expire at the end of September, reports Bloomberg. American Airlines said it will notify 25,000 employees, or about 29 percent of its U.S. workforce, that they are at risk of losing employment when the aid expires.

Strengths

• Gold ended July at $1,975.86 an ounce for a 10 percent monthly gain. (The metal then, of course, broke $2,000 an ounce just days later.) The NYSE Arca Gold Bugs Index rose 108 percent from a March 13 low through July 24. The Solactive Global Silver Miners Index rose 117 percent over the same period. Is this the start of the next bull market?

• The real yield on the 10-year Treasury closed at its lowest level ever at negative 0.9277 percent on July 28. This has boosted gold’s appeal since it does not offer interest like government bonds usually do. Holdings in all gold-backed ETFs rose to 3,234.6 tons, which includes 655.6 tons so far this year, and is more than the total added in 2009.
• Silver has performed strongly along with gold. The metal rose above $24 an ounce for the first time since 2013. Silver is rising along with demand for its use in solar power. Mike McGlone, commodity strategist at Bloomberg Intelligence, says the white metal could eventually climb to $30 an ounce amid a broad-based bull market for precious metals.

Weaknesses

• AngloGold Ashanti, the world’s third largest gold producer, announced that CEO Kelvin Dushnisky is stepping down after two years on the job. According to people familiar with the matter, shareholders pushed Dushnisky to leave after asking for further investigation into a bonus payment made by his previous employer Barrick that wasn’t initially disclosed. Bloomberg reports that before working at AngloGold, Dushnisky agreed to a signing bonus to make up for a Barrick payment that he would lose out on. However, Barrick’s annual report showed that he did in fact receive the bonus and was asked by the board to repay it.
• Barrick Gold said its costs to produce gold and copper rose in the second quarter. The all-in-sustaining cost to produce one ounce of gold was 7 percent to 9 percent higher in the second quarter compared to the first quarter, according to a company statement. Bloomberg reports that Barrick’s production was down for the last three months largely due to COVID-19 disruptions in Argentina and planned maintenance shutdown in the Dominican Republic.
• The U.S. Mint said it has reduced the volume of gold and silver coins for distribution as the pandemic slows production. A document obtained by Bloomberg says that the Mint’s West Point complex in New York will probably slow coin production for 12 to 18 months as it implements measures to prevent the virus spreading among employees.

Opportunities

• Wheaton Precious Metals CEO Randy Smallwood said that mining companies could raise as much as $3 billion by selling shares of future output. “Any time there’s a bit of financial stress in the industry it always opens up financial opportunities for us,” said Smallwood. Royalty companies such as Wheaton provide upfront payments to miners in exchange for the right to buy metals at a discount in the future, reports Bloomberg. Wheaton says it has been “very active” on potential deals, including one valued at $1 billion.
• According to Moody’s Investors Service, gold producers are expected to bounce back quickly from Covid-19 related setbacks. Due to higher gold prices and lower operating costs, miners could see greater margins. Moody’s expects second-quarter production to come in lower, but that levels will normalize in the second half of the year. Low fuel and energy process could reduce operating costs by 3 to 5 percent.
• Anglo American Plc is making a big green shift. The mining giant is advancing plans to convert its fleet of more than 400 diesel-fueled mine trucks to hydrogen power, reports Bloomberg. A pilot project will start next year at Anglo American Platinum’s open-fit Mogalakwena operation in South Africa where a 3.5-megawatt electrolyzer will produce hydrogen on site.

Threats

• Plummeting gold demand out of India could continue for longer than expected. Consumption fell in the first half of this year by 56 percent from a year earlier to 165.6 tons, according to the World Gold Council (WGC). “For gold demand to survive, the economy has to do well” and India’s economy has been hit severely by Covid-19 lockdowns, says P.R. Somasundaram of the WGC. However, if the economy were to surge back to life then demand could skyrocket.
• BMO Capital Markets lowered its forecasts for average prices of platinum group metals during 2020, reports Kitco. Analysts reduced the 2020 average platinum price forecast to $875 an ounce from $976 previously, although the bank does look for prices to climb from the mid-morning level of $788 to a fourth-quarter average of $940.
• The Covid-19 pandemic remains a threat for the mining industry. Outbreaks at mine sites can lead to closed production and nationwide shutdowns to enforce social distancing can also shut mines temporarily. WGC data shows that global mine production fell in the second quarter 776.8 tonnes, down from 826.9 tonnes in the first quarter.