The Rolls-Royce (LSE:RR) share price has rocketed over 40% in the last two days. So what exactly has happened to the British aerospace and engine manufacturer?
Bombshell news hit world stock markets at about 11.30am on Monday 9 November. UK shares that had been wallowing in the doldrums suddenly started to tick up. And up. And up a lot more.
Before we knew it, within two hours the Rolls-Royce share price had gained 37%.
Big gains and fast
For a FTSE 100 stock to rise this much is practically unheard of.
A FTSE 100 share might rise or fall between 2% to 3% in a day, and we would consider that to be very noteworthy news. But 37% in two hours? And 44% in two days? That’s fast.
It was, of course, news of a potential Covid-19 vaccine candidate from Pfizer that shocked the world.
Why the Rolls-Royce share price soared
While Rolls-Royce doesn’t sell products in the consumer-facing travel or retail sectors, it does rely on selling its engines to passenger airlines for a large proportion of its income.
The Trent 900 powers the Airbus A380 and the Trent 1000 is used in the Boeing 787, for example. Far fewer planes are in the sky, and companies like British Airways owner International Consolidated Airlines Group are losing hundreds of millions a week in cash burn. RR’s customers are slashing their plans for future spending.
Its sales outlook suddenly looked very poor indeed. So the stock market has been trading the Rolls-Royce share price at a massive discount. A working Covid-19 vaccine would change all that.
In short order
The sudden hike isn’t just down to optimism over the future of the Rolls-Royce share price though. There’s another more technical reason at play.
Short-sellers — traders who bet that the price of companies will go down, rather than up — were caught out by the Covid-19 vaccine news. When unforeseeable good news hits the market, shares considered likely to continue falling suddenly spike.
This causes what’s called a ‘short squeeze’. It’s a kind of cascade effect, where short-sellers are forced to buy back shares at an ever higher price.
This pushed the Rolls-Royce share price up by a lot in a very short space of time.
Long-suffering Rolls-Royce shareholders might have allowed themselves a little chuckle to see people betting against the company lose so much money.
Rolls-Royce future
The share price has been one of the FTSE 100’s hardest hit by the pandemic. It’s been one of the worst years in the company’s 114-year history, that’s for sure.
Covid-19 crippled the aviation industry. And Rolls-Royce has seen its balance sheet, revenue and profits crumble. It was forced to raise £2bn through a rights issue. Bosses scrapped the much-vaunted dividend payout for the first time since 1987.
But if the travel bans are over? If Rolls-Royce customers can fly their planes and will start buying engines again, this is very good news for shareholders. The market is now expecting beaten-down FTSE 100 bargain shares to soar higher.
While the outlook for the share price is suddenly better than it has been in months, I wouldn’t get too carried away. I see it deflating in the short term. It could also be a very long time before large-scale travel, and therefore sales, return.
