Financial markets found themselves at the mercy of coronavirus headlines once again this week. But digging deeper in some market-moving events, the U.S. dollar saw a swift change of its narrative as weekly trading came to a close.
Amusement park icon Six Flags admitted that its thrill-ride business needs a major rethink.
And Hong Kong faces not just a dearth of visitors, but pessimistic locals.
Here are three things that flew under the radar this week.
1. Dollar Gets a Gut Check
The U.S. dollar index surged earlier this week, setting it sights on the 100 handle, a level it has not breached in nearly three years. But its stumble on Friday has many debating whether the greenback’s rally is sustainable.
For the majority of managers on Wall Street, the greenback’s rally is on borrowed time, according to a Bank of America fund manager survey.
A net 54% of respondents surveyed in February said the dollar was overvalued, up one percentage point since the last survey and the second-highest reading since 2002, BofA said.
Concerns about the coronavirus outbreak and its impact on global growth has sparked a bid in the dollar as a safe-haven investment in recent weeks, according to the survey respondents.
The rise in the dollar caught Wall Street by surprise.
Toward the end of last year, many were betting on the dollar to falter in 2020 on expectations that easing U.S.-China trade tensions would support global growth, sparking a rebound in global economies, some of which sport unattractive negative rates (like the EU).
But the spread of the coronavirus and its potential impact on the global economy has undermined those bets.
The ratio of the MSCI US Index to the MSCI World Index, excluding the U.S., rose to a record high of 1.6, suggesting yield-starved investors view the U.S., and by extension the dollar, as the only game in town.
“Currencies are weakening on incoming bad data that leads to inflows into dollar assets,” Ben Emons, global macro strategist at Medley Global Advisors, wrote.
Others agree and expect the dollar to continue racking up gains against its rivals, with the euro feared to add to recent losses.
“Since data will most likely show the divergence between the eurozone and U.S. economies widening in the coming weeks, further losses are likely,” said Kathy Lien of BK Asset Management.
2. Six Surrender Flags
Investors likely saw the big drop in shares of theme park operator Six Flags Entertainment (NYSE:SIX) (and the obligatory accompanying roller-coaster jokes). But given how double-digit percentage moves in stocks are common lately, the scope of the fundamental problems the company is facing might have been overlooked.
The company reported earnings on Thursday and the bottom line was a very unpleasant surprise.
Six Flags reported a loss of 13 cents per share, compared with expectations for a profit of 15 cents per share, according to analysts forecasts compiled by Investing.com.
It also announced it was slashing its dividend by 70% to 25 cents per share and that its chief financial officer was leaving
There are big problems with its project to open theme parks in China, as its partner in the country defaulted on payment obligations. There will be no revenue or income from China park developments in 2020, Six Flags said.
But even more concerning, its “base business” – the core (ahem, flagship) parks like Six Flags Over Texas and Six Flags Great Adventure — is struggling. Attendance, guest spending per capita and revenue were flat in 2019.
And this year the company predicts “operating cost headwinds, including higher wages and increased investment in the parks to improve the guest experience.”
All this is leading Six Flags to overhaul its strategy, with a new plan to be unveiled at its investor day on May 28.
Piling onto the pessimism today, S&P put its current BB credit rating for the company’s debt on review at CreditWatch negative. That could mean a downgrade if S&P isn’t convinced Six Flags can stop erosion in earnings before interest, taxation, depreciation and amortization (EBITDA).
But after all that there are already some betting the turnaround will be a success.
After Thursday’s plunge, shares closed up 2.3% Friday.
3. Hong Kong Ghost Town?
While supply-chain questions abound about mainland China and the effects of Covid-19, Hong Kong is providing an illustration on what can happen to a financial center during a possible pandemic.
Charles Schwab Chief Investment Strategist Liz Ann Sonders tweeted this week, illustrating the enormous plunge in daily visits to Hong Kong.
Citing a chart from Christophe Barraud, chief economist and strategist at Market Securities, which used preliminary data from the Hong Kong Tourist Board, the island is seeing just 3,000 people visit per day.
That’s a “nearly 99% drop from February last year when about (200,000) people visited per day,” Sonders tweeted.
That may not be affecting financial market activity as much, with many in the sector living there or able to meet and work remotely. But the impact on the businesses that provide services to financial workers will be huge.
Looking at a longer-term picture, Sonders tweeted a chart showing the rise in pessimism about Hong Kong’s economy.