MarketView for April 27

Summary  

Stock prices fell ill on Monday in sympathy with the the spreading new strain of a flu could become an epidemic and possibly dampen economic growth if it got out of hand. The impact was such that it overrode the sweeping changes at General Motors and the gains in biotechnology stocks. As a result, the three major equity indexes ended the day in negative territory, while governments around the world moved to contain the spread of a swine flu outbreak that has killed up to 149 people in Mexico and spread to the United States and Canada.

After Monday's closing bell, the S&P 500 stock futures added to losses in after-hours trading after a flu expert from the World Health Organization confirmed that the pandemic alert level had been raised to Phase 4 from Phase 3. In contrast, stocks of drug manufacturers benefited from the threat of the possible flu pandemic triggered by the new swine flu strain. Gilead Sciences climbed 3.8 percent to $47.53 as the Merrill Lynch Biotech Holders ETF rose 2.1 percent.

A popular  Amex Airline Index fell 10.6 percent as investors worried that travel would be hit hard by the flu fears. Among the laggards, UAL, the parent of United Airlines, closed down 14.3 percent to $5.50, while Continental Airlines lost 16.4 percent to $11.08. The anxiety generated by a possible epidemic hammered the entire transport sector, sending the Dow Jones Transportation Average down 4.7 percent even as recent data has suggested the recession could be abating, and quarterly earnings have been less disappointing than Wall Street expected.

Meanwhile, General Motors saw its share price rise 20 percent to $2.04 after the troubled automaker announced a restructuring that investors hope will keep the company alive as it tries to secure government funding. On the Nasdaq, cell-phone chip supplier Qualcomm was a bright spot, up 4.4 percent at $43.17 after it swung to a quarterly loss, but raised its full-year revenue target on signs of market improvement.

Chevron and Exxon Mobil also weighed on the blue-chip Dow as June oil futures prices slid nearly 3 percent on flu worries. Chevron fell 1.8 percent to $65.41, and Exxon lost 0.7 percent to $66.13.

Skittishness over what a government stress test of 19 major U.S. financial institutions might reveal pressured financial stocks, Wells Fargo fell 5.1 percent to $20.30 after a Street analyst downgraded the bank's stock to "hold" from "buy."

Verizon Communications, a component of the Dow Jones industrial average, posted higher-than-expected earnings, helped by its purchase of a smaller rival and growth in cell-phone customers. Nonetheless, Verizon’s shares were down 1.5 percent to $30.54.

The CBOE Volatility Index .VIX, viewed as Wall Street's fear gauge, rose 4.1 percent to 38.32.

Crude Falls On Flu Threat

The price of May crude oil futures settled down 2.7 percent or $1.41 per barrel to settle at $50.14, off an earlier low of $48.01. London Brent crude settled down $1.35 per barrel at $50.32. Meanwhile, governments around the world rushed on Monday to reduce the impact of a flu outbreak from a virus that has killed 103 people in Mexico and spread to the United States, Canada and Europe.

The World Bank estimated in 2008 that a flu pandemic could cost $3 trillion and result in a nearly 5 percent drop in world gross domestic product. Gains in the dollar, a safe haven in times of stress, also weighed on oil and other commodities which tend to fall when the U.S. currency rises.

The global recession and sliding oil demand pushed prices toward $30 a barrel earlier this year. They have recovered to around $50 alongside an equity market rally.

"Commodity prices and returns have risen substantially since mid-February lows," Goldman Sachs said in a research note. "We believe markets will likely continue to pull back from current levels in the near term, as fundamentals are not yet stable enough to support higher prices," the bank said. "As a result, we have opened tactical shorts in both the oil and metals markets in recent days."

The Organization of the Petroleum Exporting Countries has agreed to cut supply by 4.2 million barrels per day since September last year to try to prop up prices. OPEC meets next on May 28.

Gulf oil producers said on Sunday they could tolerate moderate crude prices for longer to help revive global growth but shared a concern with consumer nations that a prolonged period of low prices could sow the seeds of a future fuel price spike.

Flu Could Be A Windfall For Some

The threat of a pandemic triggered by a new swine flu strain that has killed more than 100 people in Mexico will provide a windfall for some makers of drugs, vaccines and protective masks. Switzerland's Roche Holding AG and Britain's GlaxoSmithKline Plc are the two pharmaceutical companies set to benefit most as governments and corporations step up orders for their drugs Tamiflu and Relenza. Relenza, known generically as zanamivir, and Tamiflu, or oseltamivir, both appear to work against the new flu strain, which has spread to the United States and as far as New Zealand.

Roche said it was working on scaling up production of Tamiflu but noted that the lead time for the drug from synthesis of the product to packaging was eight months. Glaxo is also urgently seeking ways to increase production of Relenza. The company said it had supplied 100,000 packs of Relenza and 170,000 additional doses of seasonal flu vaccine to Mexico since the start of the outbreak.

Although the World Health Organization said Tamiflu was working against strains of the new H1N1 swine flu, there is some concern that it might be less effective than Relenza, since there have been widespread reports of resistance by seasonal H1N1 flu.

Demand has historically been greatest for Tamiflu, which is given as a convenient tablet, while Relenza must be inhaled. Roche sold some $3.5 billion of Tamiflu to governments in 2006 and 2007. Recently, though, Glaxo's product has been winning more business as buyers diversify their medicine reserves.

In the first quarter of 2009, sales of Relenza into government stockpiles, notably Britain and Japan, outstripped those for Tamiflu, although total Relenza sales of $323 million were still below the $350 million generated by Tamiflu. Tamiflu was originally invented by U.S. biotech company Gilead Sciences.

Shares in the two companies rose almost 4 and 6 percent respectively on Monday, while shares in some smaller biotech companies soared. However, the commercial impact would be muted because many governments have already placed substantial stockpile orders after  the previous threat from the avian flu.

Among the smaller pharmaceutical companies, Novavax, which is working on newer vaccines, saw its share price rise 125 percent; Biocryst Pharmaceuticals, which is developing a new flu drug called peramivir, rose 85 percent; and Australia's Biota Holdings, which licensed Relenza to Glaxo, saw its share price increase 82 percent.

The flu outbreak, which poses the biggest risk of a pandemic since avian flu surfaced in 1997, will also fuel demand for vaccines from major producers like Sanofi-Aventis SA, Glaxo, Novartis and Baxter International, although manufacturing sufficient supplies against the new strain will take months.

Baxter said it had asked the World Health Organization for a sample of the swine flu virus. The sample potentially could be used to develop an experimental vaccine.

"At this point, it's too soon to say" what role, if any, Baxter might play, company spokesman Chris Bona said.

Baxter, which currently sells vaccines to combat encephalitis and meningitis, has also developed a vaccine to prevent infection from the avian influenza virus. It is being stockpiled by government clients.

A number of companies said they were in talks with the WHO and the U.S. Centers for Disease Control and Prevention about developing a vaccine against swine flu and were also discussing capacity issues.

At least 20 companies make flu vaccines. Other smaller players include Australia's CSL Ltd and nasal spray maker MedImmune, acquired by AstraZeneca in 2007. In the meantime, demand for protective masks appears to have jumped in the wake of the swine flu outbreak, accelerated by government recommendations.

"We have seen an increase in demand and we have increased production," said Jackie Berry, a spokeswoman for 3M. "We have added additional shifts in our facilities."