Financial Review of Swine Flu and US Financial Shares

Posted on | April 27, 2009 |

The rapid spread of the deadly swine flu outbreak hit US shares, particularly travel related stocks, this afternoon.

The United Nations has warned that the virus has the potential of becoming a pandemic after rapidly spreading from Mexico, where officials suspect it has caused the death of more than 100 people, to the United States, Canada and now Spain.

A number of countries have begun screening air passengers for symptoms of the virus and a few European tour operators are said to have suspended trips to Mexico. Moreover, imports of pork products from Mexico and parts of the US have been banned.

This development dealt a severe blow to airlines, with shares in US Airways plunging 18.8% to $3.93, Delta Airlines tumbling 17.13% to $6.53, AMR Corporation falling 15.9% to $4.56, and Continental Airlines sliding 15.8% to $11.16 within the first half hour of trading today.

Also feeling the brunt was hotel group Marriot International, falling 5.8% to $21, Starwood Hotels & Resorts sliding 8.5% to $19.05 and Wyndham Worldwide retreating 8.3% to $9.27 per share.

Sentiment towards banks was also weak, especially after Richard Bove, an influential analyst, downgraded Wells Fargo from ‘buy’ to ‘hold’ [1]. Investors also fear that the final banking sector stress test report, scheduled for release in early May, will force bailed-out banks to raise more money or convert the government’s preferred stock into common shares, a situation that would further dilute the shareholding of existing shareholders.

Shares in Wells Fargo fell 3.4% to $20.68 following Mr Bove’s downgrade, while shares in Citigroup declined 1.3% to $3.15, JPMorgan Chase traded 0.45% lower to $33.23 and Morgan Stanley declined 0.55% to $21.84.

There has been talk about the auto sector today. As it transpires, General Motors has unveiled new restructuring plans; it is offering bondholders the opportunity to convert their debt into equity, in an attempt to cut down $44 billion worth of debt. It is also planning to sell off its Pontiac division and announce another round of cost-cutting measures. Shares in GM surged 29% to $2.18 following this announcement, while rival Ford climbed 7.4% to $5.37 a share.

On the earnings front, cell phone chip supplier Qualcomm produced disappointing first-quarter earnings, hurt by investment losses and costs relating to its legal settlement with Broadcom. Qualcomm’s shares rose 6% to $43.85, nevertheless.

Meanwhile, larger rival Verizon Communications reported better-than-expected quarterly profits and a 12% rise in revenue, helped by the acquisition of a smaller rival and growth in cell-phone customers. Shares in Verizon fell 0.7% to $30.78, however.

By around 3.45pm (London time) the Dow Jones Industrial Average had managed to climbed 17.84 points (+0.22%) to 8094.13, while the S&P 500 remained in negative terrain, down 0.10 points (-0.01%) to 866.13.

[1] Source: Reuters News (27 April 2009)

By Anthony Grech, Research Analyst, IG Index.

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