Expected stimulus keeps Wall Street hoping to get fresh legs for rally

By: |
November 2, 2020 6:32 PM

With polls suggesting Democratic candidate Joe Biden extending his lead over President Trump, markets are beginning to digest the possibility for the same after their first debate.

US stock marketThe world economy and corporate earnings will return to pre-pandemic levels in 2021, according to UBS forecasts.

Traders kept one eye on the Congress this week as they hoped for a deal on the size of the stimulus package. IBM’s decision to split into two companies sent its shares higher up as it pushed for cloud business. ExxonMobil lost its position as the biggest U.S. oil company as the nature of the energy business is undergoing change.

Stimulus hopes drive weekly gains for markets

The hopes of a fresh stimulus dictated Wall Street’s moves last week. Traders waited for clarity on whether the stimulus could be cleared in the three weeks left before the Presidential election. While the Congressmen negotiated the size of the deal, Wall Street had its best week since July, thanks to the optimism for another stimulus package. Dow gained over half a percent or 161 points while the S&P 500 did much better with a 3.8 percent rise. Nasdaq was up 4.6 percent for the week. With polls suggesting Democratic candidate Joe Biden extending his lead over President Trump, markets are beginning to digest the possibility for the same after their first debate.

Snap summary
Recent economic indicators have indicated that the consumption is slowing down and a fresh impetus may be needed to push demand. The Federal Reserve had launched an open-ended bond-buying programme and President Trump had approved a $2.2 trillion programme that included higher unemployment benefits and direct payment to citizens.

Energy leadership in the U.S. changing hands

Exxon Mobil has been dethroned as the largest oil company in the U.S., beaten by rival Chevron in market value. It is the first time that it has been pushed to second position, since it’s beginning as Standard Oil over 100 years ago. With oil demand continuing to be weaker than pre-COVID times, Exxon is finding it difficult to generate cash for its capital expenditure, putting its $15 billion a year dividend at risk. The world’s largest wind and solar energy company, NextEra Energy is now valued at $145.5 billion, superseding Chevron ($142 billion) and Exxon ($141.6 billion). Exxon earned $265 billion in revenue in 2019 while NextEra Energy’s earned $19 billion in the same year.

Snap summary
Exxon Mobil has lost half its value since January 2020 as a global fall in oil demand hit revenue and profitability. As more than half the world went into lockdown, global oil demand had fallen over 30 percent. Demand is still down 10 percent but renewable energy companies are usurping the position held by large oil and energy companies.

IBM to split into two companies by 2022

109-year-old IBM will split into two public companies as it looks to diversify its traditional business to focus on high margin cloud computing. Its IT infrastructure services business, with 4600 customers in 115 countries, will be listed as a separate company by 2021 end. CEO Arvind Krishna called the move a “significant shift” in the company’s business model. As it spins off the slower-growing business into a separate company, it could be preparing to challenge Amazon and Microsoft in the cloud business. Two years ago, it had spent $34 billion to acquire Red Hat and that could become the bedrock to script Big Blue’s turnaround.

Snap summary
It is the fourth major shift in strategy for IBM in its over 100-year history. It divested the networking business in the 1990s, PC business in the 2000s and semiconductor business earlier this decade. The move could make IBM more of a software company than a service company, changing how the company has traditionally been viewed.

Google must pay French publishers, court says

Google must talk to French media companies to pay for the use of their content, an appeals court confirms. This paves the way for an industry-wide deal in the country. The impact of the French appeals court ruling could be felt in several other countries too since the EU copyright rules makes it mandatory for publishers to demand a fee from online platforms for news snippets. Google has pledged to pay $1 billion to publishers around the world over the next three years. Its vehicle for paying news publishers, Google News Showcase, is to be launched in Germany where it has signed up with several publishers.

Snap summary
The French competition authority had ordered Google to initiate discussions with the French publishers to strike a deal to pay for the use of their news earlier. The concept of ‘neighbouring right’ as mentioned in the EU copyright rules will be applied in the case of Google paying for the news.

AMD may buy rival Xilinx for $30 billion

Advanced Micro Devices (AMD) is considering buying rival chipmaker Xilinx Inc, according to reports. The deal, if concluded, could be worth $30 billion, adding to the consolidation being seen in the global semiconductor industry. The shares for AMD have nearly doubled since March as demand for PCs, gaming devices and other tech devices that use its chips have shot up. It showed up in its Q2 revenue, as it jumped 26 percent to $1.93 billion. The chips that Xilinx make are used in data centres, besides defence and automotive industries. Chipmakers are sensing wider use of their products in devices that drive productivity at work and ease of living at homes.

Snap summary
If the AMD deal goes through, it will be among the third deals during 2020 in the semiconductor industry. Nvidia had earlier agreed to pay $40 billion for ARM Holdings. Earlier this year, Analog Devices agreed to pay $20 billion for Maxim Integrated Products.

Over 40 airlines shut down in 2020, more may follow

43 commercial airlines have stopped operations during 2020 against 49 in 2019 and 56 the year before. Unless the situation improves and there is improved government support, more airlines could be added to the list of 43 this year according to travel data company Cirium. Most of the revenue for airlines is generated during the second and third quarters, both of which have been a washout this year. According to Cirium’s data, 485 planes are idle due to airline closures this year against 431 and 408 in the last two years. U.S. airline companies have furloughed over 32,000 workers and are looking at the government for wage support programmes.

Snap summary
The International Air Transport Association issues a warning that airlines could lose $77 billion during the second half of the year. They could continue to lose at least another $5 billion in 2021 because of slower demand. It expected passenger demand to return to 2019 levels by 2024.

Quote:
“During times of uncertainty, investors are increasingly looking for asset classes that offer safety and stability for their capital. We are seeing that the utility sector has proven to be even more attractive during this pandemic and expect the level of activity to continue.”
Name: Steffen Pleser
Designation: Head, Power, Utilities & Infrastructure, Europe, Middle East & Africa
Company: UBS Group AG

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