Ethiopian Airlines crash: Boeing's US$55 billion market rally put to the test

Ethiopian Federal policemen stand at the scene of the Ethiopian Airlines Flight ET 302 plane crash, near the town of Bishoftu, southeast of Addis Ababa, Ethiopia, on March 11, 2019.
Ethiopian Federal policemen stand at the scene of the Ethiopian Airlines Flight ET 302 plane crash, near the town of Bishoftu, southeast of Addis Ababa, Ethiopia, on March 11, 2019.PHOTO: REUTERS

SINGAPORE/SYDNEY (BLOOMBERG) - News of a Boeing 737 Max crash operated by Ethiopian Airlines is bringing out equity bears.

Futures contracts on the Dow Jones Industrial Average Index - where Boeing has the largest weighting - slid as much as 0.7 per cent on Monday (March 11) after Flight ET302 plunged to the ground minutes after leaving Addis Ababa en route to Nairobi, Kenya, killing all 157 people on board.

This is Boeing's second 737 Max crash in five months.

To make matters worse, China asked domestic airlines to temporarily ground those jets by 6pm local time, and Ethiopian Airlines said it would ground them until further notice.

Boeing shares slumped 8.9 per cent to US$385 in pre-market US trading. The shares lost 19 per cent in Germany and could slide in US trading as concerns are increasing over the jet, said Eleanor Creagh, a Sydney-based market strategist at Saxo Capital Markets.

Even a 5 per cent fall would cut more than 100 points from the Dow, she estimated.

When a Lion Air plane of the same model sank into the Java Sea off the coast of Indonesia last year, killing 189 passengers and crew, the shares lost almost 7 per cent.

 
 
 

"Weakness transpiring in Boeing's share price will hit the Dow," Creagh said by phone. The stock has been responsible for about a third of the gains as markets recovered since the December low, she said.

Shares of the US manufacturer have gained 31 per cent this year, the most among Dow components and adding more than US$55 billion in market cap.

While that's partly due to the improving sentiment over the US-China trade talks, the company also reported a record cash pile for 2018 with sales reaching US$100 billion for the first time in its 102 years.

The weekend accident happened as the US stock-market rebound is showing signs of strain.

The S&P 500 Index just posted its biggest weekly loss of the year as concerns surrounding global economic growth mounted.

Risk appetite has weakened and the bar for positive surprises is now higher after a more than US$9 trillion global equity rally since a December low. The Dow, where Boeing has an 11 per cent weighting, dropped 2.2 per cent last week.

In a March 11 report, Morgan Stanley said it expects a "degree of weakness and volatility" in the shares until there is clarity on what happened with this crash, adding it is premature to make any linkage to the Lion Air accident.

Analyst Rajeev Lalwani wrote last month that the company's stock has a "clear path" to US$500 given broadly higher market multiples along with a potential order boost from a resolution in the China trade situation.