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US and European equity markets closed modestly higher on the
day, while APAC closed lower. European credit indices closed
slighter wider and US high yield ended the day tighter. Most
European benchmark government bonds traded higher on the day, while
US yields were slightly higher. Texas and California are
reconsidering their plans to fully reopen their economies as
COVID-19 cases in those states continue to grow rapidly, which will
likely create additional headwinds for the US markets ahead of next
week's quarter-end.
Americas
US equity markets closed in positive territory and at the
highest levels of the day; Russell 2000 +1.7%, DJIA +1.2%, and
Nasdaq/S&P 500 +1.1%.
10yr US govt bonds closed +1bp/0.69% yield.
CDX-NAIG closed flat/78bps and CDX-NAHY -13bps/501bps. The
below chart is the intraday change in the S&P 500 and CDX-NAHY
from yesterday's close (spread change axis is reversed to better
align visually with the S&P performance). The graph indicates
CDX-NAHY peaked at 12:51pm EST then widened out by as much as 8bps
by 2:43pm EST before closing only slightly below the day's best
level:
Crude oil closed +1.9%/$38.72 per barrel.
Texas paused reopening plans Thursday, as new coronavirus cases
and hospitalizations increased in many U.S. states. California Gov.
Gavin Newsom warned a potential influx of coronavirus-related
hospitalizations could impact reopening plans. Coronavirus-related
hospitalizations in the state increased by 32% in the last 14 days,
with more than 4,200 people in hospitals, he said Thursday. As
testing expands across the state, the rate of positive tests has
increased to 5.6% in the last seven days, the Democratic governor
said. (WSJ)
The Fed has released stress test results today with dividend
action points for banks. Large banks are required to cap dividend
payments - by not paying more than an average of their most recent
four quarters. (IHS Markit Dividend Forecasting)
All large banks will be required to resubmit and update their
capital plans later this year to reflect current stresses, which
will help firms re-assess their capital needs and maintain strong
capital planning practices during this period of uncertainty. The
Board will conduct additional analysis each quarter to determine if
adjustments to this response are appropriate."
During the third quarter, no share repurchases will be
permitted. The Board is also capping dividend payments to the
amount paid in the second quarter and is further limiting them to
an amount based on recent earnings. As a result, a bank cannot
increase its dividend and can pay dividends if it has earned enough
income."
The Fed's analysis on the potential impact of the pandemic
showed that, in the most extreme scenario, 34 banks would face $700
billion of loan losses, versus the $560 billion of loan losses
under the traditional stress tests, which was based on a scenario
set in February. (FT)
Seasonally adjusted US initial claims for unemployment
insurance, at 1,480,000 in the week ended 20 June, remained at
historically high levels, although well below the all-time high of
6,867,000 in the week ended 28 March. This was the 14th straight
week with claims in seven figures. (IHS Markit Economist Akshat
Goel)
The seasonally adjusted number of continuing claims (in regular
state programs), which lag initial claims by a week, fell by
767,000 to 19,522,000 in the week ended 6 June. This is well below
the all-time high of 24,912,000 in the week ended 9 May and
indicates that as businesses reopen, furloughed workers are
cautiously getting recalled.
The insured unemployment rate in the week ended 6 June stood at
13.4%.
There were 728,120 unadjusted initial claims for Pandemic
Unemployment Assistance (PUA) in the week ended 20 June. In the
week ended 6 June, continuing claims for PUA rose by 1,672,153 to
11,046,401.
While continuing claims for regular state programs have
declined in the past three weeks, not everyone getting off these
benefits is heading back to work. Individuals who have exhausted
regular benefits are eligible for up to 13 weeks of extended
benefits under the Pandemic Emergency Unemployment Compensation
(PEUC). In the week ended 6 June, 851,983 individuals were
receiving PEUC benefits with 38 states accepting claims for PEUC so
far.
The Department of Labor provides the total number of people
claiming benefits under all its programs with a two-week lag. The
unadjusted total for the week ended 6 June was 30,553,817, an
increase of 1,294,309 from the previous week. Sixty percent of this
total is from regular state programs and 36% from the PUA
program.
US manufacturers' orders for durable goods rose 15.8% in May,
while shipments rose 4.4% and inventories rose 0.1%. The increase
in orders outpaced both IHS Markit's assumption and the consensus
expectation. (IHS Markit Economists Ben Herzon and Lawrence Nelson)
The 4.4% increase in shipments of durable goods mirrored a
previously reported 3.8% increase in manufacturing industrial
production. Both measures remain well below their pre-pandemic
levels, but their increases in May support our view that the trough
in GDP was in April.
Most of the increase in orders was in transportation equipment,
with nearly one-half in nondefense aircraft and parts and about
one-quarter in motor vehicles and parts.
Of note was the first positive reading on orders for nondefense
aircraft and parts since February. New orders are reported net of
cancellations, so negative readings over the prior two months
indicate elevated cancellations then. In May, then, either
cancellations subsided or gross new orders turned up (or some
combination of the two).
The US goods deficit widened by $3.6 billion in May to $74.3
billion. This was in contrast to expectations for a narrowing.
Moreover, the combined inventories of wholesalers and retailers
fell 3.6% in May; we had penciled in no change. (IHS Markit
Economists Ben Herzon and Lawrence Nelson)
Nominal goods exports declined 5.8% in May and are down 34.6%
cumulatively since February, as global recession has led to
plunging demand for US exports.
Nominal goods imports declined 1.2% in May and are down 16.4%
since February, reflecting falling domestic demand.
Some of the unexpected weakness in the goods balance was in
capital goods, which implies more domestic spending on equipment,
so we lessened our forecast of the annualized decline in business
fixed investment in equipment by about 5 percentage points to a
30.7% decline.
The weakness in the combined inventories of wholesalers and
retailers was mainly in retail, which accounted for about 84% of
the total decline. This reflected a surge in retail sales in May,
roughly 60% of which came out of inventories.
US chemical volumes are expected to drop nearly 10% this year
as global economic activity contracts due to the impacts of
COVID-19, according to the American Chemistry Council's (ACC)
Mid-Year 2020 Chemical Industry Situation and Outlook. Volumes
should recover in 2021 with a return to pre-COVID output levels in
the US by the second half of 2021. "As key end-use and export
markets struggle, US chemical volumes will contract as well," said
Martha Moore, senior director of policy analysis and economics at
ACC. "Chemical volumes will fall 9.3% this year, while shipments
will decline by 13.5%," Moore said. "In 2021, volumes will rebound
12.3% and shipments will increase by 14.5%." ACC forecasts a
decline in basic chemicals volumes of 8.9% in 2020 with a 14.2%
rebound in 2021.Of the major basic chemical segments, plastic
resins fare the best with an expected decline of only 5.6% in 2020.
In specialties, the 2020 decline is expected to be 13.6% in 2020,
followed by a 10.6% gain in 2021. US chemical capital spending is
set to decline 17.6%, to $29.0 billion, in 2020, but grows 15.7% in
2021 to $33.5 billion. "It'll be 2022 or even beyond when you get
back to prior peak levels of capital spending as companies are
trying to preserve cash," Swift said. "They're doing that by
delaying or extending some of these projects."
General Motors (GM) has decided to cancel a planned third shift
at its plant in Spring Hill, Tennessee, United States, over weak
market demand. After reports surfaced that GM would indefinitely
delay a return to three-shift production at its Spring Hill plant,
the automaker and the United Auto Workers (UAW) union confirmed
that GM had decided to drop the plan for the shift instead. An
Automotive News report quotes a GM spokesperson as saying, "We
believe the best way to react to this unforeseen change in our
market is to reduce output and operate on two shifts effective
immediately. This adjustment allows the plant to maintain stable
production, protect the value of our brands in any sales
environment, and to provide the smallest impact to the plant
employment going forward." The move will mean the laying off about
680 full-time and temporary employees. (IHS Markit
AutoIntelligence's Stephanie Brinley)
The Central Bank of the Argentine Republic (Banco Central de la
República Argentina: BCRA) on 24 June released its latest monthly
banking bulletin covering April 2020. The report shows several
updates to key sector ratios. On the solvency side, the capital
adequacy ratio (CAR) stood at 21.9% and the tier-1 capital ratio at
20.0%. Regarding asset quality, the non-performing-loan (NPL) ratio
for the month was not released. However, the report gives a new
breakdown of the main sectors that contributed to its rise to 5.3%
in March. Corporate NPLs rose significantly to 7.5%, up by 3.6
percentage points compared with the same month of 2019. Most of
this rise stemmed from industry (NPL of 12%), construction (10.9%),
and trade (10.2%), while services (2.8%) and agriculture (2.6%)
recorded the lowest NPLs. As for liquidity, foreign-currency
deposits contracted by 1.9% month on month (m/m), or 41% year on
year (y/y), while local-currency deposits increased by 7.3% m/m.
(IHS Markit Banking Risk's Alejandro Duran-Carrete)
Brazilian imports of dairy products in the first five months of
2020 (January-May) plunged to the lowest since 2010. Brazil spent
USD95.24 million on purchases of dairy products (milk, cream and
milk products other than butter or cheese), which is 30% lower than
in the same period in 2019. This is the second lowest level since
2010, when import value reached USD89.7 million, according to data
from the Foreign Trade Secretariat (Secex). The decrease is due to
the Brazilian real's strong depreciation against the US dollar.
Volumes declined 35% compared to the same period last year, at an
average price of USD2.91 per kilo (+ 7.4% year -on-year). The main
supplier Argentina accounted for 63% of the total amount, with the
value totaling USD60.3 million. Fit was followed by Uruguay, with a
13% share in the total value. The US has also supplied Brazil with
a sizeable amount, accounting for 7.24% of the total import value
in January-May. It is interesting to note that imported products
were shipped mainly to the state of Sao Paulo, one of the main
consumer hubs in the country, which purchased 45.6% of the total
landed in Brazil. At the same time, Sao Paulo was responsible for
just over 43% of dairy exports from Brazil. The country's exports
topped USD20.2 million in the first five months of this year, 23.4%
higher year-on-year, however, in volume, the growth was more
modest, at 13.6%, with being sent to foreign markets 10.3 million
tons, at an average price of USD 1.96 per kilo (+ 8.3%). Algeria
was the main destination of Brazilian exports, accounting for 15%
of the total, but South America remained the key destination with
USD6.24 million worth of Brazilian products purchased in
January-May. (IHS Markit Food and Agricultural Commodity's Ana
Andrade)
Europe/Middle East/ Africa
European equity markets closed higher across the region;
Spain/France +1.0%, Germany +0.7%, and Italy/UK +0.4%.
10yr European govt bonds closed higher across the region,
except for Italy +4bps; Germany/UK -3bps, France -2bps, and Spain
-1bp.
5yr UK govt bonds closed at a -0.05% yield, which is the first
time that maturity has closed with a negative yield.
iTraxx-Europe closed +1bp/69bps and iTraxx-Xover
+2bps/396bps.
Brent crude closed +1.5%/$41.12 per barrel.
Russian Federal State Statistical Service (RosStat) confirmed
the real GDP growth rate at 1.6% y/y during the first quarter of
2020, while also providing the breakdown of the value added. (IHS
Markit Economist Lilit Gevorgyan)
As expected, the extractive sector was a key drag on the
economic activity, falling by 0.5% y/y during January-March 2020.
This weakness was mainly due to a 1.7% y/y decline in the sector's
activity in March.
RosStat slightly revised down the first-quarter growth rate for
the manufacturing, to 3.6% y/y from 3.8% y/y, compared to a 3.9%
y/y gain in the last quarter of 2019. The sector's growth eased to
2.6% y/y in March, from annual increases of 5.0% in February, and
3.9% in January.
Growth impulse came from food production, which expanded by
around 9.0% y/y in March. However, the manufacturing of air travel
and transport equipment, as well as electronics, shrunk by
one-quarter.
Russian manufacturing had a strong start to the year, when
compared to a 1.4% contraction for the same period in 2019,
implying that the recent data also benefited from the statistical
low base.
Retail and wholesale trade had healthy gains, up by 4.9% y/y in
the first quarter of 2020, a notable improvement when compared to
the 3.3% fall in the same period a year ago. However, trade volumes
declined in the first quarter when compared to 6.4% y/y gains in
the fourth quarter of 2019.
Clearly, the retail and wholesale sales have benefited from the
low statistical base effect of 2019, although rising real incomes
and wages have also contributed to the strong performance.
Total services, which make up 60.2% of the value-added
decelerated to 2.0% y/y in the first quarter from 3.3% in the
fourth quarter of 2019. A closer look at services breakdown
suggests that the main drag came from 4.4% y/y drop in transport
and storage.
Bayer today announced a series of agreements to resolve legacy
Monsanto litigation, including a payment of $10.1-10.9 billion
(€9.1-9.8 billion) to address current and future claims alleging
that glyphosate, a widely used herbicide first introduced by
Monsanto in 1974, causes cancer. Funded from free cash flow and the
recent divestiture of Bayer's animal health business, Bayer says
the settlement brings closure to about 75% of the current Roundup
litigation—involving approximately 125,000 filed and unfiled
claims overall—for $8.8-9.6 billion, which also includes an
allowance expected to cover plaintiffs with whom the company has
not yet reached an agreement. Bayer inherited the Roundup liability
with its $63-billion takeover of Monsanto in June 2018. Moody's
notes that while the settlement removes significant uncertainty for
Bayer, it comes at a high price. "[The settlement] will delay the
company's deleveraging trajectory as proceeds from asset disposals
and free cash flow generation will now be used to fund settlement
payments, instead of reducing debt stemming from the financing of
the transformative Monsanto acquisition," says Moritz Melsbach,
Moody's Assistant Vice President. Bayer also announced that it has
resolved legacy Monsanto litigation related to dicamba drift for up
to $400 million the most recent polychlorinated biphenyl (PCB)
water litigation exposure for approximately $820 million.
Moody's today published a downgrade of BASF's long-term and
short-term credit ratings from "A2/P-1/review for downgrade" to
"A3/P-2/outlook stable." The reasons for these changes include the
economic impact of the COVID-19 pandemic and related uncertainty.
Moody's says the downgrade reflects BASF's rating ratios that had
already been weak for the A2 rating when entering the COVID-19
outbreak, which also limits the potential for improvement in case
of a recovery in 2021. "With expected 2021 numbers the company
would not be in line with requirements to maintain an A2 rating,
such as a Moody's-adjusted EBITDA margin that Moody's expects to
reach levels of only around 13% in 2021; high gross leverage with
debt/EBITDA of 3.7 times [x] in 2021, even though this is still a
considerable improvement from the expected 4.5x in 2020; and the
emerging negative free-cash-flow [FCF] profile that Moody's expects
will become a feature of BASF as the company embarks on a large
capital spending program in Asia and in the area of battery
materials, coupled with an expectation of continued high dividend
payouts. Moody's estimates negative FCF of about €1.0 billion in
2020, around €2.0 billion in 2021, and €2.8 billion in 2022."
Austrian industrial production (including construction)
declined by 15.1% month on month (m/m) in seasonally adjusted,
EU-harmonized terms during April, reflecting the lockdown enforced
to contain the COVID-19 virus and following a somewhat curtailed
March decline of 7.0% m/m (initially reported as a 9.5% drop). The
combined drop during March-April of 21.1% compares with a larger
25.2% decline in neighboring Germany during this period. (IHS
Markit Economist Timo Klein)
Production excluding construction, i.e. largely manufacturing,
declined by a similar 15.3% m/m in April, following a 6.1% m/m fall
in March (revised up from a 7.8% drop; see table below for further
details). This translates into a combined plunge of 20.5% during
these two months, while construction output weakened even more (by
23.0% versus the February level).
In year-on-year terms, calendar-adjusted production excluding
construction fell 22.0% in April, which compares favorably with
declines of 30.1% in Germany and 28.0% in the eurozone as a
whole.
During its session on 24 June, the Czech National Bank (CNB)
policy council voted unanimously to keep the base interest rate
stable at 0.25%. Inflation was slightly above expectations in
April-May (mainly because of higher core inflation) and is
currently one of the highest in the European Union. (IHS Markit
Economist Sharon Fisher)
Amid continued high economic uncertainty, confidence indicators
showed mixed results in June, with large month-on-month (m/m)
increases in services and trade confidence matched by weakening
industrial and construction sentiments. Consumer confidence
improved moderately owing to an improving outlook for household
finances, inflation, and unemployment.
All confidence indicators were down sharply compared with
February's levels, with the largest drops reported in the services
and industrial sectors, and consumer and trade sentiments
experienced more modest declines. Owing to a worsening assessment
of current demand, industrial confidence decreased in June to the
lowest level since early 2009.
In terms of industry, the automotive sector struggled the
hardest, with production down by 35.7% year on year (y/y) in the
first five months of 2020. After plunging by nearly 90% y/y in
April owing to closures at major factories, the number of vehicles
produced dropped by 52% y/y in May, according to the Czech
Automotive Industry Association.
Czech services have been hit hard by a decline in tourism, and
it is unclear how many foreign visitors will arrive despite the
recent opening of borders to "safe" European countries.
The CNB expects inflation to fall to the 2% target by the end
of 2020. The inflation outlook was viewed as balanced, with fiscal
policy presenting upside risks and the exchange rate having an
anti-inflationary impact.
South Africa's public-sector debt-to-GDP ratio is expected to
reach 81.8% by March 2021. Higher taxes, government spending
rationalization and stronger growth are necessary to stabilize the
public-sector debt trajectory over the medium term. (IHS Markit
Economist Thea Fourie)
South African Finance Minister Tito Mboweni presented the 2020
Supplementary Budget to parliament on 24 June, showing the budget
deficit widening to an estimated 15.7% of GDP in fiscal year (FY)
2020/21 - well above the 6.8% of GDP assumed in February.
The National Treasury's estimates show that the government's
tax revenue will be ZAR300 billion (USD16.8 billion) below target
during FY 2020/21. "This is mainly due to revised revenue
projections and pay-outs from the Unemployment Insurance Fund
(UIF)," the National Treasury reported. As of mid-June, UIF
payments totaling ZAR23 billion were made to 4.7 million workers
affected by the COVID-19 pandemic.
Total government spending (including debt servicing costs) is
expected to exceed ZAR2 trillion during FY 2020/21. The
supplementary budget makes provision for an additional ZAR21.5
billion of healthcare spending and ZAR12.6 billion for services at
the front-line of the government's response to the pandemic, to
enable increased screening and testing. An additional ZAR25.5
billion has been allocated to vulnerable households and ZAR6.1
billion for youth employment programs.
Finance Minister Mboweni warns that tax measures to the amount
of ZAR40 billion will have to be implemented over the next four
years, while the government will have to find spending adjustments
totaling ZAR230 billion over the next two years.
The National Treasury expects South Africa's GDP to contract by
7.2% during 2020, while headline inflation is expected to average
3.0% this year.
5yr CDS spreads on the Republic of South Africa almost breached
500bps on 3 April and were at the widest level since March 2009.
Spreads have since tightened in almost 200bps to close at 305bps
today:
Asia-Pacific
APAC equity markets closed lower across the region; Australia
-2.5%, South Korea -2.3%, Japan -1.2%, Hong Kong -0.5%, and India
-0.1%.
China saw a 7.5% y/y growth in foreign direct investment (FDI)
in May, slowing from 8.6% y/y in April, according to the Ministry
of Commerce (MOC). The cumulative FDI in the first five months
remained in 3.8% contraction y/y. (IHS Markit Economist Yating Xu)
By sector, high-tech sectors and new economy remain attractive
to foreign investors. FDI into high-tech industries grew by 2% y/y
through May.
Information services saw a 42.3% y/y expansion with e-commerce
businesses notching up gains of 67.9% y/y and innovation and design
service increasing by 49.8% y/y.
According to China Daily citing an online statement by the
Ministry of Commerce (MOC) on 18 June, China plans to significantly
lower the threshold for foreign investors' strategic investment in
listed companies to introduce more overseas capital and practical
management experience as part of the efforts to improve the
governance structure of listed firms.
The total asset requirements for non-controlling shareholder
foreign investors will be reduced from having USD100 million to
USD50 million and for wholly-owned foreign investors from managing
USD500 million to USD300 million. The lockup period for foreign
investors' shares will be adjusted from three years to 12
months.
Gaztransport and Technigaz (GTT) has received an order from
China Huanqiu Contracting & Engineering Co. (HQC) for the
design of two membrane full containment LNG storage tanks. The two
tanks, each with a net capacity of 220,000 m3, will be the largest
land storage tanks in China, according to GTT. The onshore storage
tanks will be located in the Tianjin south port Industrial Zone in
China and are planned to be commissioned during the last quarter of
2022. (IHS Markit Upstream Costs and Technology's Dag
Kristiansen)
Taiwan's export orders, representing a leading indicator of
actual exports, increased in May for the third straight month,
although the gain nearly flattened. Export orders were up by 0.4%
year on year (y/y), slowing from a 2.3% y/y expansion in April.
(IHS Markit Economist Ling-Wei Chung)
The gain in May was bolstered by a 22.2% y/y surge in orders of
information and communication products and a 13.4% y/y jump in
orders of electronic products, as the technology sectors benefitted
from booming demand for products and equipment related to working
from home and remote education.
Orders of non-technology sectors slumped by more than 20% y/y
in May, led by drops in orders of mineral products, chemicals, base
metal, and plastic products.
Meanwhile, boosted by booming technology demand, orders from
Europe increased at a double-digit pace for the first time in five
months, jumping 12.3% y/y, accelerating from a 7.6% y/y expansion
in April. This was followed by an 8.6% y/y increase in orders from
the US and a 2.7% y/y gain in orders from mainland China and Hong
Kong SAR.
Orders from ASEAN dropped 6.0% y/y in May, faster than a 3.9%
y/y decline in April. Orders from Japan also contracted, down 8.1%
y/y, accelerating from a 4.7% y/y decrease in April.
Concurrently, supported by rising export orders, industrial
production (IP) increased 1.5% y/y in May, although the pace of
gain decelerated from a 4.2% y/y expansion in April. It also marked
the slowest increase in seven months, barring a seasonal disruption
in January.
Output of the key electronic component industry jumped 22.2%
y/y, marking the sixth month of a double-digit expansion. It was
boosted by a 36% y/y surge in production of integrated circuits,
maintaining the above-30% y/y increasing trajectory since the
beginning of 2020.
Toyota's latest corporate governance report revealed that it
holds 10.25 million shares of Uber Technologies, reports Reuters.
These shares are valued at JPY31.15 billion (USD293 million) as of
30 March, which represents around 0.6% of Uber's outstanding
shares. Toyota, DENSO ,and SoftBank that jointly invested USD1
billion in Uber's autonomous vehicle unit, the Advanced
Technologies Group. Toyota has also previously partnered with Uber
in 2018 to offer an on-demand autonomous ride-hailing service. (IHS
Markit Automotive Mobility's Surabhi Rajpal)
The US Commerce Department has stated that it has begun its
investigations into the imports of automotive tires from Taiwan,
Thailand, South Korea, and Vietnam to check whether these tires are
being sold in the US market at less than fair values, reports
Reuters. The Department will also be investigating to determine
whether unfair subsidies were provided to tire manufacturers in
Vietnam for the production of passenger vehicle and light truck
tires. The investigations are being conducted in response to
petitions filed during May 2020 by the United Steelworkers (USW)
representing US tire plant workers. The United States reportedly
imported approximately USD4-billion worth of tires from these four
markets in 2019, out of which tires worth USD2 billion were from
Thailand. The USW has also stated that the imports of tires from
these countries have risen by almost 20% since 2017 and have now
crossed 85 million tires. In 2015, the USW won orders on imported
automotive tires from mainland China, which has led to a sharp
reduction in tire imports from the region. (IHS Markit
AutoIntelligence's Jamal Amir)
Posted 25 June 2020 by Chris Fenske, Head of Capital Markets Research, Global Markets Group, S&P Global Market Intelligence
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