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Global equity markets and credit indices closed higher again
today on optimism from the growing number of re-openings, improving
higher frequency data, and continued hopes of additional government
stimulus. Benchmark government bonds were lower on the day in the
wake of the positive momentum from equities and other risk assets.
As with every Thursday since mid-March, tomorrow's US jobless claim
report will be closely watched for signs of improvement in the US
employment situation in addition to Friday's US non-farm payroll
report.
Americas
US equity markets closed higher today; Russell 2000 +2.4%, DJIA
+2.1%, S&P 500 +1.4%, and Nasdaq +0.8%.
10yr US govt bonds closed +6bps/0.75% yield and 30yr bonds
+6bps/1.55% yield. 10s sold off 9bp between the peak price of the
day at 7:30am and the lowest point at 11:00am ET.
CDX-NAIG closed -3bps/73bps and CDX-NAHY -21bps/461bps.
Crude oil closed +1.3%/$37.29 per barrel.
The US labor department, which governs 401(k) retirement
accounts, said private equity could be used within the
professionally managed funds on offer to savers, such as target
date funds which invest in multiple asset classes. The Department
of Labor's statement on Wednesday was the result of a request for
guidance submitted by Partners Group and Pantheon, two private
equity managers. The pair in 2013 launched private equity funds
with daily pricing and liquidity that were designed to be slotted
into investments in 401(k) plans, but regulatory uncertainty and
fear of litigation had limited their appeal until now. (FT)
Today's 8:30am ET ADP National Employment Report showed nonfarm
private- sector employment in the U.S. decreased by 2.76 million
jobs in May vs an expected decrease of 8.75 million jobs.
The seasonally adjusted final IHS Markit US Services Business
Activity Index registered 37.5 in May, up from April's record low
of 26.7 and slightly higher than the 'flash' figure of 36.9. The
rate of reduction in activity softened notably amid some reports of
businesses returning to work, but was nonetheless the
second-sharpest since data collection began in October 2009. The
IHS Markit Composite PMI Output Index posted 37.0 in May, up from
April's record-breaking low of 27.0. Although the pace of decline
eased, it remained significant and the second fastest since data
collection began in October 2009. (IHS Markit Economists Chris
Williamson and Siân Jones)
US manufacturers' orders declined 13.0% in April, while
shipments declined 13.5%. Both were broadly in line with
expectations. Meanwhile, manufacturers' inventories declined 0.4%
in April, less of a decline than we assumed (details in the below
table). (IHS Markit Economists Ben Herzon and Lawrence Nelson)
The Bank of Canada announced no change to its overnight policy
rate of 0.25%. The unprecedented declines in supply and demand
lowered first-quarter real GDP in line with the Bank of Canada's
projections laid out in the April Monetary Policy Report. Although
there is some pullback in the frequency of the large asset-purchase
programs announced in March, they will continue well into the
recovery. The Bank of Canada will keep the overnight rate at 0.25%
for a prolonged period. Canada's first-quarter real GDP decline of
2.1% (not annualized) from the last quarter of 2019 was estimated
to be about midway in the Bank of Canada's April forecast
monitoring range. The Bank is expecting second-quarter real GDP
levels to decline about 10-20% before the economy advances in the
third quarter. (IHS Markit Economist Arlene Kish)
US light-vehicle sales are estimated to have dropped 30.1% y/y
in May, a less dramatic y/y decline than in April and a
month-on-month improvement. In May, many stay-in-place orders and
restrictions on auto sales were eased, while interest rates
remained low. Although the economic damage brought by the COVID-19
pandemic continues, US automobile sales in May improved from
April's low, as OEMs' incentives, online sales, and "reopening" of
activities - especially at auto dealerships - helped to provide a
cushion against a worst-case scenario. IHS Markit forecasts
full-year 2020 light-vehicle sales of 12.7 million units in the US.
(IHS Markit AutoIntelligence's Stephanie Brinley)
Brazilian light-vehicle registrations decreased 75.8% year on
year (y/y) in May, according to initial data from the National
Federation of Motor Vehicle Distributors (Federação Nacional da
Distribuição de Veiculos Automotores: Fenabrave). (IHS Markit
AutoIntelligence's Tarun Thakur)
The federation reported registrations of 56,639 light vehicles
last month, compared with 234,147 in May 2019.
Registrations of medium and heavy commercial vehicles (MHCVs)
and buses fell by 50.8% y/y last month; 5,558 MHCVs were sold,
compared with 11,293 units in the same month a year earlier.
The best-selling automaker in the light-vehicle market, General
Motors (GM), had a market share of 17.6% in May.
Regeneron Pharmaceuticals (US) and Intellia Therapeutics (US)
have expanded their partnership to give Regeneron the rights to
develop up to five additional in vivo CRISPR (clustered regularly
interspaced short palindromic repeats)/Cas9-based therapeutic liver
targets, including joint development of therapies for hemophilia A
and B. Pre-clinical trials demonstrated the targeted in vivo
insertion of a factor IX transgene in primates, leading to normal
or higher levels of circulating human factor IX, which is typically
missing or defective in hemophilia B patients. Under the terms of
the new agreement, Regeneron will also have non-exclusive rights to
independently develop and commercialize up to 10 ex vivo
gene-edited products. (IHS Markit Life Science's Margaret
Labban)
Arkema today announced a long-term partnership with Nutrien,
the world's largest integrated fertilizer company, for the supply
of anhydrous hydrogen fluoride (AHF) to Arkema's Calvert City,
Kentucky, site. The project will secure Arkema's access to AHF, the
main raw material used in fluorine chemistry. It supports the
company's growth of fluoropolymers in the water treatment,
electronics, and batteries segments and offers greater
environmental protection than more traditional production
processes, the company says. As part of the agreement, Arkema will
invest $150 million to build a 40,000-metric tons/year AHF
production plant at Nutrien's Aurora, North Carolina, site,
scheduled to start up in the first half of 2022. About half the
capacity will be used in the production of polymers and fluoro
derivatives, and the rest for the production of
low-global-warming-potential fluorogases. AHF is used to make
products including fluoropolymers and specialty derivatives.
Europe/Middle East/ Africa
European equity markets rallied significantly for the second
consecutive day; Germany +3.9%, Italy +3.5%, France +3.4%, Spain
+3.0%, and UK +2.6%.
10yr European govt bonds closed lower across the region;
France/Spain/Germany +6bps, UK +5bps, and Italy +4bps.
iTraxx-Europe closed -2bps/65bps and iTraxx-Xover
-12bps/375bps. It's worth noting that iTraxx-Europe closed at its
best level since 4 March:
Brent Crude closed +0.6%/$39.79 per barrel and was as high as
$40.53 per barrel during APAC trading hours.
Argo AI, an autonomous and artificial intelligence (AI)
technology company, has announced the closing of its partnership
agreement with Volkswagen (VW) on 1 June. The deal, which was
reached in July 2019, includes a USD2.6-billion investment in Argo
AI by VW and will open up a presence for Argo AI in Europe. Argo AI
and parent company Ford both posted to their company blog sites
comments on the VW deal. VW announced on 28 May that its
supervisory board had approved the deal, as well as electric
vehicle (EV) and commercial vehicle projects and further unnamed
projects. (IHS Markit AutoIntelligence's Stephanie Brinley)
Seasonally adjusted German unemployment increased by another
238,000 in May, following April's jump by 373,000, thus reaching
2.875 million at the end of May. (IHS Markit Economist Timo Klein)
The Labor Agency has also calculated the effects of the
COVID-19 virus, estimating that it alone is responsible for a
monthly increase of 197,000 in May after 381,000 in April.
The combined impact of 578,000 roughly sets back the German
unemployment situation to late 2014, or at least to late 2015 when
looking at the unemployment rate that now increased from 5.0% in
March (close to 40-year lows) to 6.3% in May.
The Italian government's lockdown measures to contain the
spread of the COVID-19 virus closed parts of the economy during
April, triggering deeper employment losses during the month. (IHS
Markit Economist Raj Badiani)
Total employment fell by 1.2% month on month (m/m), equivalent
to 275,000 jobs, to 24.4 million in April. This had been preceded
by a 0.5% m/m drop in March.
In annual terms, the level of employment was 2.0% lower in
April compared with a year earlier.
Unexpectedly, the unemployment rate dropped to 6.3% in April,
the lowest rate since November 2007, and down from 8.0% in March
and 9.1% in February.
According to the Italian National Institute of Statistics
(Istituto Nazionale di Statistica: ISTAT), the fall in the
unemployment rate in both March and April was because of the rising
inactivity rate, with an increasing number of people neither
working nor looking for work. ISTAT argued that many laid-off
workers stopped looking for jobs during two months of
lockdown.
Indeed, the size of the labor force contracted by 3.0% m/m in
April, which implies that 758,000 fewer people were looking for
work when compared with March.
The employment losses were less severe than expected in April
and they appeared to be limited by Economy Minister Roberto
Gualtieri's move to suspend dismissal procedures from 23 February
until mid-August. Gualtieri has pledged repeatedly that "nobody
must lose their job because of the coronavirus". However, we
suspect that greater job destruction occurred among the
self-employed, service-sector workers on temporary contracts, and
those in the "grey" economy.
According to our May update, we anticipated a sharp climb in
the unemployment rate in April, helping to lift the average rate to
14.4% in 2020 from 10.0% in 2019. Given the falls in both March and
April, we are likely to cut the unemployment rate forecast for 2020
in our June update.
According to the Austrian Labour Market Service (AMS), there
were 473,300 unemployed people in Austria at the end of May, down
by 49,000 from April and up by 194,000 (69.7%) versus May 2019.
(IHS Markit Economist Timo Klein)
The annual gap has thus narrowed compared with April (76.3%),
but only modestly so.
The unadjusted unemployment rate declined from 12.8% to 11.5%
in May, but part of this is purely seasonal: the gap with the rate
a year ago (6.8%) was 4.7 percentage points, down from 5.5
percentage points in April but only matching the gap in March.
The added information of (seasonally unadjusted) daily data
shows that the peak was reached at 533,600 on 13 April, and further
declined by 60,000 until the end of May, mostly owing to the full
reopening of the retail sector and many services.
Vacancies, which had exceeded their year-ago level until
February, were down by 30% y/y in May (absolute level:
57,597).
Finally, dependent employment declined by 165,000 (or 4.4%) y/y
in May, following annual declines by 200,000 in April and 150,000
in March. The dip by 165,000 in combination with the unemployment
increase of 194,000 means that the labour force had fallen by
29,000 y/y (or roughly 0.6%), less severe than in April (-2.0%) but
still in sharp contrast to February's increase of 26,000
(0.6%).
According to the first estimate by the State Secretariat for
Economic Affairs (Secrétariat d'État à l'économie: SECO) of the
Swiss Economics Ministry, the country's real, seasonally and
calendar-adjusted GDP declined by 2.6% quarter on quarter (q/q) in
the first quarter of 2020, following steady moderate growth of
around 0.4% q/q in each of the four quarters of 2019. However, the
interim recession during the second half of 2018 (cumulatively
-0.4%) had already slowed annual growth in 2019 to 1.0% from 2.7%
in 2018. (IHS Markit Economist Timo Klein)
A closer look at the external sector reveals that exports of
goods and services (excluding valuables) increased by 1.1% q/q in
the first quarter, following an upwardly revised 0.2% q/q in the
fourth quarter of 2019.
The first-quarter increase was entirely driven by goods (3.4%
q/q), while exports of services were weak at -4.4% q/q.
By contrast, imports of goods and services (excluding
valuables) were depressed in both categories - goods posted -1.1%,
services -1.2% q/q.
Goods exports apparently benefited from especially strong
deliveries of chemical and pharmaceutical products, most notably to
the United States. This hides declining exports in most other
industrial sectors.
With respect to final domestic demand (-2.7% q/q in the
aggregate), the declines for investment in equipment (-4.0% q/q)
and private consumption (-3.5% q/q) stand out negatively.
GDP in the first quarter of 2020 dropped roughly to the extent
IHS Markit had predicted (-2.4% q/q) and thus we do not see a
pressing need to change our forecasts for 2020 and 2021
The Turkish new light-vehicle market decreased by 2.4% year on
year (y/y) in May to 25,073 units, according to data released by
the Automotive Distributors' Association (Otomotiv Distribütörleri
Derneği: ODD). (IHS Markit AutoIntelligence's Nitin Budhiraja)
Of this total, passenger vehicle sales were down by 7.6% y/y to
25,073 units during the month, while light commercial vehicle (LCV)
sales stood at 7,162 units, up by 21.6% y/y.
The country's light-vehicle market has now posted a
year-to-date (YTD) increase of 20.1% y/y to 183,095 units,
comprising 146,528 passenger vehicles, up by 21.7% y/y, and 36,567
LCVs, up by 13.9% y/y.
In the YTD, C-segment vehicles account for 60.1% of total
passenger vehicle sales in Turkey, with sedans being the most
preferred vehicle type, accounting for 44.7%.
In the LCV segment, vans account for 74.0% of total sales in
the YTD, followed by light trucks with 12.5%.
IHS Markit forecasts Turkish light-vehicle sales to decline to
463,000 units in 2020 from 479,061 units sold last year.
Asia-Pacific
APAC equity markets closed higher across the region; South
Korea +2.9%, Australia +1.8%, Hong Kong +1.4%, Japan +1.3%, India
+0.8%, and China +0.1%.
The city authorities of Chinese capital Beijing are considering
adding 20,000 new energy vehicle (NEV) license plates for car-less
families that intend to make a purchase. According to the draft
regulations released by the Beijing Municipal Commission of
Transport as part of a public consultation, the extra NEV
license-plate quota is planned for this year. The city is drafting
a plan to set up a credit system for "car-less families" interested
to joining the lottery system by which license plates are
allocated. (IHS Markit AutoIntelligence's Abby Chun Tu)
The China Association of Automobile Manufacturers (CAAM) on 3
June released estimates of new vehicle sales in China in May prior
to its monthly briefing. According to a statement posted by the
association on its WeChat social media account, it expects new
vehicle sales in China to reach 2.136 million units in May, up 3.2%
month on month and up 11.7% year on year (y/y). From January to
May, new vehicle sales in China are expected by CAAM to reach
around 7.9 million units, down by 23.1% y/y. The estimates are
based on May's sales reports released by major automotive groups in
the country. IHS Markit expects more details to be released by CAAM
in the coming week. (IHS Markit AutoIntelligence's Abby Chun
Tu)
Yandex has announced that it will maintain its Detroit,
Michigan, operations as a US hub of its autonomous vehicle fleet,
reports Automotive News. According to the report, Yandex was one of
several companies contracted to provide autonomous vehicle
transportation for the reworked 2020 North American International
Auto Show, which has been postponed to 2021. Despite the show's
cancellation, Yandex will test its autonomous car that it developed
with Hyundai Mobis in the area, the report says. Yandex unveiled
its fourth-generation of autonomous vehicle based on the 2020
Hyundai Sonata, which features an increased number of cameras from
six to nine and in which the radars have been moved, among other
efforts, to improve its system. (IHS Markit AutoIntelligence's
Stephanie Brinley & Surabhi Rajpal)
New vehicle sales in Australia fell 35.3% year on year (y/y)
during May to 59,894 units, according to data from the Federal
Chamber of Automotive Industries (FCAI). Sales of passenger cars
shrank 52.1% y/y to 13,836 units, while the sport utility vehicle
(SUV) segment posted a decline of 30.0% y/y to 28,652 units during
the month. Light commercial vehicle (LCV) sales totaled 14,791
units, down 22.9% y/y, and heavy commercial vehicle (HCV) sales
stood at 2,615 units, down 26.5% y/y. According to CarAdvice,
Toyota was the leading automaker in May with a 24.2% market share
and sales of 14,466 units, followed by Mazda with a 9.5% market
share and sales of 5,661 units and Hyundai with a 6.9% market share
and sales of 4,109 units. (IHS Markit AutoIntelligence's Nitin
Budhiraja)
Facebook's messaging platform WhatsApp and PayPal have invested
in ride-hailing company Gojek as part of the Indonesian company's
ongoing Series F funding round. Both participants did not disclose
the investment size or the stakes that they would receive, reports
Reuters. Cameron McLean, market head at PayPal International, said,
PayPal's "payment capabilities would be integrated into Gojek's
services". WhatsApp, in partnership with Gojek, plans to support
the growth of millions of small businesses in Indonesia. This move
might strengthen WhatsApp's presence in Indonesia, where it has
more than 100 million users. PayPal's investment in Gojek would
accelerate digitalization in the country by connecting leading
marketplaces and payment networks. (IHS Markit Automotive
Mobility's Surabhi Rajpal)
During May 2020, total imported coal arrivals into India was
quite weak and calculated at just 12mt, which is 10.8mt lower than
previous year levels. Thermal and metallurgical coal arrivals for
the said period calculated at 8.2mt (down 9.7mt y-o-y) and 3.8mt
(down 1mt y-o-y), respectively. Despite majority of locations in
India not under lockdown, the country is still facing challenges in
terms of weak domestic demand from consumption side to difficulty
in finding laborer's and workers to restart the factories and also
in arranging logistics as majority of truck drivers had abandoned
their vehicles and went back to their native places. (IHS Markit
Maritime & Trade's Rahul Kapoor and Pranay Shukla)
Tata Motors announced in a filing to the Bombay Stock Exchange
(BSE) yesterday (2 June) that it has resumed operations at all its
vehicle plants in India, and its Jamshedpur plant received approval
on 27 May. (IHS Markit AutoIntelligence's Isha Sharma)
The automaker added that around 59% of its passenger vehicle
showrooms have restarted operations, and around 90% of suppliers in
the commercial vehicle segment have received permissions to restart
operations.
Of this, only 60% of suppliers have been able to start
supplies, while 98% of suppliers in the passenger vehicle segment
have received permissions and also restarted operations.
Revealing its plans to improve liquidity, the company stated in
the filing that, "As of 31 March 2020, the company had cash and
cash equivalent of INR47 billion [USD626.5 million], and undrawn
credit facility of INR15 billion.
To further shore up the liquidity, the company has issued
commercial papers of INR35 billion and also raised INR10 billion
through non-convertible debentures [NCDs]."
Indian peanut processors are starting to suffer a financial
squeeze after the government decreed the extension of confinement
measures until June 30, setting some relief measures to strengthen
consumption. The harvest of Java variety is taking place in the
state of Gujarat just now, according to the Indian processor and
trader PnutKing in its latest market update. Farmers expect a
strong crop. Traders and processors are minimizing orders as their
stocks are totally replenished due to weak consumption during
lockdown. PnutKing reported that many small processors are ready to
close for financial reasons. The impact of the damage on the
industry will depend on the speed of the recovery in consumption.
(IHS Markit Agribusiness' Jose Gutierrez)
Moody's has downgraded the Maldives' ratings to B3 from B2, and
maintained a Negative outlook. These downgrades come as a result of
the shocks to the tourism sector caused by the COVID-19 virus
pandemic, which in turn will severely weaken the country's fiscal
and external positions, all without sufficient buffers to counter
any resulting deterioration. (IHS Markit Economist Andrew Vogel)
The coronavirus disease 2019 (COVID-19) virus pandemic has
caused a severe shock to the Maldives' tourism sector, which
Moody's cites as accounting for 60% of GDP, in addition to being a
major source of government revenue and foreign-exchange earnings.
Even if tourism activity were to return by late 2020, Moody's still
projects an economic contraction of more than 10% for the
year.
This shock will place substantial pressure on government
finances and the country's liquidity position. With Moody's
expecting a sharp increase in the fiscal deficit through 2022,
financing needs will also rise sharply despite the country's
limited ability to secure external financing and its weak domestic
position.
Posted 03 June 2020 by Chris Fenske, Head of Fixed Income Research, Americas, IHS Markit
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