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Global equity markets closed higher today on calming of tensions
between the US and China, as well as a stronger than expected
retail sales report out of the US. IG and high yield European
iTraxx indices and CDX-NAIG closed higher, while CDX-NAHY was
slightly lower on the day despite a strong open. 10yr US government
bonds and German bunds closed lower today. The steady increases in
COVID-19 cases in the southern US and parts of China continue to be
in the backdrop and are being closely monitored by the markets.
Americas
US equity markets closed higher today; Russell 2000 +2.3%, DJIA
+2.0%, S&P 500 +1.9%, and Nasdaq +1.8%.
10yr US govt bonds closed +3bps/0.76% yield.
Federal Reserve Chairman Powell played down the significance of
the central bank's decision to begin buying individual corporate
bonds in the secondary market to the Senate Banking Committee
today. "We're not actually increasing the dollar volume of things
we're buying," he said on Tuesday. "We're just shifting away from
ETFs to this other form of index." In its announcement yesterday,
the Fed said it will follow a diversified market index of U.S.
corporate bonds created expressly for the facility in deciding
which individual issues to purchase. (Bloomberg)
CDX-NAIG closed -1bp/69bps and CDX-NAHY closed lower
+3bps/462bps. The below chart is today's intraday day-over-day
changes in the S&P 500 vs CDX-NAHY with the direction of the
CDS axis reversed to align directionality. The data shows the sharp
decline in both indices during Fed Chairman's congressional
testimony that began around 10:00am EST and then began diverge at
11:00am EST with the S&P rallying and CDX-NAHY selling off
further.
Crude oil closed +3.4%/$38.28 per barrel.
Year to date % changes by sector in the S&P 500 indicates
that the Energy and Minerals sector is the worst performer at
-34.8%, while technology services at +5.5% and health technology at
+3.6% are the only sectors higher YTD.
Total US retail trade and food services sales surged 17.7% in
May, following a cumulative decline of 21.8% over March and April.
The May recovery brings retail trade and food services sales within
7.9% of the pre-pandemic February level. (IHS Markit Economists
James Bohnaker and David Deull)
Retail sales came roaring back in all major categories,
especially those in which businesses began reopening in late April
and May. Some of the monthly percentage increases were astounding;
sporting goods and hobby stores (88.2%), furniture and home
furnishing stores (89.7%) and clothing and accessories stores
(188.0%) led the way.
Retail categories that were already outperforming maintained
momentum in May as well. Nonstore retailers (up 9.0%), building
materials & garden supply stores (up 10.9%) and food &
beverage stores (up 2.0%) experienced strong demand in
May—sales growth in each category is comfortably in the
double-digits compared with the same month a year earlier.
While consumers are still eschewing air travel and public
transportation, travel by car has recovered strongly and supported
improvement in retail sales of gasoline (up 12.8%) and motor
vehicles and parts (up 44.1%) in May.
We were expecting April to be the low point for retail sales
but had not anticipated this rapid initial rebound. While this is
encouraging, labor markets and consumer confidence will need to
sustain early improvement in order for a wider economic recovery to
take hold. Potential setbacks from a second wave of COVID-19 remain
a risk.
Total US industrial production (IP) rose 1.4% in May, while
manufacturing IP rose 3.8%, as many factories resumed at least
partial operations as states across the US began to reopen their
economies. (IHS Markit Economists Ben Herzon and Lawrence Nelson)
The details in this report that bear on our GDP tracking (and a
separate report on retail inventories for April) left our tracking
forecast of second-quarter GDP growth unrevised (to the nearest
whole number) at -37%.
The increase in IP in May was encouraging and supports our view
that the trough in GDP was in April. However, the level of IP in
May was 15.4% below the pre-pandemic (February) level, leaving
virtually all of the recovery for future months.
The increase in manufacturing IP was reflected in most major
industries, although output within primary metals, machinery, and
electronic equipment continued to decline.
Of note was a rebound in the auto sector, where assemblies were
reduced nearly to zero in April as assembly plants were idled to
limit the spread of COVID-19. Nevertheless, assemblies in May fell
short of our assumption, implying somewhat lower motor vehicle
output in the second quarter than we previously forecast.
Mining output declined 6.8% in May, with sharp declines in
crude oil extraction and oil and gas well drilling extending their
recent slides.
The output of electric and gas utilities declined 2.3% in May,
with electric power generation down 1.1% and natural gas
distribution down 8.1%.
AT&T Inc. is notifying over three thousand employees that
their jobs are being eliminated and it will be closing 250 stores
as part of a $6 billion cost-cutting push, which is an attempt to
slim down one of the most heavily indebted companies in the U.S.
(Bloomberg)
Tesla is negotiating with a Texan county authority over
possible incentives in support of a new auto assembly plant in the
area, reports Reuters. According to the report, the Travis County
Commissioners Court is scheduled to discuss the terms of the
possible deal on 17 June, with a vote due in the coming weeks.
However, a report by local newspaper the Austin American-Statesman
indicates that it is not clear if the negotiations with the county
authority show that the electric vehicle (EV) manufacturer has
picked the area as the location for a new plant. Reportedly,
neither the Travis county government nor Tesla commented on the
matter. (IHS Markit AutoIntelligence's Stephanie Brinley)
The US National Highway Traffic Safety Administration (NHTSA)
has launched an initiative to make available nationwide data on
autonomous vehicle (AV) testing through an online and public-facing
platform. The initiative, called the Automated Vehicle Transparency
and Engagement for Safe Testing (AV TEST), aims to improve safety
and transparency for the on-road testing of AVs. This is a
voluntary and non-regulatory initiative that involves partnerships
between state and local governments, along with vehicle makers. So
far, nine companies and eight states have signed up for this
initiative. The participating companies are Beep, Cruise, Fiat
Chrysler Automobiles (FCA), Local Motors, Navya, Nuro, Toyota,
Uber, and Waymo. The states are California, Florida, Maryland,
Michigan, Ohio, Pennsylvania, Texas, and Utah. (IHS Markit
Automotive Mobility's Surabhi Rajpal)
Toyota's Collaborative Safety Research Center (CSRC) and the
Massachusetts Institute of Technology (MIT) AgeLab have released
the DriveSeg dataset, which gives researchers free access to
autonomous vehicle (AV) data. The dataset uses continuous driving
scene segments instead of single images to provide a broader view
in identifying more amorphous objects. Rini Sherony, senior
principal engineer at CSRC, said, "By sharing this dataset, we hope
to accelerate research into autonomous driving systems and advanced
safety features that are more attuned to the complexity of the
environment around them." The dataset comprises two parts: DriveSeg
(manual) and DriveSeg (Semi-auto). DriveSeg (manual) is a video
consisting of 5,000 frames that are marked manually with per-pixel
human labels. DriveSeg (Semi-auto) is a video consisting of 20,100
frames that uses artificial intelligence-based labelling systems to
assess the potential of training vehicle perception systems on
pixel labels. (IHS Markit Automotive Mobility's Surabhi
Rajpal)
The refrigerated pasta, sauces and cheese brand Buitoni will be
sold to Brynwood Partners as it has entered into a definitive
agreement with Nestlé USA. The transaction, including a 240,000 sq.
ft. manufacturing facility in Danville (Virginia), is expected to
close within the next 30 days, subject to US regulatory review.
Terms and conditions have not been disclosed; however it is worth
recalling that Buitoni's sales totaled USD130 million in 2019. The
transaction includes the rights to the Buitoni brand in the US,
Canada and the Caribbean territories. Since 2017, Nestlé has done
more than 50 transactions representing about 12% of its portfolio
(USD10.2 billion in value) after failing to meet its own growth
targets. Part of those deals were divestitures of slower-growing
businesses, such as the sale of its chocolate to Ferrero in 2018
(for USD2.8 bln) or of ice cream business to Froneri (USD4.0 bln).
(IHS Markit Agribusiness' Cristina Nanni)
According to data from the Colombia National Administrative
Department of Statistics (Departamento Administrativo Nacional de
Estadística: DANE), industrial production declined by a sharp 29.6%
in April. At the same time, retail sales plunged by 42.9%. (IHS
Markit Economist Ellie Vorhaben)
Manufacturing was the leader in the decline, falling by 35.8%,
underpinned by a 30% decline in beverage production and an 82%
decline in non-metallic mineral production. Mining and quarries
also played an important role, falling nearly 30% because of a 68%
drop in carbon extractions.
Out of 26 activities, only 2 grew positively: the distribution
of water and the production of food, which grew by 3.5%.
Retail sales plunged significantly in April, led by a 54%
decline in the purchase of fuel for cars and a 94% drop in the
purchase of cars and motorcycles. As expected, sales of household
cleaning products and food were the only positive drivers of
growth.
Colombia's lockdown policies are slowly being removed, although
some key hotspots will remain under lockdown until 15 June,
including the capital city of Bogota. According to the
International Development Bank, movement in Colombia is still 40%
lower than it was in early March, on par with movement data in
Argentina and Chile.
Europe/Middle East/ Africa
European equity markets closed sharply higher; Italy +3.5%,
Germany +3.4%, Spain +3.3%, UK +2.9%, and France +2.8%.
Most European govt bonds closed higher, except for Germany
+2bps and UK flat; Italy -5bps, Spain -4bps, and France -1bp.
iTraxx-Europe closed -6bps/64bps and iTraxx-Xover
-35bps/368bps.
Brent crude closed +3.1%/$40.96 per barrel.
According to the Office for National Statistics (ONS), the
number of UK workers on payroll plunged by 612,000, or 2.1%,
between March and May. The new release is based on experimental
data of the number of employees on payroll using HM Revenue and
Customs's Pay As You Earn Real Time. Employees who are "furloughed"
through the Coronavirus Job Retention Scheme have their payments
reported through this system and contribute towards the employment
measure. (IHS Markit Economist Raj Badiani)
The claimant count, which measures the number of people
claiming benefit principally for being unemployed, increased to 2.8
million in May, representing an increase of 125.9%, or 1.6 million,
since March 2020. The claimant count also includes the increasing
number of people becoming eligible for unemployment-related benefit
support, although still employed.
The ONS also published its traditional headline employment and
unemployment data in the three months to April, which are lagging
behind more timely data, namely a sharp rise in claimant counts and
the dwindling workers on payroll. According to the ONS, total UK
employment (all aged 16-plus) rose by 6,000 to stand at 33.144
million compared with the three months to January.
The ONS data indicates year-on-year (y/y) growth in total
employment was solid, standing at 245,000 in the three months to
April, or 0.7%. This was preceded by gains of just over 1.0%
throughout 2018, 2019, and early 2020.
The ONS reported that there were about 4.90 million
self-employed people (14.9% of all people in employment) in the
three months to April: the 11,000 y/y drop was the first since
August-October 2018. In quarterly terms, the number of
self-employed workers fell by 131,000 in the three months to April
compared with the three months to January.
UK Prime Minister Boris Johnson and other high-ranking UK
government officials connected on 15 June 2020 via a video call
with the leaders of EU institutions, marking the first of multiple
top-level Brexit meetings scheduled until the end of July. Prior to
the new negotiations on future UK-EU relations, the UK government
had formally notified the European Union that it will not extend
the current post-Brexit transition period beyond the previously
agreed date of 31 December 2020. However, Cabinet Office Minister
Michael Gove stated that the United Kingdom would not impose full
customs checks on goods coming from the EU before July 2021. (IHS
Economists Raj Badiani and Jan Gerhard)
The Volkswagen (VW) Group's chief financial officer (CFO) Frank
Witter has said that the company is still maintain its goal of
making a full-year operating profit despite second quarter results
which will be 'very bad'. According to a report by German
publication WirtschaftsWoche, Witter made the comments at an
internal managers' meeting that was also attended by CEO Herbert
Diess. He added that the entire VW Group would have to be extremely
disciplined in terms of its cost management if it is to meet its
2020 financial target of remaining in the black. VW confirmed the
comments by the two executives were made in the meeting to Reuters.
(IHS Markit AutoIntelligence's Tim Urquhart)
Germany's final consumer price index (CPI) inflation data for
May have confirmed a decrease in the rate to 0.6% year on year
(y/y). In net terms, energy prices explain all of May's inflation
decline, whereas the core measure ex-energy and food has steadied
at 1.2%. This is also due to service-sector price increases linked
to new hygiene restrictions, which are unlikely to unwind in the
foreseeable future, helping to put a floor under inflation in the
months ahead. Germany's final CPI inflation data based on national
methodology from the Federal Statistical Office (FSO) have
confirmed the flash data released on 28 May, showing slippage of
0.1% month on month (m/m) and a fall of the annual inflation rate
to 0.6% from April's 0.9%. (IHS Markit Economist Timo Klein)
Germany's federal government will pay EUR300 million (USD338
million) for shares amounting to approximately 23% of the share
capital of unlisted German biotech CureVac, under a capital
increase deal that was announced yesterday (15 June) by economic
affairs minister Peter Altmaier and Dietmar Hopp, who is the
co-founder of life sciences investment company dievini Hopp BioTech
Holding, which owns more than 80% of CureVac's shares. The CureVac
shares will be acquired by the state-owned development bank
Kreditanstalt für Wiederaufbau (KfW); according to press release
published by dievini Hopp BioTech Holding, the details of the
investments were agreed in draft contract. The funds will
reportedly be made available for the continued development of
CureVac's proprietary pipeline and messenger RNA (mRNA) platform
technology, as well as business expansion. (IHS Markit Life
Sciences Brendan Melck)
The Spanish government has revealed details of measures
designed to boost demand and encourage investment in its domestic
automotive industry in the wake of the COVID-19 virus pandemic.
According to an announcement made by Spanish Prime Minister Pedro
Sánchez yesterday (15 June), the government has allocated
EUR3.75-billion-worth of funding to the "Plan to Promote the value
chain of the Automotive Industry, towards a Sustainable and
Connected mobility". The plan features 20 measures of an economic,
fiscal, regulatory, logistical, competitiveness, training and
professional qualification, of sustainable public purchasing and
strategic planning that cover the entire value chain of the
industry. (IHS Markit AutoIntelligence's Ian Fletcher)
In the near term, in order to prop up the domestic vehicle
market, the country is introducing a parc renewal scheme. Under the
terms of the plan, applicants will be able to a scrap a car that is
10 years old or more and gain a benefit from the government of
EUR800 which is then at least matched by an OEM. Customers will be
able to replace with a car with carbon dioxide (CO2) emissions of
less than 120 g/km and with a Manufacturer Suggested Retail Price
(MSRP) below EUR35,000. However, this price limit is increased to
EUR45,000 for those with reduced mobility or for battery electric
vehicles (BEVs).
Spain is also using EUR100 million of funding to incentivize
customers through the second iteration of the MOVES scheme. To
support the market for BEVs, private customers and businesses will
receive up to EUR4,000 to buy such a vehicle, although this rises
to EUR5,500 when a car up to 10 years old is scrapped. It will also
be open for the purchase of heavy commercial vehicles (HCVs) fueled
by natural gas.
The Spanish government has also allocated a budget of EUR415
million that will be used to support R&D in the country. This
will include R&D into renewable hydrogen, industrial innovation
projects in sustainable mobility and improved connectivity.
Following the surprisingly weak performance in late 2019,
Moldova's unadjusted GDP growth accelerated to 0.9% year on year
(y/y) during the first quarter. In seasonally adjusted terms,
Moldova's GDP increased by 0.5% quarter on quarter (q/q) and 1.2%
y/y. (IHS Markti Economist Sharon Fisher)
Data by expenditure indicate that the country's first-quarter
GDP was driven primarily by fixed investment, which benefitted from
the rising spending on construction (partly owing to the
Ungheni-Chisinau gas pipeline, which is scheduled for completion by
1 August). In contrast, household demand and net exports
deteriorated, particularly in the latter's case.
Growth in value added was boosted by a positive performance in
a range of sectors, including construction, information and
communications, trade, agriculture, and manufacturing. Sectors
reporting declines included utilities, hotel and restaurant
services, transport and storage, and public administration.
Into the second quarter, foreign trade data indicate that
exports slumped by 28.7% y/y in local currency terms in April,
signaling that industrial output declined sharply as well. In US
dollar terms, money transfers from abroad fell by 11.5% y/y in
April, while the volume of new loans plunged by 21.2% y/y.
IHS Markit has downgraded Kenya's short-term sovereign-risk
rating by 5 points to 35/100 (BBB, Supportive Credit Fundamentals),
with no change to our medium-term rating of 55/100 (B+, High
Payments Risk). We also put a Negative outlook on both the short-
and medium-term ratings to account for greater external liquidity
pressures through increased risk of foreign exchange transfer
payment delays. (IHS Markit Sovereign Risk's Ama Baidu-Forson)
IHS Markit currently projects that Kenya's real GDP growth rate
to contract by 2.0% in 2010 due to adverse impacts from the
coronavirus disease 2019 (COVID-19) virus outbreak. As of 9 June,
2,862 COVID-19 cases had been reported in the country with 85
deaths, according to the World Health Organization (WHO).
We expect economic growth slowdowns across several key sectors
- especially trade and transport, tourism, construction,
manufacturing, financial services, and real estate. The ongoing
locust invasion will also dampen agricultural output in parts of
the country.
Our short-term sovereign ratings downgrade underscores elevated
liquidity needs over the next 12 months as headwinds facing the
external sector prevail. We expect deterioration in the balance of
payments, especially via the current and financial and capital
accounts.
Asia-Pacific
APAC equity markets closed higher across the region; South
Korea +5.3%, Japan +4.9%, Australia +3.9%, Hong Kong +2.4%, China
+1.4%, and India +1.1%.
Issuance of CNY100 billion special government bonds in June may
lead to liquidity shortage in the short term; the market-oriented
issuing way may ease concerns of monetarization of fiscal policy
and inflation surge in the longer term. (IHS Markit Economist
Yating Xu)
China will issue CNY 100 billion (USD14.1 billion) of special
government bonds on 18 June for COVID-19 control measures in a bid
to stabilize economic development, according to a release by the
Ministry of Finance (MOF) on 15 June.
The bonds will be issued with two batches on fixed-rate,
including CNY50 billion of five-year bonds and CNY50 billion of
seven-year bonds. Both will be listed and traded on 23 June.
To be noted, all of the special government bonds will be issued
on the open market and individual investors are allowed to
purchase.
Domestic thermal coal prices in China continued to firm up on
back of increased demand from cement and chemical industries
coupled with production controls at the mines (on back of safety
measures implemented at Shaanxi after an accident) and sales
licensing (from Inner Mongolia) on the supply side. As per
McCloskey, reflecting strong sentiment, offers from some domestic
suppliers, particularly for low sulphur material, were at RMB10/t
($1.27/t) above the mainstream transactions. Prices for 5,500NAR
coal are now close to the upper limit of the government's desired
green zone of RMB500-570/t ($70.52-80.39/t) FOB. As per Commodities
at Sea, total coal arrivals in June 2020 are calculated at 24.5mt
(Thermal coal~17.7mt and Metallurgical coal ~6.8mt). Overall, in
first half of this year total coal arrivals are calculated at
133.7mt (Thermal coal ~105.4mt and Metallurgical coal ~28.3mt) vs
117.3mt (Thermal and Metallurgical at 95mt and 22.4mt, resp) a year
ago. (Maritime & Trade's Rahul Kapoor and Pranay Shukla)
Chinese imported iron ore demand is also quite strong and
during May 2020 crude steel production stood at 92.3mt (surpassing
90mt levels for the first time this year). Imports are unable to
keep pace with crude steel production as a result portside imported
iron ore inventories continued to decline. Iron ore arrivals in
June 2020 are forecasted at 97.7mt (bringing 1H20 imports at
505.7mt, up 48.8mt y-o-y). Amidst decline in supplies from Brazil,
there has been a surge in arrivals from Australia, India and
Ukraine. (Maritime & Trade's Rahul Kapoor and Pranay
Shukla)
The Bank of Japan (BoJ) held its Monetary Policy Meeting (MPM)
on 15 and 16 June as originally scheduled for the first time since
the January MPM. Although the BoJ maintained its monetary policy,
including the amount of asset purchases temporarily increased in
response to the coronavirus disease COVID-19 virus crisis. (IHS
Markit Economist Harumi Taguchi)
The bank increased the cap on a special program to support
corporate financing: special operations (fund-provisioning against
private debt pledged as collateral and fund-provisioning against
eligible loans) to JPY90 trillion (USD838 billion) from about JPY55
trillion.
The decision probably reflected significant slowdowns for
corporate profits, as well as severe economic conditions because of
the virus crisis at home and abroad, leading to increased
difficulties for corporate funding in a broad range of industries.
The bank assessed that financial conditions have been accommodative
on the whole, but less so in terms of corporate financing.
While the BoJ announced it will continue with Quantitative and
Qualitative Monetary Easing with Yield Curve Control, aiming to
achieve the stability target of 2% inflation in a stable manner,
its near-term outlook for year-on-year (y/y) change in the consumer
price index (all items less fresh food) remains negative.
Despite maintaining its monetary policy, the bank hinted that
it could leave short- and long-term policy interest rates to drift
below their current levels under the severe effect of
COVID-19.
Kobe Steel has acquired a majority share of Wuxi Compressor
Co., based in Wuxi, China, turning the company into a subsidiary.
Wuxi Compressor manufactures, designs, and sells non-standard
(process gas) compressors, a core component used in petroleum
refining, chemical, and natural gas plants. In response to the
growing demand for non-standard compressors in China, Kobe Steel
acquired a 44.3% equity share of Wuxi Compressor from Wuxi Victor
Group Co. in 2011. Kobe Steel reached an agreement with Wuxi Victor
to acquire an additional 25.7% in Wuxi Compressor in April 2020,
turning it into a 70% owned subsidiary of Kobe Steel. The company
explained that by turning Wuxi Compressors into a subsidiary, Kobe
Steel will be able to provide more flexible business operations and
further strengthen its marketing capabilities while offering more
attentive service in China. The Kobe Steel Group has manufacturing
locations for non-standard compressors in Japan, the United States
and China, along with sales and service locations in Germany, the
United Arab Emirates, Brazil, the Philippines, and Singapore. (IHS
Markit Upstream Costs and Technology's Kamila Langklep)
Japan's Sumitomo Corporation has acquired a stake in
Israel-based Anagog, a developer of smartphone-based position and
movement information analysis tools, according to a company
statement by Sumitomo. Currently, Anagog is developing JedAI, a
software package that works on smartphone apps to perform data
analysis. JedAI uses information obtained through GPS, Wi-Fi, and
acceleration sensors installed on devices to analyses elements such
as users' positions, movements, habits, and tastes. (IHS Markit
AutoIntelligence's Nitin Budhiraja)
Hyundai has decided not to pay interim dividends for 2020 as
part of its preemptive measure to secure liquidity amid
deteriorating business conditions owing to the COVID-19 virus
pandemic, reports Maeil Business Newspaper. The automaker said that
it would consider normalising dividend payouts in the second half
of the year depending on the state of global markets and recovery
in sales. Its auto components-making affiliate Hyundai Mobis also
announced that it will suspend interim dividends owing to
uncertainties in the business environment. Hyundai's dividend
payout ratio had grown steadily over the past few years, from 16.8%
in 2015 to 35.4% in 2019. Last year, it paid out interim dividends
of KRW1,000 (USD0.83) per share for a total payout of KRW263
billion. However, its shareholder reward program has hit a snag in
2020 owing to the COVID-19 virus pandemic, which resulted in
sluggish sales. (IHS Markit AutoIntelligence's Jamal Amir)
In a filing to the Bombay Stock Exchange (BSE), Tata Motors has
reported a consolidated net loss of INR98.63 billion (USD1.30
billion) for the fourth quarter of fiscal year (FY) 2019/20 ended
31 March 2020. (IHS Markit AutoIntelligence's Isha Sharma)
The automaker had posted a net income of INR11.08 billion in
the corresponding quarter of FY 2018/19. Revenues from operations
declined by 27.7% year on year (y/y) to INR624.92 billion.
British unit Jaguar Land Rover (JLR) remained the biggest
contributor to Tata's top line during the fourth quarter of FY
2019/20.
Hit by the COVID-19 virus pandemic, JLR has reported a
GBP539-million net loss while its revenues declined by 24% y/y to
GBP5.4 billion. JLR's retail unit sales fell by 30.9% during the
quarter to 109,900 units.
Posted 16 June 2020 by Chris Fenske, Head of Capital Markets Research, Global Markets Group, S&P Global Market Intelligence
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