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Equity markets closed mixed across APAC and Europe, while all
major US equity indices closed lower. iTraxx and CDX closed wider
across IG and high yield and Brent/WTI was also weaker on the day.
US government bonds rallied on July's decline in US consumer
confidence, despite data indicating that the growth rate of new
COVID-19 cases appears to be declining in the US.
Americas
US equity markets closed lower and close to the nadir of the
day; Nasdaq -1.3%, Russell 2000 -1.0%, DJIA -0.8%, and S&P 500
-0.7%.
10yr US govt bonds closed -3bps/0.58% yield and 30yr bonds
-4bps/1.22% yield.
CDX-NAIG closed +2bps/72bps and CDX-NAHY +3bps/455bps.
Gold closed +0.7%/$1,944 per ounce to yet another new all-time
high close and had reached another record intraday high of $1,974
per ounce overnight.
Crude oil closed -1.3%/$41.04 per barrel.
Coronavirus cases in the U.S. climbed 1% as compared with the
same time Monday to 4.31 million, according to data collected by
Johns Hopkins University and Bloomberg News. The increase was below
the average 1.7% daily gain over the past week. Deaths rose 0.7% to
148,298. (Bloomberg)
The US Conference Board Consumer Confidence Index fell 5.7
points (5.8%) to 92.6 in July after a 12.4-point jump in June. The
June reading had reflected hopes for a speedy economic recovery as
states reopened for business, but in mid-July COVID-19 cases were
surging past their previous highs and it was clear that such
optimism was premature. The July reading is consistent with our
expectation of slower monthly growth in consumer spending in the
third quarter than in May and June. (IHS Markit Economists David
Deull and James Bohnaker)
The present situation index advanced 7.5 points to 94.2, not
enough to offset a 14.6-point retrenchment in the expectations
index to 91.5.
Views on the present situation for both employment and business
conditions improved in July. The labor index (the percentage of
respondents viewing jobs as plentiful minus the percentage viewing
jobs as hard to get) increased 4.1 points to 1.3, about its level
as of mid-2016.
The plunge in the expectations index brought it to the lowest
level since March as consumers came to appreciate that the COVID-19
virus will remain a major threat to public health and a drag on
business activity into the fall and beyond. In its press release,
the Conference Board noted that declines were large in Florida,
Texas, and California, states where the surge in cases has been
particularly pronounced.
The net share of respondents expecting business conditions to
improve in six months fell 14.9 percentage points to 12.3%. A net
10.3% expected employment conditions to improve, down 13.7
percentage points from June.
Purchasing plans were mixed in July. The share of respondents
planning to buy autos in the next six months fell 0.4 percentage
point to 11.5%, and the share planning to buy major appliances fell
2.1 points to 43.5%. The share planning to buy homes, however,
increased 0.6 percentage point to 7.4%, matching its highest level
since 2006. Record-low mortgage rates and a shift toward living
situations conducive to social distancing have made homebuying a
more attractive prospect.
The US homeowner vacancy rate, the proportion of residential
inventory vacant and for sale, dropped four ticks in the second
quarter from a year earlier, to 0.9%—this was the lowest
second-quarter reading since 1986. (IHS Markit Economist Patrick
Newport)
Nearly every estimate in the release is tainted. The key flaw
was that the Census suspended in-person interviews, replacing them
with telephone interviews. According to a FAQ, the Census Bureau
went out of its way to track down phone numbers. This was
insufficient to keep the response rate from plummeting to 67%, 12
percentage points below the year-earlier value and 13 percentage
points down from the first quarter. Response rates fell
progressively from 83% in February to 73% in March, 70% in April,
67% in May, and 65% in June.
The rental vacancy rate, the proportion of rental inventory
vacant and for rent, dropped to 5.7%, from 6.8% a year earlier.
This was the lowest reading since the second quarter of 1984.
The homeownership rate soared to 67.9%, from 64.1% four
quarters earlier.
The seasonally adjusted homeownership rate jumped 2.9
percentage points from the first quarter to 68.2%—the highest
reading since the third quarter of 2007.
Estimated housing inventory increased to 140.362 million, up
1.153 million year over year.
The S&P CoreLogic Case-Shiller composites decelerate
slightly in May but US home price growth remains strong. (IHS
Markit Economist Troy Walters)
For the third month in a row, data in May were limited to only
19 cities as opposed to 20 under normal circumstances. Data for
Wayne County, Michigan, were unavailable and as a result, there are
no data for Detroit in this release.
Both the 10-city and 20-city composite indices were flat month
over month (m/m) in May.
Home prices were up month on month (m/m) in 11 of the 19 cities
reported. Increases ranged from 0.1% in Boston, Miami, Portland,
and Washington, DC, to 0.6% in Phoenix. Prices fell in Las Vegas
(down 0.1%), Minneapolis (down 0.7%), New York (down 0.1%), Seattle
(down 0.2%), and San Francisco (down 0.5%).
On an annual basis, home price growth slowed in May. The
10-city index was up 3.1% year on year (y/y), slower than April's
reading of 3.3%. The 20-city index was up 3.7% y/y compared to 3.9%
in April.
Despite decelerating, y/y price growth in May remained well
into positive territory, with prices higher than one year ago in
all 19 cities reporting. Increases ranged from 9.0% in Phoenix to
just 1.3% in Chicago.
Growth in the national index slowed slightly to 4.5% y/y in
May.
Eastman Kodak Co. has won a $765 million government loan from
the U.S. International Development Finance Corporation under the
Defense Production Act, the first of its kind. The purpose of the
loan is to help expedite domestic production of drugs that can
treat a variety of medical conditions and loosen the U.S. reliance
on foreign sources. (WSJ)
The Federal Reserve is extending the emergency lending
facilities it set up to shore up financial markets during the
pandemic from September to the end of this year, in the latest sign
of its concern that the coronavirus crisis will continue to weigh
on the US economy. (FT)
Volkswagen (VW) has announced that the expansion of its
California testing facility is complete, with facilities focused on
powertrain engineering services. The facility is located in Oxnard,
creating the Oxnard Engineering Campus (OEC). OEC is on nine acres,
holding design and testing space. The center is intended to support
VW brands including VW, Audi, Bentley, and Porsche - all offered in
North America. The powertrain engineering services will support
product development, governmental compliance and emissions testing.
OEC will have an enhanced focus on electric vehicle (EV) range
testing and analysis, according to a VW statement. The OEC actually
comprises three different centers, the Test Centre California
(TCC), VW Quality and Audi Engineering, and Design Centre
California (DCC). The DCC takes a new home as part of the OEC,
moving from a prior location in Santa Monica, California. Johan de
Nysschen, COO for VW Group of America, is quoted as saying, "The
next few years are going to be transformative for the Volkswagen
Group as we are introducing our first long-range battery electric
vehicles. The campus has been completely upgraded to further
support the successful development, design and testing of products
that will be sold in this market." (IHS Markit AutoIntelligence's
Stephanie Brinley)
COAST Autonomous has selected LeddarTech's Leddar Pixell Cocoon
LiDAR sensor for its autonomous delivery vehicle, according to a
company statement. The vehicle will be deployed at the Kinney
County Railport (KCRP) in Texas (United States) to autonomously
operate and move equipment and supplies. LeddarTech claims that its
Cocoon LiDAR is designed to create a 360-degree cocoon to provide
enhanced collision prevention in autonomous vehicles. Pierre
Lefevre, chief technology officer at COAST Autonomous, said, "It
has been a great opportunity to deploy vehicles at KCRP. The
railyard is the perfect environment to show how autonomous vehicles
function, particularly in an industrial environment, keeping the
workforce safer and improving efficiency by allowing them to focus
on more highly skilled tasks". COAST Autonomous develops vehicle
automation and monitoring systems that transform vehicles into
driverless shuttles. The company has also developed an autonomous
shuttle, named COAST P-1, which does not have pedals or a steering
wheel. Its electric wheel hub motors allow it to achieve speeds of
up to 25mph, and it has a maximum capacity of up to 20 passengers.
The shuttle can also be reconfigured to be used as a delivery
vehicle. It can be hailed via a smartphone application and
determines its best route using COAST's mapping software. (IHS
Markit Automotive Mobility's Surabhi Rajpal)
The volume of the treated area of agrochemicals rose by some 7%
in the first three months in Brazil. The national crop protection
association, the Sindiveg, reported that equivalence treated area
(PAT), which calculates the volume use by treated area, was up
during the first quarter and increased from 513 million ha to 550
million ha equivalent. That followed a year in which Latin
America's agrochemical market bucked the global trend in 2019,
rising 8% while other regions saw sales drop. However, one study
revealed a big drop in imports from China in the early months of
2020. Imports were down 40% from China. Imports from China and
India combined fell by 28% to $199 million, of which $69 million
came from China. There was a switch towards sourcing from Europe,
reflecting a likely effect of shutdowns due to the pandemic.
Imports from the continent rose by 10% to $102 million. Imports
from the US were stable at some $154 million. That contrasted with
trade picture for 2019. The impact of the ongoing trade war between
China and the US seems to be reflected in the values exported to
various destinations from China. Unlike previous years, the US was
not the top destination for Chinese exports during the first three
quarters of 2019. Brazil was the top destination with $1,027
million worth of pesticides being exported there. The US followed
with $846 million. The picture contrasts with 2018, when $1,314
million worth pf pesticides were exported to the US and $988
million worth to Brazil. (IHS Markit Crop Science's Robert
Birkett)
Europe/Middle East/ Africa
European equity markets closed mixed; Spain +1.1%, UK +0.4%,
Germany flat, France -0.2%, and Italy -0.6%.
10yr European govt bonds closed mixed; Italy +3bps, Spain +1bp,
UK flat, France -1bp, and Germany -2bps.
iTraxx-Europe closed +1bp/60bps and iTraxx-Xover
+6bps/365bps.
Brent crude closed -0.7%/$43.60 per barrel.
The Spanish employment recovery ended abruptly in the first
half of 2020. Employment shrunk for a second successive quarter
when falling by 6.7% quarter on quarter (q/q) during the second
quarter of 2020 after a 0.4% q/q in the first, the first drop since
late 2013. (IHS Markit Economist Raj Badiani)
The latest labor market indicators show a significant hit from
the COVID-19 virus, namely the impact of a lengthy lockdown of the
economy during March and part of the second quarter.
According to the national statistical office (INE), employment
shrunk markedly during the second quarter of 2020. On an annual
basis, total employment fell by 6.1% year on year (y/y), or by 1.2
million jobs to 18.6 million, the first drop since early 2014. This
compares to gains of 1.1% y/y in early 2020, 2.3% in 2019 and 2.7%
in 2018.
A breakdown by economic activity reveals that services endured
the sharpest job losses in the second quarter, down by 6.2% y/y
(922,200 new jobs) to 14.9 million. Industry employment was 4.4%
lower y/y, implying 122,200 fewer jobs to stand at 2.6
million.
Firms shed workers on temporary contracts, which decreased by
21.1% y/y or 0.9 million to 3.5 million during the second quarter,
dwarfing the loss of permanent jobs (down 1.9% y/y). Spain has a
high incidence of temporary employment, which reflects dense job
protection legislation for permanent workers.
On a seasonally adjusted basis, employment shrunk for a second
successive quarter when falling by 6.7% quarter on quarter (q/q)
during the second quarter after a 0.4% q/q in early 2020, the first
drop since late 2013. This matched IHS Markit's estimate for the
second quarter.
The INE notes that the public health measures to contain the
COVID-19 virus have had an even larger negative impact on the
employment level because workers suspended via the Temporary
Suspension of Employment (ERTE) are recorded as employed. The ERTE
scheme allows firms to suspend employment, with workers able to
apply for unemployment benefits during the time of their
suspension.
Meanwhile, the number of unemployed people increased by 4.3%
y/y to stand at 3.4 million during the third quarter. Therefore,
the unemployment rate increased to 15.3% in mid-2020, up from 14.0%
a year ago.
INE reports that over a million people lost their jobs during
the second quarter but are not classified as unemployed since they
did not meet the technical conditions to be included in this group,
such as still actively seeking work. Therefore, the number
classified as inactive rose by 8.7% y/y or by 1.4 million, or the
activity rate fell.
Boehringer Ingelheim Animal Health has bolstered its
regenerative medicine capabilities with the acquisition of Global
Stem cell Technology (GST). GST is a Belgian veterinary
biotechnology firm focused on the research and development of stem
cell therapies to treat orthopedic and metabolic diseases in
animals. Financial details of the deal have not been disclosed. The
acquisition of GST follows a two-year partnership that led to the
first ever authorization and market launch of a stem cell product
for animal health in Europe. Boehringer launched Arti-Cell Forte in
April 2019, for the reduction of mild to moderate recurrent
lameness associated with non-septic joint inflammation in horses.
Boehringer first signed an exclusive European distribution deal
with GST for Arti-Cell Forte in June 2018, after the therapy
received a landmark positive opinion. A spokesperson for Boehringer
told IHS Markit Animal Health the company expects the integration
of GST to accelerate the market launch of Arti-Cell Forte in other
territories. (IHS Markit Animal Health's Sian Lazell)
A new three-year loan deal with the International Monetary Fund
(IMF) will provide Moldova with crucial funding as it struggles
with the impact of the COVID-19 virus pandemic. (IHS Markit
Economist Sharon Fisher)
The IMF announced on 27 July that a staff-level agreement has
been reached with the Moldovan authorities on three-year Extended
Credit Facility and Extended Fund Facility (ECF/EFF) arrangements.
Replacing a previous three-year agreement from November 2016, the
new program aims to push forward institutional reforms and support
Moldova's post-pandemic recovery.
Moldova has struggled to contain the spread of the pandemic,
and the country had 23,154 confirmed cases as of 27 July, with 748
deaths. Public finances have deteriorated markedly, with the
central government deficit nearly doubling in the first half of
2020.
If approved by the IMF's Executive Board, the ECF/EFF loan
would give Moldova access to approximately USD558-million-worth of
financial assistance. The IMF loan deal would also open the door to
funding from other international donors.
The IMF's Executive Board is expected to consider Moldova's
loan agreement in September, and approval depends on the
implementation of a number of policy actions related to central
bank independence, oversight of the financial sector, and fiscal
transparency. Key priorities for institutional reform over the next
three years include fiscal governance, oversight of the non-bank
financial sector, market regulation, rule of law, and tackling
corruption.
The International Monetary Fund (IMF) has approved South
Africa's request for USD4.3 billion in emergency financing under
the Rapid Financing Instrument (RFI). Although the relatively
limited IMF conditionalities have been downplayed by local
politicians, the potential benefits of adhering to the IMF
guidelines should not be underestimated by the government. (IHS
Markit Economist Thea Fourie)
The IMF has approved USD4.3 billion of financial assistance to
South Africa under the RFI, amounting to 100% of South Africa's
quota. On 22 June, the Africa Development Bank (AfDB) approved a
USD304-million loan to the South African government, in support of
the government's efforts to mitigate the social and economic
impacts stemming from the COVID-19 pandemic.
A statement that accompanied the IMF's RFI approval outlines
that the funding will be used to address pressing
balance-of-payments needs originating primarily from the fiscal
pressures in the South African economy, to limit regional pandemic
spillover effects, and, it is hoped, catalyze additional financing
from other international financial institutions.
Remittance inflows to Kenya remained resilient during the first
five months of 2020, latest statistics from the Central Bank of
Kenya (CBK) show. Remittances from North America, accounting for
53% of total remittance inflows, grew by 13.1% year on year (y/y)
during the first five months of 2020, offsetting a 30.3% y/y
contraction in remittances from Europe. Overall remittance inflows
to Kenya increased by 1.7% y/y during the first five months of
2020. (IHS Markit Economist Thea Fourie)
The impact of global travel restrictions amid the COVID-19
pandemic has been detrimental for Kenya's tourism sector. Foreign
tourist arrivals to Kenya contracted by 20.2% y/y during the first
quarter of 2020, numbers from the Kenya National Bureau of
Statistics (KNBS) show. The drop in foreign tourist arrivals in
March accelerated to average a massive 59.1% y/y.
A fall in Kenya's trade deficit and resilient remittance
inflows left Kenya's overall current-account deficit at USD1,088
million during the first quarter of 2020, down from USD1,673
million in the fourth quarter of 2019, latest statistics of the
KNBS show. Low import demand amid higher exports were primarily
responsible for the improvement in the trade deficit.
Inflows on the capital and financial account moderated to
USD445 million during the first quarter of 2020, from USD1.375
billion in the fourth quarter of 2019, allowing for a fall in
Kenya's total foreign-reserves holdings by USD472 million to
USD12.4 billion (or 5.2 months of imports of goods and services) by
the end of March 2020. The build-up of global COVID-19-related
uncertainties during the first quarter resulted in a sharp reversal
of capital flows to developed economies.
Kenya's total exports rebounded during May and June, the CBK
reported, driven primarily by tea, horticultural products and
re-exports. "Horticulture exports are almost at normal levels,
mainly due to a pickup in demand and easing of supply restrictions
in key destination markets, and increased cargo capacity," the CBK
reported.
Kenya's real GDP remained strong, increasing by 4.9% y/y during
the first quarter, the KNBS reported. The Kenyan economy gained
from strong growth in the agricultural and fishing industries,
followed by the manufacturing and services sectors. Output in the
accommodation and food services sector - the first sector to be
impacted by the COVID-19 pandemic - contracted by 9.2% y/y over the
period.
Five new members were appointed to electricity distribution and
transmission utility Kenya Power and Lighting Company's (KPLC)
board on 20 July, after the majority shareholder, Kenya's Treasury,
forced the previous members to resign a week previously. (IHS
Markit Country Risk's William Farmer and Eva Renon)
In June, KPLC issued a third consecutive annual profit warning,
projecting annual earnings would fall by 25%.
The previous year, net earnings fell by 92%. The recurrent
balance-sheet issues stem from high power purchase costs and
subsidized connections for rural communities. KPLC has faced
corruption and fraud investigations, with senior managers arrested
in 2019 for alleged tendering fraud, and over 100 employees were
dismissed in 2019 for their alleged involvement in electricity
theft.
As a result of the lockdown and curfew measures introduced in
response to the COVID-19 virus pandemic, electricity demand has
fallen by 8%, according to state-owned Kenya Electricity Generating
Company.
Consequently, in June, KPLC issued force-majeure notices to 10
independent power producers (IPPs). The IPPs have complained that
reduced demand does not constitute a valid justification to negate
their power purchasing agreements, raising the possibility of a
legal challenge.
Treasury Secretary Ukur Yatani has seen through budget
rationalization measures since his appointment in July 2019, so the
Treasury's leadership at KPLC is likely to drive efficiency
improvements.
This would include efforts to reduce transmission and
distribution losses, which KPLC estimated at 24% over 2019.
Asia-Pacific
APAC equity markets closed mixed; South Korea +1.8%, India
+1.5%, China/Hong Kong +0.7%, Japan -0.3%, and Australia
-0.4%.
Taiwan's export orders and industrial output expanded at a
faster pace in June as demand for electronics and information and
communication products continued to surge during the month, which
provided the key driving force and which was bolstered by booming
demand for distance working and learning. That said, the resurgence
of COVID-19 infections around the world and the resulting
increasing uncertainties to global demand have prompted the
government to step up its effort to stimulate the economy with
additional budget in July. (IHS Markit Economist Ling-Wei Chung)
Taiwan's cabinet added an extra special budget to its COVID-19
relief fund in late July to combat the pandemic and provide needed
support to hard-hit sectors. The total of relief fund to date
amounted to TWD420 billion (USD14.2 billion).
The initial relief package was announced in February with the
amount of TWD60 billion, which was followed by the first
supplementary budget announced in April with the total of TWD150
billion. As the pandemic shows no signs of easing globally, the
cabinet announced the second supplementary budget in late July with
the amount of TWD210 billion, including TWD38.3 billion allocated
to fight against the spread of the virus and TWD171.7 billion on
bailout and measures to support the economy.
By ministries, the bulk of the second extra budget - TWD137.6
billion - will be allocated to the Ministry of Economic Affairs. It
includes TWD45.0 billion on supplementary for business loans,
TWD38.2 billion on discount coupons (Triple Stimulus Vouchers), and
TWD37.8 billion on subsidies for trade services sector,
exhibition-related sector, and manufacturing sector.
Export orders - representing a leading indicator of actual
exports - expanded for the fourth straight month in June, rising by
6.5% year on year (y/y), accelerating from a just 0.4% y/y gain in
May. It also represented the fastest increase since August
20218.
Orders of electronic products remained the key driver of
expansion, surging 23.9% y/y in June, while orders of information
and communication products continued to climb as well, up 17.1%
y/y. The technology sectors continued to benefit greatly from
booming demand for products and equipment related to working from
home and remote education.
Non-technology sectors remained lagged behind as they continued
to suffer from plunging demand, hit hard by the adverse effect of
the pandemic. That said, although still declining at a double-digit
pace, a pick-up in international oil and raw material prices helped
narrow the contractions.
By markets, orders from the US, mainland China, Hong Kong SAR,
and Europe expanded at a double-digit pace, boosted mainly by
booming technology demand. These helped offset shrinking orders
from Japan and still-sluggish demand from ASEAN.
Concurrently, supported by rising export orders, IP strengthen
in June as well, increasing 7.3% y/y, accelerating from a 1.7% y/y
gain in May. Surging technology production continued to lead the
expansion in June, while the narrower declines in the
non-technology production helped the acceleration in overall
manufacturing production during the month.
The enticement of lower costs could accelerate the unleash of
pent-up travel demand in the second half, boosting tourism spending
and in turn stabilizing employment in related sectors. Renewed
regional case surges remain the major headwind for a sustained
pickup. (IHS Markit Economist Lei Yi)
Mainland China's Ministry of Culture and Tourism (MCT) lifted
the ban on interprovincial group tours on 14 July, after a nearly
six-month shutdown since late January. Following this, local
governments have started rolling out ticket price discounts to
attract more tourists for spurring tourism consumption.
Shandong issued a notice on 24 July, lowering ticket prices for
81 state-owned tourist sites in the region by 50-80% from August
until the end of 2020, according to the provincial development and
reform commission and cultural and tourism department.
Similarly, Shanxi announced on 18 July to waive admission
tickets on workdays for 126 local tourist attractions in the second
half of 2020. To cover the income loss, fiscal subsidies of no less
than 20% will be provided both at the provincial and municipal
level.
IHS Markit has downgraded Fiji's medium-term sovereign risk
rating to B+ (55/100 on IHS Markit's numerical scale), from BB-
(50), and returned the outlook to Stable. This is due primarily to
extreme current-account pressures caused by the collapse of tourism
revenues in the wake of the COVID-19 pandemic. (IHS Markit
Sovereign Risk's Andrew Vogel)
Given Fiji's economy is already lacking diversity and its
agricultural and manufacturing sectors have weak competitiveness,
the small island country is heavy reliant on tourism exports and
transportation services for maintaining a current-account surplus.
The coronavirus disease 2019 (COVID-19) pandemic is putting
extraordinary pressure on the country's economy as travel
restrictions and containment measures disproportionately affect its
services exports.
As the pandemic progresses, the scenario of a quick recovery
for tourism exports and related services has become less likely.
Given the short-term losses suffered will already translate to
permanent losses in the medium- and long-term, any further weakness
in the tourism sector would add additional pressure to the
country's medium-term liquidity risks.
Fiji is also very import dependent and, with potential stimulus
measures being undertaken along with recovery efforts from April's
Cyclone Harold, room for the country to reduce spending is quite
small, leaving Fiji's liquidity position in a weakening position
and elevating its overall risk.
Posted 28 July 2020 by Chris Fenske, Head of Fixed Income Research, Americas
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