December Market Recap

Strengths

• The U.S. Transportation Department released a proposal that would require airlines to offer lavatories accessible to disabled passengers on more aircraft. The plan would require airlines to ensure new, single-aisle jets with at least 125 seats to have accessible toilet seats and other features, reports Bloomberg. Current rules do not require single-aircraft to have accessible lavatories, even as those planes are increasingly used for long-haul flights.
• Australia’s Qantas Airways decided to use the Airbus A350-1000 over Boeing’s 777X for proposed ultra-long haul flights connecting Sydney with New York and London. Qantas plans to begin commercial services between 2022 and 2023, and had used the Boeing 787 Dreamliner for test flights of the 20 hour routes. Bloomberg reports that Airbus will fit an additional fuel tank on the A350 to give the aircraft the range to fly the routes with a full passenger load.
• Airlines for America (A4A) projected that 47.5 million passengers would fly globally on U.S. airlines over the 18-day winter holiday travel period from December 19 through January 5. The industry trade organization reports that an average of 2.6 million passengers would fly each day during the period, an increase of 3 percent from the same period a year ago.

Weaknesses

• Boeing announced that it would halt production of its 737 MAX plane in January as the troubled plane is yet to be approved to return to service. The manufacturer had been producing around 40 of the planes per month at its assembly plant in Washington, employing 12,000 workers. Boeing said that it will redirect workers to other projects. Since Boeing is a major contributor to the U.S. economy, chief economist at Wilmington Trust Luke Tilley predicts that stopping production for one quarter would cut 0.3 of a percentage point from quarterly annualized GDP growth. The Wall Street Journal reported that Boeing has a backlog of 4,545 MAX orders as of the end of November.
• The International Air Transport Association (IATA) lowered its annual 2019 profit estimate for the airline industry to $25.9 billion, which is $2.1 billion less than its prediction in June and almost $10 billion down from estimates a year ago. The organization stated that a main concern for 2020 is that the new 737 Max aircraft with return to service and expand capacity too fast. The IATA does, however, expect 2020 to fare better than 2019, with an estimate of $29.3 million in profits.

• An American Airlines mechanic pleaded guilty to attempted destruction of an aircraft for tampering with a flight-monitoring device on a jet in Miami, reports Bloomberg News. The mechanic said he was upset over stalled contract talks and court records show that his brother might have been involved with the Islamic State group, reports the Associated Press. Pilots got an error message in the cockpit and aborted takeoff after noticing the error in the device.

Opportunities

• FTSE Russell said that EasyJet PLC will be returning to the FTSE 100 Index just six months after being removed. The budget airline suffered in early 2019 on concerns that Brexit would hurt demand for air travel between the U.K. and Europe. Bloomberg reports that EasyJet then recovered in October when the carrier reported earnings would hit the top end of guidance.
• After 20 years, Delta Air Lines is selling its struggling private jet charter business to Wheels Up Partners. Delta CEO Ed Bastain said in an interview that the luxury charter business had been marginally profitable and didn’t grow as hoped. However, Delta is confident that Wheels Up will be able to provide greater marketing power and focus. Wheels Up is an on-demand aviation company with 6,000 members, according to Bloomberg.
• According to people familiar with the matter, the Hinduja Group is likely to bid for the grounded carrier Jet Airways India. Bloomberg reports the group plans to submit an expression of interest by January 15. Jet Airways, which was once India’s largest by market value, saw its stock fall almost 90 percent in 2019 as it fell victim to a price war initiated by budget carriers and defaulted to banks.

Threats

• The air travel industry continues to come under fire for being a big global polluter. The European Green Deal was unveiled by the European Commission, which aims to fight climate change in many ways, including a fuel tax. According to a July report from the commission, the new taxes could cost airlines 14.4 billion euros per year, more than double their currently yearly taxes in the bloc. Airlines have pushed back against a fuel tax, saying that investment in sustainable fuels and electric planes would be more effective in reducing carbon emissions, reports Bloomberg News.
• Hong Kong’s air travel industry has been hurt further by continued protests in the city that have deterred visitors. Cathay Pacific Airways reported a fourth straight monthly drop in passenger traffic and may have to cut as many as 1,000 jobs. Bloomberg reports that the Hong Kong Airport Authority said it seized seven planes from Hong Kong Airlines for failing to make certain payments.
• South Africa’s government is placing South African Airways (SAA) under a local form of bankruptcy protection to try and prevent the total collapse of the airline, reports Bloomberg. The state-owned carrier will receive around $274 million in funding for radical restructuring. SAA last turned a profit in 2011 and has received billions in bailouts since 1994.

Strengths

• The price of gold finished December at 1,519.50 an ounce, close to a six-year high, or up 15 percent for 2019. Gold mining stocks, as measured by the NYSE Arca Gold Miners Index, had an even stronger year, returning an impressive 40 percent. Palladium was the top performing precious metal for 2019, gaining a whopping 54.20 percent.

• Australia’s Perth Mint reported a 67 percent increase of sales of coins and minted bars in November from October of 54,261 ounces. This buying is largely driven by purchases by Britons amid uncertainty surrounding Brexit. The Australian Bureau of Statistics shows that Britons bought $5.3 billion of Australian gold in the third quarter of this year, which is the most ever in a single quarter and a 1,400 percent increase over the prior quarter.
• In an example of a “smart” gold transaction, Barrick Gold sold an 83.25 percent stake in the Massawa project in Senegal to Teranga Gold for $430 million in cash and shares. Teranga’s flagship mine is just 25 kilometers from the Massawa project, making it a smart buy for Teranga with infrastructure and processing nearby, reports Bloomberg. Pending and completed gold M&A has reached around $33 million so far in 2019 – the highest amount since 2011.

Weaknesses

• Gold imports by India fell for a fifth straight month in November amid the slowest economic growth in six years that has curbed demand during peak wedding season, reports Bloomberg. Due to high prices for gold in India and an increase in import taxes, smuggling is on the rise. The India Gem and Jewellery Domestic Council said smuggled inflows of gold could increase 30 percent to 40 percent in 2019 to 140 tons.
• Newmont Goldcorp lowered its production forecast and raised its cost outlook. Bloomberg reports that the world’s largest gold miner says output will be 6.7 million ounces in 2020 and all-in sustaining costs will be $975 an ounce. On a positive note, Newmont said it will repurchase as much as $1 billion of its own shares over the next 12 months.
• South African platinum-group metals output fell for a third straight month in October due to ongoing power outages. According to Statistics South Africa, output dropped 4.8 percent from a year earlier. Petra Diamonds began halting mining operations in the country after receiving a notice from the power company to reduce its power load. Bloomberg reports that both Impala Platinum Holdings and Sibanye Gold Ltd. were also impacted by government notices of power shutoffs.

Opportunities

• Equinox Gold Corp is acquiring Leagold Mining Corp for $586 million. Bloomberg reports the deal would expand Equinox’s production to 700,000 ounces in 2020, with the new company operating six mines in the U.S., Mexico and Brazil. This is another example of a major producer picking up a junior with one large deposit. With a need to replenish reserves, we could see more juniors being acquired by the majors. Sean Boyd, CEO of Agnico Eagle Mines, told Bloomberg in its 2020 outlook that “the greatest challenge for the industry is replenishing reserves.” CEO of Barrick Gold Mark Bristow said that “more mining consolidation is still needed, especially in the gold sector.”
• Kinross Gold has been busy raising cash. Kinross announced that it has agreed to sell its remaining shares of Lundin Gold for C$150 million to Newcrest Mining and the Lundin Family Trust. Kinross earlier announced that it has sold its royalty portfolio to Maverix Metals for $74 million.
• Turkey is taking big steps to increase gold consumption. The nation’s Treasury is writing changes that would allow the certification and standardization of scrap of unregistered gold people might carry when they enter the country, reports Bloomberg. Turkey is a top consumer and its jewelry industry was one of the few to report an uptick in demand for the yellow metal last quarter.

Threats

• ABN Amro strategist Georgette Boele says they see gold weakening in the coming weeks and months with a price average of $1,400 an ounce. However, they do expect prices to increase to $1,600 by December of 2020. Before this happens, extreme net-long positioning would clear up because “these positions currently hang over the market and prevent prices from moving substantially higher.”
• JPMorgan is bullish on 2020 and is advising clients to short gold via the options market, overweight equities and underweight bonds, reports Bloomberg. This is in big contrast to Goldman Sachs, which sees gold soaring next year. JPMorgan sees recession risks subsiding while Goldman sees recession risks arising from the trade war.
• De Beers announced that its diamond sales in 2019 fell by almost $1.4 billion – capping a very bad 12 months. Bloomberg writes that there has been little good news this year for the diamond industry as an oversupply of rough diamonds hurt prices. In November the company cut prices across the board by 5 percent.