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European and US equity markets closed higher today, while APAC
markets were mixed. iTraxx closed tighter across IG and high yield,
while CDX IG was tighter and high yield slightly wider on the day.
European government bonds were close to unchanged on the day, while
US government bond yields were higher and the curve steepened. The
number of large retailers filing for bankruptcy protection grew
further over the weekend, while on a positive note bondholders
appear to be close to an agreement with Argentina's government over
the country's debt restructuring.
Americas
US equity markets closed higher on the day; Russell 2000 +1.8%,
Nasdaq +1.5%, DJIA +0.9%, and S&P 500 +0.7%.
10yr US govt bonds closed +2bps/0.56% yield and 30yr bonds
+4bps/1.25% yield.
CDX-NAIG closed -2bps/68bps and CDX-NAHY +1bp/434bps.
Gold closed flat/$1,986.30 per ounce, but was as high as
$2009/per ounce intraday, which is the first time it broke through
$2,000/per ounce.
Crude oil closed +1.8%/$41.01 per barrel.
Argentina's government is finalizing an agreement with a group
led by BlackRock Inc. and a handful of large U.S. investment firms
to restructure about $65 billion in foreign debt and resolve the
country's third sovereign default in 20 years, said people involved
in the talks. Committees representing investors holding the bulk of
Argentina's external debt have agreed to exchange their defaulted
bonds for new securities under a settlement worth nearly 55 cents
on the dollar, these people said. (WSJ)
Offshore drilling contractor Noble Corporation has entered into
a restructuring support agreement with two ad hoc groups of the
largest holders of its outstanding bond debt regarding a consensual
financial restructuring transaction. Noble and selected
subsidiaries have filed voluntary petitions for relief under
chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the Southern District of Texas. (IHS
Markit Upstream Costs and Technology's Matthew Donovan)
The restructuring will be implemented through a plan of
reorganization that the company expects to be confirmed by this
fall, allowing Noble to emerge from chapter 11 before the end of
2020.
The restructuring support agreement outlines a plan for the
elimination of all of the company's bond debt, which currently
represents over USD3.4 billion of debt, through the cancellation
and exchange of debt for new equity in the reorganized company. The
company's major bondholders have agreed to invest USD200 million of
new capital in the form of new second lien notes.
Noble Corporation will also emerge with a new USD675 million
secured revolving credit facility to be provided by its current
syndicate of revolving credit facility lenders, with JPMorgan Chase
Bank, N.A. as administrative agent.
Noble plans to continue to operate as normal during the
restructuring and will continue to pay employee wages and health
and welfare benefits as well as vendors in the normal course.
The seasonally adjusted IHS Markit final U.S. Manufacturing
Purchasing Managers' Index (PMI) posted 50.9 at the start of the
third quarter, up from 49.8 in June but slightly lower than the
previously released 'flash' estimate of 51.3. The latest figure
signaled a marginal improvement in the performance of the U.S.
manufacturing sector, the first since February. (IHS Markit
Economist Chris Williamson)
Monthly US GDP rose 5.0% in June following a 4.4% increase in
May. The back-to-back increases followed back-to-back declines over
March and April that lowered GDP a cumulative 15.3%; the increases
over May and June reversed about one-half of that decline. About
two-thirds of the June increase was accounted for by personal
consumption expenditures. Other important contributors included
nonfarm inventory investment, net exports, and the portion of
monthly GDP not covered by the monthly source data. The level of
GDP in June was 20.4% above the second-quarter average at an annual
rate; i.e., zero growth of monthly GDP in each month of the third
quarter would imply 20.4% annualized growth of GDP for the third
quarter. This is about what we expect (we currently look for 20.1%
annualized growth in the third quarter). (IHS Markit's US
Macroeconomics Team)
Total US construction spending declined 0.7% in June; IHS
Markit had expected a 1.2% decline. (IHS Markit economists Ben
Herzon and Lawrence Nelson)
Core construction spending, which excludes federal and private
residential outside of new housing (and which enters our GDP
tracking), declined 0.9%, also a bit less than we expected. In
response, we left our estimate of second-quarter GDP growth
unrevised (to one decimal) at -32.9% (annual rate), and we raised
our forecast of third-quarter GDP growth 0.1 percentage point to a
20.1% annualized rate of increase.
The decline in total construction spending in June marked the
fourth consecutive monthly decline after reaching a pre-pandemic
peak in February. Since February, total construction spending has
declined 6.0%.
Relative to the manufacturing sector, where industrial
production dropped 20.1% over March and April, the construction
sector has, so far, held up well.
Manufacturing is already recovering, and we think construction
is near a trough. One reason to be optimistic about construction is
that homebuilders have become optimistic. The National Association
of Home Builders (NAHB) Housing Market Index for July has all but
regained its pre-pandemic (February) level.
On the other hand, one reason not to be optimistic about
construction is that some of the recent weakness is unrelated to
the pandemic and may continue in coming months. Averaged over the
second quarter, education dropped for the fifth straight quarter,
lodging for the fourth straight quarter, and office and
manufacturing for the third straight quarter. These categories were
sliding even before the pandemic caused the recession.
In the week ended 18 July, US states reported 1,369,798 total
initial unemployment claims, a decrease of 134,950 from the prior
week. (IHS Markit Economists Alex Minelli and Fran Hagarty)
After experiencing sizable decreases for several weeks
following their peak in the week ended 4 April, the descent of
initial claims from record highs has slowed considerably over the
past six weeks, and an increase was even seen in the week ended 11
July as reopening efforts in multiple states have been halted
because of recent viral outbreaks.
By the week ended 13 June, new claims for unemployment
insurance had fallen more than 76% from their April peak. Since
then, they have declined less than 6% and remain far above
pre-COVID-19 levels.
Of the 35 states that saw a decrease in initial filings,
Florida (down 23,855), Texas (down 17,608), and Georgia (down
16,139) saw the largest declines in the week ended 18 July.
Florida's sizable decrease is attributable to fewer layoffs in
goods-producing industries such as construction and manufacturing,
while Georgia owes its decline to less separations in the service
sector.
The largest increases in initial claims occurred in Louisiana
(5,728), Virginia (5,654), and California (4,680). This is the
third week in a row claims have risen in California as viral
outbreaks across the state led officials to reverse reopening
efforts.
Continuing claims in the week ended 11 July numbered
16,128,018, down 964,281 from the week ended 4 July. Of the 37
states where continuing claims decreased, the largest declines were
in California (down 241,903), Florida (down 166,797), and
Pennsylvania (down 144,381).
On the other end of the scale, 13 states and Washington DC did
experience increases in continuing claims, led by Mississippi
(22,495), New York (14,747), Colorado (10,874), and Nevada
(10,083).
On a regional basis, the Northeast and North Central con tinue
to see decreases in the four-week moving average of continuing
claims as a proportion of their labor forces. Meanwhile, the West
and South have remained flat since the beginning of June despite
showing signs of improvement in May.
Over the weekend, Tailored Brands Inc. -- the owner of Men's
Wearhouse and JoS. A. Bank -- and department store Lord &
Taylor filed for Chapter 11. The Canadian unit of Chico's FAS Inc.
declared bankruptcy on July 31. The previous week, it was Ann
Taylor and Lane Bryant parent Ascena Retail Group Inc. At least 25
major retailers have now filed for bankruptcy this year, with 10 of
these coming over the last five weeks. (Bloomberg)
IDEXX Laboratories has recorded animal health revenues growth
of 3% in the second quarter of 2020. (IHS Markit Animal Health's
Sian Lazell)
Total animal health sales amounted to $598.3 million in Q2.
Companion animal group (CAG) sales were up 3% (+4% organic) during
the quarter to $566.1m.
CAG diagnostics achieved recurring revenue growth of 7% on both
a reported and organic basis, generating $510.2m. IDEXX said growth
across its major modalities improved in Q2, reflecting the "broader
market recovery for clinical visits and related diagnostic products
and services".
However, overall CAG sales growth was constrained by a decline
in new instrument placements due to continued restrictions on
access to some veterinary clinics and deferral of purchasing
decisions.
Despite these impacts, IDEXX's premium instrument installed
base expanded 14% year-on-year, backed by high customer
retention.
Sales of the company's VetLab consumables were up 12% (+13%
organic) to $196.1m, supported by ongoing expansion of the firm's
global premium instrument installed base, strong customer
retention, higher testing utilization and moderate net price
gains.
Reference laboratory diagnostic and consulting services climbed
7% (+6% organic) to $228.8m. This growth was supported by volume
gains through existing customers, moderate net price realization
and new customers.Revenues from rapid assay products dropped 6%
(-5% organic) to $64.7m. This unit was impacted by early quarter
volume pressure cause by the COVID-19 pandemic and "unfavorable
revenue impacts related to promotional program timing".
Veterinary software, services and diagnostic imaging systems
turnover also declined to around $37m, representing a decrease of
4% (-3% organic). IDEXX saw double-digit growth in
subscription-based service revenues, moderated by declines in new
veterinary software and diagnostic imaging systems placements.
By region, CAG revenues grew 5.5% in the US but was down by
around 1% internationally during the second quarter of 2020.
In contrast to the overall growth in the CAG division, IDEXX's
smaller livestock, poultry and dairy (LPD) business saw turnover
drop to $32.2m - representing a downward trajectory of 3% but
growth of 2% on an organic basis.
IDEXX said the performance of its LPD division was influenced
by an unfavorable impact from the reversal of accelerated customer
stocking orders related to COVID-19 in the first quarter, of
approximately $2.5m. This reduced revenue growth by 8%.
The business saw improvements in core swine testing volumes,
continued benefits from new African swine fever diagnostic testing
programs in Asia and growth in poultry testing. However, these
gains were restricted by "lower herd health screening levels,
compared to strong prior-year results".
Europe/Middle East/ Africa
European equity markets closed sharply higher; Germany +2.7%,
UK +2.3%, France +1.9%, Italy +1.5%, and Spain +1.4%.
European govt bonds were close to unchanged on the day; Spain
+1bp and Germany/UK/France and Italy flat.
iTraxx-Europe closed -2bps/58bps and iTraxx-Xover
-15bps/360bps.
Brent crude closed +1.4%/$44.15 per barrel.
Germany's Federal Statistical Office (FSO) has reported, based
on data from various regional states, that the country's national
Consumer Price Index (CPI) declined by 0.5% month on month (m/m) in
July. On a year-on-year (y/y) basis, consumer prices edged
downwards by 0.1% in July 2020, its lowest reading since April
2016. (IHS Markit Economist Diego Iscaro)
Using the EU-harmonised CPI measure, prices declined by 0.5%
m/m and stagnated on a y/y basis.
While the detailed breakdown of the German national data will
only be published with the final numbers on 13 August 2020, the
breakdown by selected products shows prices of goods, which had
increased by 0.2% m/m in June, declining by 1.4% y/y in July.
While the decline in energy prices accelerated from 6.2% y/y to
6.7% y/y, the increase in food prices moderated sharply from 4.4%
y/y to 1.2% y/y. Service price inflation also moderated from 1.4%
y/y to 1.2% y/y.
Components are also available from the largest and most
populous state of North Rhine-Westphalia (NRW). Inflation in NRW
declined by 0.7% m/m and 0.2% y/y for its headline index - the
latter following a rise of 0.9% in June. The marked deceleration in
the annual inflation rate was mainly due to lower food prices
(+0.8% y/y following +3.9% y/y in June), while NRW's core rate of
inflation without food and energy eased from 1.2% y/y to 0.8%
y/y.
The management reshuffle being undertaken by the Volkswagen
(VW) Group is 80% complete, according to the automaker's CEO,
Herbert Diess. According to an interview conducted by Frankfurter
Allgemeine Zeitung and reported by Reuters, the senior executive
said, "We are 80% done with our personnel decisions. Some
outstanding decisions have been prepared and we will implement them
in a planned manner." Diess added that the automaker is seeking to
enact an "integrative" leadership style, which has been
successfully enacted by Thomas Schmall, the chairman of the board
of management of Volkswagen Group Components, and that it will do
more to bring on managers internally. Diess also told the newspaper
that the automaker's Skoda brand needed to do more to compete with
South Korean and French brands. There have been a host of
managerial changes in the senior ranks of the VW Group of late,
including the appointment of new heads of the VW brand, the OEM's
software development, and the Traton truck business. (IHS Markit
AutoIntelligence's Ian Fletcher)
According to the Swiss Federal Statistical Office (SFSO), Swiss
consumer prices declined by 0.2% month on month (m/m) in July. On a
year-on-year (y/y) basis, prices declined by 0.9%, following a
four-year low of 1.3% y/y during the previous two months. (IHS
Markit Economist Diego Iscaro)
The EU-harmonized measure, with its different composition, was
slightly positive in m/m terms (+0.1%), while the y/y decline stood
at 1.2%.
The easing of the annual deflation rate was mainly the result
of a substantially weaker decline in transport prices (see table
below). Prices of recreation and culture also fell at a softer
pace, while prices of clothing and footwear rose marginally for the
first time in four months.
Core consumer prices, a measure that excludes the effect from
volatile components such as food and energy, declined by 0.1% m/m
and were thus slightly softer than the flat (national) headline
measure. The core inflation annual rate declined once more from
-0.8% y/y to -0.4% y/y, its weakest fall in four months.
The May PMI for the Swiss manufacturing sector (seasonally
adjusted) - compiled by the Association for Procurement and Supply
Management (procure.ch) and published by Credit Suisse - recovered
significantly after four months of prints in the low-40s. The
headline index stood at 49.2 in July, up from 41.9 in June. (IHS
Markit Economist Daniel Kral)
Despite the significant improvement, the index remained below
the critical 50-level, which indicates expansion. Switzerland's
headline manufacturing PMI continued to underperform the eurozone,
which had a reading of 51.8 in July, and its main trading partner
Germany, at 51.0.
The breakdown into individual components reveals that the
output sub-index rebounded by 13.4 points between June and July, to
53.4, indicating strong expansion. However, apart from suppliers'
delivery times, all other subcomponents that contribute towards the
headline index remained in contraction territory. Employment and
orders in July were at 46.6 and 47.8, respectively, although both
recorded strong improvements compared with June.
The KOF Barometer (released on 30 July) improved by 25 points,
from 60.6 in June to 85.7 in July, the biggest monthly improvement
in the history of the series. This represents a quick rebound from
the all-time low of 49.6 in May amid severe COVID-19-related
restrictions in Switzerland and Europe.
CNH Industrial has reported losses during the second quarter of
2020, as its sales revenues have contracted amid the COVID-19 virus
pandemic. (IHS Markit AutoIntelligence's Ian Fletcher)
For the three months ending 30 June, the company's consolidated
revenues fell by 26.3% year on year (y/y) to USD5,578 million.
Its adjusted EBITDA dropped by 68.7% y/y to USD298 million in
the second quarter, as adjusted EBIT profits dropped from USD651
million during the second quarter of 2019 to just USD15
million.
CNH Industrial's net income fell by 15.5% y/y but still stood
at USD361 million as this included a gain of USD1,475 million from
the re-measurement at fair value of its investment in Nikola
Corporation, in which it holds a 7% stake of the newly listed
entity.
However, this was partly offset by USD840 million worth of
non-cash impairment charges primarily related to the goodwill
allocated to construction, as well as asset optimization charges of
USD282 million, mainly as a result of the COVID-19 virus pandemic's
impact on used trucks.
On an adjusted basis, the company's net income slipped from a
profit of USD430 million to a loss of USD85 million in the second
quarter.
From a business unit perspective, the revenues of CNH
Industrial's Commercial and Specialty Vehicles unit, which includes
the Iveco brand, fell by 35.5% y/y to USD1,739 million in the
second quarter.
At CNH Industrial's Powertrain business, which it intends to
spin off alongside the majority of Commercial and Specialty
Vehicles assets eventually, net revenues fell by approximately
32.7% y/y to USD763 million due to the COVID-19 virus pandemic
reducing volumes.
Asia-Pacific
APAC equity markets closed mixed; India -1.8%, Hong Kong -0.6%,
Australia flat, South Korea +0.1%, China +1.8%, and Japan
+2.2%.
The Office of the United States Trade Representative (USTR) on
29 July announced an additional 12-month extension of exemptions
for 14 categories of imported Chinese products, mostly related to
medical supplies, from Section 301 tariffs. The USTR had initially
granted exemptions for 69 categories of products from Section 301
tariffs in July 2019. (IHS Markit Country Risk's David Li)
The impact of the COVID-19 virus pandemic has rendered China
increasingly unlikely to fully meet phase-one agreement purchasing
targets. China has committed to increasing its imports from the
United States by USD200 billion above the 2017 baseline by the end
of 2021, representing a 92% increase in the value of its imports of
the products covered
China is likely to significantly increase agricultural
purchases during the autumn harvest season, which also aligns with
central government concerns about food security amid the COVID-19
virus outbreak and severe floods.
China has demonstrated intent to preserve the phase-one
agreement and prevent its collapse, with the key goal of seeking to
avoid further deterioration in China-US economic relations. Rather
than using COVID-19 as a reason to renegotiate its conditions or
withdraw from the deal altogether - by invoking the deal's force
majeure clause - both sides have repeatedly reaffirmed their
intention to meet their commitments.
The Chinese new energy vehicle (NEV) market is set to witness
another year of contraction of sales and production during 2020,
after an expansionary period between 2014 and 2018. Demand for NEVs
contracted for the first time in 2019, with a fall of 4% year on
year (y/y) in sales volumes, according to data from China
Association of Automobile Manufacturers (CAAM). Due to the impact
of the coronavirus disease 2019 (COVID-19) virus outbreak and the
dwindling subsidies for NEVs, IHS Markit forecasts production of
NEVs in China, which mainly consist of plug-in hybrid electric
vehicles (PHEVs) and battery electric vehicles (BEVs), to decrease
by 9.3% to around 1.09 million units in 2020. Of this total, BEV
production volumes are expected to drop by 15.2% to around 840,000
units. Despite a plethora of models on offer, the forecast decline
in NEV output largely reflects falling demand in the retail market
as private vehicle buyers still lack interest in BEVs, the largest
NEV category in the Chinese market. In this article, we have
highlighted the top performers in the NEV market in an attempt to
provide some insights into consumer preferences in the world's
largest NEV market. (IHS Markit AutoIntelligence's Abby Chun
Tu)
Chinese electric vehicle (EV) maker Xpeng Motors has raised an
additional USD300 million from investors, including Qatar's
sovereign wealth fund, reports Reuters, citing sources familiar
with the matter. The report also indicates that the EV startup has
filed for an initial public offering (IPO) in the United States.
Xpeng has already launched two models, the G3 electric crossover
and the P7 high-performance electric sedan, on the market. With the
latest funds raised, Xpeng is expected to have raised around USD800
million in its C+ round of fundraising. The startup is likely to
follow its rivals, NIO and Li Auto, in going public in US in an
effort to secure capital needed to support the development of new
products and technologies. (IHS Markit AutoIntelligence's Abby Chun
Tu)
Preliminary data show that Taiwan's real GDP fell 0.7% year on
year (y/y) in the second quarter of 2020, reversing noticeably from
a 1.6% y/y expansion posted in the first quarter. It was not only
the first contraction since the first quarter of 2016, but also the
largest decline since the third quarter of 2009 as the COVID-19
virus outbreak took a heavy toll on consumption and tourism-related
activities. (IHS Markit Economist Ling-Wei Chung)
In seasonally adjusted terms, the economy contracted as well in
the second quarter, at an annualized 8.8% from the preceding
quarter, representing the worst decline since the fourth quarter of
2008 during the peak of the 2008-09 global financial crisis.
The decline in the second quarter was seen across the board,
except gross investment.
Domestic demand fell 0.7% y/y in the second quarter, dragged
down especially by a record contraction in private consumption,
subtracting 2.7 percentage points from economic growth.
Shrinking consumer spending more than offset a jump in gross
investment, which contributed 2.2 percentage points to
second-quarter growth.
Although imports continued to shrink at a faster pace than
exports during the second quarter, the decline in exports
accelerated noticeably, which resulted in negative contribution
from net exports by 0.1 percentage point.
The main drag continued to come from private consumption,
dropping at a record pace of 5.1% y/y, as consumption and
tourism-related activities were hit the hardest by the
pandemic.
Dampened by travel restrictions locally and globally, outbound
tourism collapsed with the numbers of residents travelling overseas
plunging by a record 98.9% y/y and resulting in a 96.4% y/y slump
in overseas travel spending, which subtracted six percentage points
from private consumption.
That said, with the reduction in overseas travelling, some
residents turned more to spending at home, which provided some
offset to the pandemic impact that became more evident in the
second quarter. Within resident spending at home, spending on food
services was hardest hit by the pandemic, plunging the most by
12.4% y/y, while retail sales dropped 5.8% y/y in the second
quarter.
Coupled with the plunges in consumption related to public
transportation, lodging, hotels, and recreations, they remained the
key factors weighing down private consumption in the second
quarter.
On the other hand, consumption related to e-commerce, online
shopping, delivery services, online games, and other sales related
to staying at home continued to surge. In particular, online
shopping jumped 18.3% y/y in the three months through June.
These, combined with the vibrant local stock market with a 54%
y/y surge in the trading value, provided some support and helped
moderate the fall in private consumption during the second
quarter.
Concurrently, gross investment continued to expand for three
straight quarters, jumping 9.6% y/y in the second quarter. This is
reflected by a 0.8% y/y increase in imports of capital goods (in
Taiwan dollar terms), although the gain moderated from a 1.5%
expansion in the first quarter as imports of semi-conductor
equipment virtually flattened with a 0.1% fall.
Despite the impact of the COVID-19 pandemic on world trade and
the severe economic contraction during second-quarter 2020 in key
export markets such as the United States, European Union and Japan,
Vietnam's exports remained resilient in July, showing a marginal
increase of 0.3% year on year (y/y). (IHS Markit Economist Rajiv
Biswas)
Industrial production rose by 1.1% y/y in July, with
manufacturing up 2.1% y/y while electricity production rose by 2.7%
y/y and mining output contracted by 7.9% y/y. For the first seven
months of 2020, industrial production rose by 2.6% y/y, reflecting
a very resilient performance compared with many other Asian
industrial economies, which have faced sharp contractions in
industrial output due to the pandemic and related lockdowns.
Reflecting Vietnam's success in limiting the domestic spread of
the COVID-19 virus during the first seven months of 2020, retail
sales of goods and services rose by 4.3% y/y in July.
Vietnam's export sector has also weathered the economic shocks
to key global markets relatively well, with exports having remained
stable y/y over the first seven months of 2020 despite the sharp
slump in world trade. With economic activity rebounding in the
United States and European Union as COVID-19 lockdowns have been
gradually eased, orders for Vietnamese exports should be given a
boost during the second half of 2020.
However, a key new risk that has emerged in recent days has
been an outbreak of new COVID-19 cases in Vietnam's third-largest
city, Danang. This has forced authorities to put lockdown measures
in place in the city, with several cases reported in Danang's
factories.
Nissan has announced that it is enabling owners of battery
electric vehicles (BEVs) to pay for parking by discharging power
from their batteries at the new Nissan Pavilion exhibition space in
Yokohama (Japan). The company said that the 10,000-square-metre
space has zero emissions and is supplied with electricity from
installed solar panels and from hydroelectric power. The company
noted that the sites Nissan Chaya Café is also off the electricity
grid and is only supported by power from solar panels or plugged-in
vehicles. (IHS Markit AutoIntelligence's Ian Fletcher)
Posted 03 August 2020 by Chris Fenske, Head of Fixed Income Research, Americas
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