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APAC equity markets closed higher on the day, while most US and
all major European indices closed lower. Nasdaq closed higher and
above 10,000 for the first time, with tech also being the only
sector in the S&P 500 that closed higher today. European
benchmark government bonds were lower on the day, while the long
end of the US Treasury curve rallied significantly. The FOMC
statement triggered a brief rally across US credit indices and
equity markets, but the rally faded across both markets before the
close.
Americas
Most US equity markets closed lower except for the Nasdaq
+0.7%, which also closed above 10,000 for the first time; Russell
2000 -2.6%, DJIA -1.0%, and S&P 500 -0.5%. The S&P 500
whipsawed back and forth from higher-to-lower after the FOMC
meeting announcement at 2:00pm ET, ultimately closing on a
downswing.
10yr US govt bond closed much higher today at -10bps/0.72%
yield.
CDX-NAIG closed +2bps/74bps and CDX-NAHY -8bps/451bps. CDX-NAHY
rallied on the FOMC announcement, but began to sell-off at 2:20pm
ET and closed near the widest spread of the day:
Crude oil closed +1.7%/$39.60 per barrel.
The extreme price dispersion reported in the municipal bond
market in March had improved significantly as of May. The below
chart shows the price change versus the highest intramonth traded
price at the bond level. A negative price change (left of the zero
on the x-axis) indicates a bond that declined from its highest
price that month and a positive price change (right of zero)
indicates a price increasing to its highest price that month.
The Federal Open Market Committee today concluded its scheduled
two-day policy meeting. As expected, it made no changes to its
setting for interest rates, including the target for the federal
funds rate that was maintained at a range of 0% to ¼%. It indicated
that securities purchases would continue at least at current rates.
Almost all FOMC members expect that it will be appropriate to keep
the federal funds rate at its current level at least through 2022.
(IHS Markit Economists Ken Matheny and Kathleen Navin)
The statement noted that weaker demand and lower oil prices are
holding down consumer price inflation, and that the ongoing public
health crisis will "weigh heavily on economic activity, employment,
and inflation in the near term." The crisis poses "considerable
risks" to the economic outlook over the medium term.
In a somewhat surprising development, the FOMC expects the Open
Market Desk to continue purchases of Treasury securities and agency
residential and commercial mortgage-backed securities "at least" at
the current pace, over "coming months". That implies Treasury
purchases of about $80 billion per month and combined residential
and commercial MBS purchases at approximately $40 billion per month
in the aggregate.
It would not have been surprising had the FOMC offered guidance
that the pace of securities purchases would continue to slow, as it
has since April, in response to improving financial conditions and
the restoration of liquidity in securities markets.
The US consumer price index (CPI) declined 0.1% in May, in part
reflecting a 1.8% decline in energy prices. The food CPI rose 0.7%
in May. The core CPI fell 0.1%, its third consecutive monthly
decline. This is the first time the core CPI has declined for three
consecutive months. (IHS Markit Economists Ken Matheny and Juan
Turcios)
The 12-month change in the core CPI fell 0.2 percentage point
to 1.2%, the lowest since March 2011. The 12-month change was 2.4%
as recently as February.
Prices in sectors of the economy where COVID-19-related
disruptions greatly reduced activity generally continued to
decrease in May. The CPI for apparel (down 2.3%), motor vehicle
insurance (down 8.9%), and airline fares (down 4.9%) all fell
substantially in May. The declines in prices for apparel and
airline fares were not as steep as in April.
Bureau of Labor Statistics (BLS) data collection efforts
continued to be hampered in May by the coronavirus disease 2019
(COVID-19) pandemic. In-person price collection has been suspended
since 16 March. Upon suspension, data collectors were instructed by
the BLS to attempt to collect data by telephone, email, or the
website of the establishment. Any missing prices were generally
imputed by BLS. Despite these efforts, the percentage of
unavailable prices in the CPI was elevated in May relative to a
normal month.
The Michigan-based company Zivo is developing natural
nutritional compounds and bioactive molecules derived from
proprietary algal strains. The firm is producing algal biomass
compounds to be used as feed additives for cattle, poultry and
dogs. The US Patent and Trademark Office issued the firm a notice
of allowance for a US patent application titled 'Compounds and
Methods for Affecting Cytokines'. A notice of allowance precedes
the formal issuance of a US patent, which Zivo expects to follow
shortly. Zivo's proprietary composition alters the production and
function of proteins such as cytokines and transcription factors.
The firm is developing its algal strain to tackle bovine mastitis,
bovine respiratory disease complex, transition cow syndrome, canine
osteoarthritis and canine skeletal-muscular overexertion, as well
as porcine reproductive and respiratory syndrome virus immune
disorder. (IHS Markit Animal Pharm's Joseph Harvey)
General Motors' (GM) autonomous vehicle (AV) subsidiary Cruise
Automation plans to launch its first driverless vehicle by 2025,
reports Hindustan Times Auto News. GM CEO Mary Barra said in a
recent interview, "I definitely think it will happen within the
next five years. Our Cruise team is continuing to develop
technology so it's safer than a human driver. I think you'll see it
clearly within five years." (IHS Markit Economist Automotive
Mobility's Surabhi Rajpal)
IHS Markit's registration data for 1 January to 31 March 2020
shows that the market share of registrations of luxury models
continued to gain ground in the United States against non-luxury
vehicle models. (IHS Markit AutoIntelligence's Stephanie Brinley)
Although the sales volume dropped in first quarter 2020, in
what was expected to be a year of lower demand, which has been
exacerbated by the restrictions to slow the spread of the COVID-19
virus, the share of luxury vehicles reached 13.9%, up from 12.1% in
first quarter 2018.
In full-year 2019, crossover utility vehicles (CUVs) crossed
the threshold of more than 50% of luxury vehicle sales, reaching
51.8%. In the first quarter of 2020, this slipped slightly to
50.8%, but the dominance of CUVs in the luxury vehicle segment is
likely to continue.
Brazilian agricultural exports reported monthly records in May,
with products such as sugar, soy meal, coffee and beef driven being
by currency movements as well as solid purchases from China.
Brazil's agricultural sector accounted for 32.9% of the country's
total exports, increasing its total share in the Brazilian trade
balance by 37.3% year-on-year, according to the Ministry of
Economy. (IHS Markit Agribusiness' Ana Andrade)
Soy shipments reached 15.5 million tons - the 2nd largest
volume in history, and greater than the 10 mln tons exported in May
2019. Concerning its by-product, soy meal, Brazil exported almost 2
mln tons in May, rising by 18.3% y-o-y.
Between January and May, 49.1 mln tons of soy were exported,
increasing by 40% over the same period last year and spurred by
Chinese demand. Challenges surrounding ASF also contributed to
rising foreign sales.
Meanwhile, Brazil exported 155,136 tons of fresh beef in May,
up by 24.8% y-o-y. Exports of fresh chicken rose by 4.3% to 372,501
tons, while pork jumped by 53.2%, to a record 90,722 tons.
For sugar, shipments totaled 2.7 mln tons in May, up 1.5 mln
tons on the same period in 2019. Brazilian mills are more focused
on sugar production instead of ethanol, due to current foreign
exchange rates and export prices. Sugar exports in May saw its
highest monthly volume since September 2017, when shipments totaled
2.9 mln tons.
Foreign sales of Brazilian coffee, also saw another record
volume, hitting roughly 3.6 mln 60-kilos bags last month, versus
3.3 mln a year earlier. This was its highest level since December
2018, when Brazil shipped 4 mln tons.
Europe/Middle East/ Africa
European equity markets closed modestly lower across the
region; Spain -1.1%, Italy -0.9%, France -0.8%, Germany -0.7%, and
UK -0.1%.
10yr European bonds closed mixed; UK -7bps, Germany -2bps,
France +1bp, Spain +5bps, and Italy +8bps.
Brent Crude closed +1.3%/$41.73 per barrel.
iTraxx-Europe closed +2bps/67bps and iTraxx-Xover
+18bps/376bps.
On 9 June the International Capital Market Association (ICMA)
published voluntary guidelines for Sustainability-Linked Bonds
("SLBs"), adding to its existing taxonomies for Green and Social
Bonds. (IHS Markit Economist Brian Lawson)
SLB instruments are bonds whose terms are dependent on the
issuer meeting pre-defined sustainability or ESG objectives,
committing to specific, measurable improvements in a defined
timeline.
Proceeds normally may be used for general corporate purposes,
although some issuers may structure SLBs also compliant with Green
or Social Bond criteria.
SLBs will have clearly defined objectives measured by key
performance indicators (KPIs), which should be strategically
significant, readily quantifiable, externally measurable, and based
on Sustainability Performance Targets.
The KPIs should require "ambitious" improvements in performance
and be easily referenced against external benchmarks.
In turn, achievement of KPIs, or failure to meet them, should
affect the terms of the bonds (e.g. coupon or principal due).
As with Green and Social Bonds, instruments should be subject
to regular disclosure requirements and independent performance
measurement.
The initial first-quarter estimate of a 3.8% quarter-on-quarter
(q/q) Eurozone GDP contraction has been revised to a 3.6% q/q
decline. Private consumption was the main contributor to the record
decline in GDP, but investment and exports also plunged. (IHS
Markit Economist Ken Wattret)
Although the quarter-on-quarter (q/q) contraction in eurozone
GDP during the first quarter of 2020 is now a little smaller than
initially reported, it nonetheless remains the largest fall on
record, surpassing the 3.2% q/q contraction in the first quarter of
2009 amid the global financial crisis. The second quarter of 2020
will be far weaker still.
As expected, given the severe disruption caused by COVID-19
virus-related containment measures late in the quarter, the initial
breakdown by expenditure of the first-quarter data shows a record
q/q plunge in private consumption (-4.7%). There were also very
large q/q contractions in investment (-4.3%) and exports (-4.2%),
while public consumption fell comparatively modestly (-0.4%).
Based on value added by output type, weakness was again
broad-based in the first-quarter 2020 data, but the largest q/q
contractions were evident in trade, transport, accommodation, and
food service activities (-6.8%), arts, entertainment, and other
services (-6.8%), construction (-3.8%), and manufacturing
(-3.4%).
April's 20.3% month-on-month (m/m) decline in French industrial
output was the largest since the current series started and
followed a fall of 16.2% m/m in March. On a year-on-year (y/y)
basis, output contracted by 34.2%, also the largest annual decline
on record. (IHS Markit Economist Diego Iscaro)
The breakdown by type of production shows that output of
consumer durables more than halved on a m/m basis, while production
of capital and intermediate goods fell by 30.0% m/m and 20.9% m/m,
respectively.
Production of non-durables fell by a lesser 13.5% m/m,
following a decline of 3.4% m/m in March.
Production of transport equipment was particularly weak in
April, hit by an 88% decline in production of motor vehicles.
The fall in production of machinery and equipment goods also
accelerated from 21.0% m/m in March to 24.6% m/m as a large number
of firms remained closed throughout the whole of April because of
the containment measures implemented in mid-March in response to
the outbreak of the COVID-19 virus.
Given the gradual unwinding of the containment measures from
mid-May, IHS Markit expects production to have grown on a m/m basis
in May. However, this would be a technical increase resulting from
the easing of restrictions, and output will remain substantially
below February's levels for a prolonged period (until mid-2024,
according to our May forecasts).
The Central Statistical Office (KSH) has published the latest
high frequency data showing the impact of the COVID-19 virus
pandemic on Hungarian economic activity. (IHS Markit Economist
Dragana Ignjatovic)
In a first estimate, the KSH revealed that industrial activity
collapsed in April, falling by nearly 40% y/y. Although the
breakdown has not been published yet, all segments are likely to
have suffered led by the manufacturing sector.
Within manufacturing, the automotive segment is likely to have
been particularly hard hit by supply chain disruption and closure
of factories during the lockdown, and social distancing
measures.
In a separate KSH release, the collapse in foreign trade was
detailed. Exports fell by nearly 40% y/y in euro terms, while
imports dropped nearly 30% y/y in April. This resulted in the trade
balance entering deficit (EUR611 million) for the first time since
August 2018, although the balance for the first four months of the
year remains in surplus (EUR1.2 billion).
In a final KSH release, consumer price inflation continued to
ease in May, rising by 2.2% y/y. The moderation in inflationary
pressures has been driven by a near 8% y/y drop in fuel prices and
a 1% fall in clothing prices as shops were closed. This has been
offset by still elevated levels of food price growth (+8.4% y/y)
and alcoholic beverages and tobacco (+6.7% y/y). Consumer price
growth averaged 3.5% y/y in January-May.
CNH Industrial has announced that its Iveco business now holds
a 7.11% stake in Nikola Corporation after the company was merged
with publicly traded special purpose acquisition company, VectoIQ
Acquisition Corp. In a statement, the company said that under the
terms and conditions, Iveco received 1.901 shares in VectoIQ
Acquisition Corp for every share it held in Nikola, amounting to
25,661,449 shares, before it changed its name to Nikola Corporation
and began trading on 4 June. Iveco's stake in Nikola Corporation
has come about following an agreement announced in September 2019
for a partnership between the two companies for the development of
new battery electric- and fuel-cell powered trucks. (IHS Markit
AutoIntelligence's Ian Fletcher)
Asia-Pacific
APAC equity markets closed mixed; India +0.9%, South Korea
+0.3%, Japan +0.2%, Australia +0.1%, Hong Kong flat, and China
-0.4%.
China's year on year (y/y) consumer price index (CPI) fell by
0.9 percentage point from April to 2.5% in May, the fourth
consecutive month of decline after the Spring Festival, according
to the National Bureau of Statistics (NBS). (IHS Markit Economist
Yating Xu)
The month on month (m/m) CPI reported a 0.8% deflation,
compared to a 0.9% deflation a month ago.
Food price continued to deflate m/m and the y/y inflation
narrowed. Consumer goods price inflation declined to the lowest
since July 2019.
Positive side is that transportation fuel price stopped
declining as international oil price rose.
Meanwhile, service price inflation edged up to 1.0% as nearly
90% of regions downgraded emergency control level to 3rd or lower
and non-essential service businesses gradually reopen.
Core CPI excluding crude oil and food stayed at 1.1% y/y,
unchanged from the previous month.
The m/m producer price index (PPI) deflated by 0.4% in May,
narrowing from a 1.3% m/m deflation in April. However, the y/y PPI
deflated further to 3.7% due to the high base data. The headline
deflation was concentrated in mining and quarrying industries.
Japan's private machinery orders (excluding volatiles), a
leading indicator for capital expenditure (capex), fell by 12.0%
month on month (m/m) in April for the second consecutive month of
increase. The larger-than-expected decline was due largely to a
drop in orders from non-manufacturing (down 20.2% m/m), in addition
to a third straight month of decline in orders from manufacturing
(down 2.6% m/m). Orders from overseas also declined sharply,
slipping by 21.6% m/m following a 1.3% m/m drop in the previous
month. (IHS Markit Economist Harumi Taguchi)
The decline in orders from manufacturing was due largely to
lower orders from general-purpose and production machinery,
non-ferrous metals, and other transport equipment, while orders
from many other industry groupings continued to decline.
The sluggish orders were in line with weak demand and
disruptions throughout the supply chain caused by the COVID-19
virus.
The sharp fall in orders from non-manufacturing largely
reflected slippage following robust increases in orders from
transportation and postal activities as well as
telecommunication.
The April results signal significant effects from global
containment measures on industrial production and the likeliness of
a steep decline in private capex over the near term. According to
the Machine Tool Builders' Association, domestic and foreign
machinery orders continued to decline at a faster pace in May.
S&P Global Ratings has revised its outlook on Japan's
long-term sovereign credit ratings from Positive to Stable while
maintaining its long- and short-term sovereign credit ratings on
the country at A+ (15 on the IHS Markit scale) and A-1,
respectively. (IHS Markit Economist Harumi Taguchi)
The revision to Stable reflects S&P's view that Japan's net
debt burden will rise to above 170% of GDP in fiscal year (FY) 2020
and relatively large fiscal deficits will continue to pressure the
country's debt level for 2-3 years following the sizeable
supplementary budget announced by the government on 27 May.
Although S&P expects little effect on Japan's economic
fundamentals from the COVID-19 virus pandemic, it anticipates that
relatively large fiscal deficits will continue to keep upward
pressure on the general government debt-to-GDP ratio.
Honda's four-wheel vehicle plant in Turkey, and motorcycle
plants in India and Brazil halted operations due to a cyberattack
that affected several factories worldwide, reports France Media
Agency. According to the report by the agency, the cyber-attack,
which affected 11 Honda plants - including five in the US -
targeted Honda's internal servers and spread a virus through the
company's systems. The automaker is in the process of investigating
details of the attack. (IHS Markit AutoIntelligence's Tarun
Thakur)
Taiwan's exports fell 2.0% year on year (y/y) in May,
accelerating slightly from a 1.3% y/y contraction in April. Robust
demand for technology products supported shipments to mainland
China, the United States, and Japan, jumping 10.6% y/y, 9.3% y/y,
and 7.5% y/y, respectively. They were boosted by restoring capacity
in mainland China, the gradually reopening in the US, and demand
related to working from home and online learning and games. (IHS
Markit Economist Ling-Wei Chung)
Shipments to ASEAN - with non-technology exports accounting for
the largest share - plunged 17.9% y/y in May, and exports to Europe
slumped 13.1% y/y. They marked the second month of double-digit
declines.
Electronic exports continued to provide the key support to
overall export growth, jumping by 13.2% y/y in May, after surging
24.3% in April. It marked the fourth straight month of double-digit
expansions and benefitted from a 14.2% y/y increase in exports of
semi-conductor products.
Exports of information and communication products expanded
10.9% y/y in May, after climbing 12.9% y/y in April. Shipments of
laptop computers and related products surged 32.5% y/y, and exports
of servers and routers jumped 28.0% y/y. They mainly benefitted
from increasing demand for products related to working from home,
telecommunicating, and remote learning. These came despite a very
high base effect.
Weighted down by additional drag from lower global oil and
commodity prices, shipments of mineral products plunged the most by
57.3% y/y. This was followed by 10-20% y/y drops in exports of
plastics, chemicals, and base metals.
Machinery exports continued to fall but at a smaller 6.1% y/y,
as stronger demand from mainland China and a low comparison base
provided some support.
New vehicle sales in South Korea, including passenger vehicle
imports, grew by 9.8% year on year (y/y) during May to 168,257
units, up from 153,267 units in May 2019, according to reports by
Yonhap News Agency and the Korea Automobile Importers and
Distributors Association (KAIDA), as compiled by IHS Markit. In the
year to date (YTD), total vehicle sales in the country stand at
718,416 units, down marginally by 0.2% y/y. (IHS Markit
AutoIntelligence's Jamal Amir)
Hyundai and Kia maintained their lead of the South Korean
vehicle market in May with a combined share of 72.5%.
Hyundai posted a 4.5% y/y increase in its monthly sales to
70,810 units, while affiliate Kia recorded growth of 19.0% y/y to
51,181 units.
Renault Samsung was the third-largest automaker with sales of
10,571 units during the month, up 72.4% y/y.
SsangYong's sales plunged 25.0% y/y to 7,575 units, while
General Motors (GM) Korea's sales decreased by 10.9% y/y to 5,993
units.
The South Korean new vehicle market grew for a third
consecutive month during May. The growth last month can be
attributed to strong demand for new model launches and government
incentives.
LG Chem will sell part of its liquid crystal display (LCD)
polarizer business to Shanghai Shanshan Chemical (Shanghai, China)
for 1.3 trillion South Korean won ($1.1 billion). LG Chem says that
it is divesting the unit that makes LCD polarizers required to
produce TVs and handsets, but will retain the unit that produces
LCD polarizers used in cars. LG Chem says that the market for LCDs
is deteriorating. It plans to focus on securing core
competitiveness, mainly in organic light-emitting diodes (OLED) in
the field of IT materials. LG Chem says customers are also
expanding their investment in OLED, and that the material market is
expected to change rapidly to OLED and next-generation
displays.
Bosch plans to build a semiconductor component manufacturing
and sensor testing facility in Penang (Malaysia), reports New
Strait Times. The report highlights that the construction of the
plant at the Batu Kawan Industrial Park is expected to start in
2021 with first-series production expected in 2023. More than 400
associates are expected to work at the new facility. The plant will
primarily focus on the final testing of components made at Bosch
Automotive Electronics's fab in Dresden (Germany). The
semiconductor components expected to be manufactured in the new
plant will cater to airbag systems and engine control units, among
other applications. (IHS Markit AutoIntelligence's Jamal Amir)
Siemens Gas and Power Kazakhstan and Mangistaumunaigaz have
signed a nine-year service contract for two STG-800 gas turbine
units (GTU) at the Kalamkas oil and gas field. The contract
includes servicing, upgrading power equipment, remote monitoring
and technical support. Gas turbine units will be linked to Siemens
remote monitoring center. Siemens is the original equipment
manufacturer of the serviced gas turbines. The gas turbine power
plant, located on Buzachi Peninsula, Kazakhstan's Mangystau
Province, is designed to cover its own infrastructure needs, as
well as the technological needs of the Kalamas oil and gas field.
(IHS Markit Upstream Costs and Technology's Kamila Langklep)
Posted 10 June 2020 by Chris Fenske, Head of Fixed Income Research, Americas, IHS Markit
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