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US and European benchmark government bonds sold off in tandem
today, with US 30yr bond yields almost increasing by double digits
(basis points). US and APAC equity markets closed mixed, while
European equity markets were lower across the region. Oil and gold
both closed lower, while iTraxx and CDX credit indices were close
to unchanged on the day. Fed Chair Powell shared details today on
the Fed's upcoming major shift in how they will react to inflation
and US initial claims for unemployment insurance failed to fall
back below 1,000,000 new claims last week.
Americas
US equity markets closed mixed; DJIA +0.6%, Russell 2000 +0.3%,
S&P 500 +0.2%, and Nasdaq -0.3%.
10yr US govt bonds closed +6bps/0.76% yield and 30yr bonds
closed +9bps/1.51% yield.
CDX-NAIG closed +1bp/68bps and CDX-NAHY +1bp/372bps.
Gold closed -1.0%/$1,952 per ounce.
Crude oil closed -0.8%/$43.04 per barrel.
Following a more than yearlong review, Powell said Thursday
that the Fed will seek inflation that averages 2% over time, a step
that implies allowing for price pressures to overshoot after
periods of weakness. It also adjusted its view of full employment
to permit labor-market gains to reach more workers. The new
strategy, outlined by Powell in a speech delivered virtually for
the central bank's annual policy symposium traditionally held in
Jackson Hole, Wyoming, is being undertaken to tackle years of
too-low inflation. It hands the central bank flexibility to let the
job market run hotter and price pressures float higher before
taking action as it may previously have done. (Bloomberg)
US seasonally adjusted initial claims for unemployment
insurance, at 1,006,000 in the week ended 22 August, remained at
historically high levels, although well below the all-time high of
6,867,000 in the week ended 28 March. (IHS Markit Economist Akshat
Goel)
The seasonally adjusted number of continuing claims (in regular
state programs), which lags initial claims by a week, fell by
223,000 to 14,535,000 in the week ended 15 August. The insured
unemployment rate in the week ended 15 August fell 0.2 percentage
point to 9.9%.
There were 607,806 unadjusted initial claims for Pandemic
Unemployment Assistance (PUA) in the week ended 22 August. In the
week ended 8 August, continuing claims for PUA fell by 252,004 to
10,972,770.
In the week ended 8 August, 1,407,802 individuals were
receiving Pandemic Emergency Unemployment Compensation (PEUC)
benefits.
The Department of Labor provides the total number of people
claiming benefits under all its programs with a two-week lag. In
the week ended 8 August, the unadjusted total fell by 1,042,323 to
27,017,232.
Beginning with the next release, the method of seasonal
adjustment will be switched from multiplicative to additive. Over
the last several months, and especially in March, multiplicative
adjustment has resulted in differences between adjusted and
unadjusted figures that are too large to be reasonably accounted
for by seasonality. Switching to additive adjustment will fix this
issue.
The US Pending Home Sales Index (PHSI) climbed 5.9% to 122.1 in
July, its best reading since October 2005—and not too distant
from the 127.0 record high set in July 2005. Four months earlier,
at the end of April, the index recorded an all-time low of 69. (IHS
Markit Economist Patrick Newport)
All four indexes have posted solid gains in the past three
months. For the first time since April 2006, all four regional
indexes are above the 100 threshold.
The South, which accounted for 44% of existing home sales in
July, soared to an all-time high, despite the raging pandemic.
What's driving sales? Mostly, it's near-record-low mortgage
rates, pent-up demand, and record-low inventories, which have led
to bidding wars and a rush to buy.
For those able to work from home living in cities, such as San
Francisco, Boston, or New York, where real estate is pricey, it is
a good time to cash out and move into a larger, less-expensive
house where traffic is never a problem. It is unclear how much this
new development—the ability to work from home—is also
driving sales.
Applications to buy homes remain strong, according to the
Mortgage Bankers Association. Its Purchase Index for the week
ending 26 August was 33% higher than a year earlier, according to a
report released yesterday (26 August).
The PHSI leads existing home sales by a month or two, according
to the National Association of Realtors. Expect solid existing home
sales, likely higher than July's 13-year high, in August or
September or both.
The below chart uses IHS Markit's mutual fund holdings database
to quantify the degree of dispersion in the prices on individual
bonds used to calculate NAVs for US funds holding municipal bonds.
The analysis includes 58,851 bonds for the December 31, 2019 (green
line) reporting date and 68,163 for March 31, 2020 (orange line).
The graph shows the number of bonds that fall into each price range
(maximum-minimum price for each CUSIP). It is important to note
that approximately 54,000 bonds on December 31, 2019 and 57,000
bonds on March 31, 2020 had a max/min price range of only 0-2
dollars (not shown in graph due to scale). The graph highlights the
sharp increase in price disparity in March due to the extreme
volatility across all sectors that month, with the data indicating
over 11,000 bonds on the March 31, 2020 reporting date had a price
difference of three dollars or more.
According to the Financial Times (FT), one-fifth of S&P 500
companies were trading on 21 August at more than 50% below their
peak values. (IHS Markit Economist Brian Lawson)
The same source cited Cornerstone Macro data suggesting that
the average member of the index was 28.4% below its peak.
Technology shares were up 27% in 2020, and those in consumer
discretionary activities by 23%.
Conversely, from a base of 19 February valuations, energy
stocks were the worst performing in the index, down by 34.2%,
followed by financials with a 21.6% loss.
Industrials, real estate and utilities were down by 9.3%, 13.3%
and 15.5% respectively.
Even in outperforming sectors performance divergence is very
strong. Within the consumer area, as an example cited by the FT,
Amazon (which has a 43% weighting in the sector's index presence)
had appreciated 78% in 2020, while Carnival (cruise line) and Ralph
Lauren have fallen by over 40%.
The S&P 500 equally weighted index (not market cap
weighted) is currently 6% below it's all time high set on 12 Feb of
this year.
Most chemical producers along the US Gulf Coast have been
spared any substantial impact from Hurricane Laura, which has been
moving north through Louisiana since making landfall 30 miles east
of the Texas border at 1 a.m. CDT. The storm, which hit the coast
with sustained winds of 150 miles/hr, at the high end of category 4
status, seems to have focused its attention on Lake Charles,
Louisiana. Photos from the area show skyscrapers with half their
windows blown out, and though the storm is rapidly losing strength,
the National Hurricane Center (NHC) warns that damaging winds will
continue over portions of northern Louisiana and Arkansas into this
evening. Laura has been rapidly weakening as it heads inland, says
NHC. The storm surge will result in dangerously elevated water
levels into early afternoon for the Gulf Coast from Sabine Pass,
Texas, to Port Fourchon, Louisiana, says NHC, and in some areas
where surge penetrated far inland, floodwaters will not fully
recede for several days. Producers located in Houston, Port Arthur,
and Beaumont were largely spared, and market sources expect the
steam crackers and polyolefins units in the area to be back online
today and tomorrow. However, the steam crackers around Lake Charles
could be offline for weeks, affecting about 12% of US ethylene
capacity, while polyolefins units in the area could be down for a
week. Operations around Geismar, Louisiana, were also unaffected,
and the Port of New Orleans had already reopened before noon. The
Port of Houston was slated to resume container exports on Friday.
The most visible damage in the Lake Charles area this morning
occurred at BioLab, a small producer of trichloroisocyanuric acid
and disodium isocyanurate, biocides, and disinfectants. A fire
onsite was producing a billowing plume of dark smoke as of
mid-morning.
US ag exports are forecast to reach $140.5 billion in Fiscal
Year (FY) 2021, with exports to China expected to rise to $18.5
billion, up $4.5 billion from the level expected in FY 2020,
according to USDA's latest Outlook for US Agricultural Exports. For
FY 2021, USDA also forecasts imports of $136 billion, which would
be a new record high, leaving a trade surplus of $4.5 billion. The
growth in ag exports expected for FY 2021 "is primarily driven by
higher exports of soybeans and corn," USDA said. "Soybean exports
are forecast up $4.2 billion from FY 2020 to $20.4 billion, largely
due to expected strong demand from China and reduced competition
from Brazil," the report detailed. Meanwhile, "Corn exports are
projected up $700 million to $9.0 billion on expectations of higher
export volume." Other FY 2021 increases include horticultural
product exports, which are expected to rise $500 million to $35.0
billion, "with increasing sales of tree nuts and miscellaneous
products," USDA said. Livestock, poultry, and dairy exports are
also forecast higher in FY 2021, up $500 million to $32.3 billion,
"led by higher beef and veal, variety meat, dairy and poultry
exports." Bucking the trend is cotton, with USDA forecasting FY
2021 exports down $400 million to $5.0 billion, due to "smaller
volume and unit values." The rise in ag imports USDA expects in FY
2021 is attributed "largely to a $3.9 billion increase in
horticultural products, and a $700 million increase in grain and
feed imports," USDA said. (IHS Markit Food and Agricultural
Policy's Richard Morrison)
Ford is working with Bosch and real-estate company Bedrock on
an automated valet-parking demonstration project in Detroit,
Michigan, United States. The project began in August and runs until
the end of September, with the three partners planning to
demonstrate the system to consumers, the media, and technical
stakeholders. The demonstration system is located at Bedrock's
residential redevelopment project in the Corktown neighborhood of
Detroit and is near Ford's new mobility innovation district center
in the city. The automated valet parking (AVP) system was developed
by Bosch and leverages infrastructure to communicate automated
vehicle parking directions, rather than using self-driving software
onboard the vehicle. In this demonstration project,
infrastructure-based sensors are located in Bedrock's Assembly
Garage, a new parking garage in the city. Vehicles using the Bosch
AVP can drive themselves through the garage and automatically park
themselves. The Ford vehicles are equipped with
vehicle-to-infrastructure (V2I) technology and communicate with
Bosch's intelligent parking infrastructure. The infrastructure's
sensors recognize and localize the vehicle and potential hazards
and guide the parking maneuver, rather than relying on a
self-driving system in the vehicle; however, there is hardware in
the vehicle that enables the communication and access to the
vehicle systems. (IHS Markit AutoIntelligence's Stephanie
Brinley)
Lucid Motors has shared more details of its upcoming Air
electric sedan as the reveal date approaches (see United States: 18
June 2020: Lucid plans to reveal Air sedan on 9 September). On 26
August, Lucid announced that its "Space Concept" architecture will
maximize the model's interior space with a miniaturized electric
drivetrain and battery pack. The dual-motor version will have a
113-kWh extended battery pack and deliver up to 1,000 horsepower.
Lucid says that the Air sedan will offer more interior space than
competing luxury vehicle and EV offerings, including having the
largest EV front trunk to date, with 280 liters of space and 739
liters of luggage space in total. In a statement, Lucid said the
concept "capitalizes upon the miniaturization of Lucid's in-house
developed EV drivetrain and battery pack to optimize interior cabin
space within Lucid Air's relatively compact exterior footprint".
The statement also refers to Lucid's full-canopy glass roof. (IHS
Markit AutoIntelligence's Stephanie Brinley)
Voyage has shared the details of its first production-ready
robotaxi, the G3, designed to operate without a driver behind the
wheel. The G3 is a modified Chrysler Pacifica Hybrid minivan
equipped with "driverless-ready vehicle platform" with updated
software, sensors and computing power developed in partnership with
Nvidia and Blackberry. Voyage said G3 robotaxi deploys three
distinct features that are crucial for driverless vehicle
operations. The first feature Voyage calls it a "commander", which
acts as the brain of the G3 as it enables autonomous point-to-point
driving. The second feature is "shield" that acts as an advanced
driver assist system with collision avoidance to bring the vehicle
to a safe stop if necessary. The third feature is called
"Teleassist" that allows an operator to remotely monitor the G3
over a cellular connection to handle any unexpected situations on
the road. Voyage has also partnered with GHSP, a global supplier of
automotive systems, to deploy ultraviolet-C (UV-C) light in the G3
to reduce the risk of COVID-19 exposure. The rays are used to
sterilize ambulances and hospital rooms to destroy viruses, fungus
and bacteria. (IHS Markit Automotive Mobility's Surabhi
Rajpal)
Canada's current-account deficit narrowed by $4.6 billion to
$8.6 billion. The goods account deficit decreased by $1.0 billion
to $7.7 billion, mainly owing to the small surplus in motor
vehicles and parts. (IHS Markit Economist Chul-Woo Hong)
The services account deficit improved by $4.3 billion to $0.2
billion as the travel balance turned into a $2.0-billion surplus,
which was the first surplus since the third quarter of 1986.
The primary income surplus fell by $0.9 billion to $0.2 billion
while the secondary income deficit slightly narrowed to $1.0
billion.
Total goods exports and imports plunged 23.7% quarter on
quarter (q/q) and 23.0% q/q, respectively, in the second quarter
because of the negative impact from the COVID-19.
On balance, the biggest decline was the energy products
surplus, which was down by $5.6 billion to $8.2 billion.
It was followed by metals ores and non-metallic mineral
products (down by $1.8 billion) and metals ores and non-metallic
minerals (down by $1.1 billion).
On the other hand, the balance of motor vehicles and parts
increased to a $0.3-billion surplus, which was the first surplus
since the second quarter of 2006 as imports (down 66.9% q/q)
plummeted more than that of exports (down 56.2% q/q).
Moody's Investors Service has downgraded Chile's medium-term
sovereign rating outlook to Negative from Stable. The rating
remains unchanged at A1, equivalent to 15/100 on IHS Markit's
scale. (IHS Markit Economist Ellie Vorhaben)
Moody's has left Chile's medium-term rating unchanged at A1,
but says the Negative outlook is warranted because of the fiscal
impact that the COVID-19 pandemic will have on the country's fiscal
deficits and debt levels.
Without fiscal consolidation measures put in place, debt will
continue rising amid heightened fiscal deficits. This will weaken
the fiscal buffers, which have historically been a strong supporter
of Chile's investment grade rating.
The main reason Moody's is less optimistic about future of
fiscal reform is that several political and social events over the
short term will make it difficult politically to implement fiscal
consolidation (austerity) measures.
These include elections in 2021, constitutional reform set to
begin in fall (autumn) 2020, and growing demand for policies that
equalize economic opportunity. Furthermore, the deep recession
forecast for 2020 will leave little appetite for revenue-raising or
cost-saving measures.
If the Chilean government were able to prove its commitment to
fiscal reform, this could warrant an upgrade back to a Stable
outlook. In the past, Chile's adherence to fiscal prudence and its
solid governance and policy effectiveness indicators garnered it an
investment grade rating; ensuring these indicators remain strong
will be key to maintaining this rating.
Europe/Middle East/Africa
European equity markets closed lower across the region; Italy
-1.4%, UK -0.8%, Germany -0.7%, and Spain -0.5%.
10yr European govt bonds closed lower across the region; UK
+4bps, Spain +2bps, and Italy/Germany +1bp.
iTraxx-Europe closed flat and iTraxx-Xover -2bps/321bps.
Brent crude closed -1.3%/$45.55 per barrel.
Distressed corporate borrowing has eased but the data on
Eurozone households' loan demand and credit conditions augur poorly
for consumer spending prospects beyond the short-term bounce. (IHS
Markit Economist Ken Wattret)
July's "hard" lending data from the European Central Bank (ECB;
which are adjusted for loan sales and securitization effects)
showed the second successive moderation in the year-on-year (y/y)
growth rate for loans to non-financial corporations (NFCs).
The y/y rate of increase remained relatively elevated, at 7.0%,
double its trend prior to the COVID-19 virus shock (see first chart
below). However, the monthly flow of loans to NFCs has shown a
clear moderation, following a record pace of increase at the height
of the disruption to the economy in March and April.
With businesses in extreme distress during that period, demand
for loans surged. This was also captured in the ECB's bank lending
survey (BLS) for the second quarter, with the net percentage of
banks reporting an increase in loan demand from enterprises soaring
to +62, a record high
The BLS reported much higher demand for short-term loans (net
percentage +60) than long-term loans (+11), with financing needs
for inventories and working capital rocketing, while financing
needs for fixed investment declined.
This is echoed in the breakdown of July's "hard" lending data,
with growth in loans to NFCs with a maturity of over 5 years (6.4%
y/y) not increasing anywhere near as quickly as loans with a
maturity of 1 to 5 years (16.5% y/y).
In contrast to the data for NFCs, loan growth to the eurozone's
household sector has been comparatively low and stable, remaining
unchanged at 3.0% y/y in July for the third straight month.
However, the headline rate of change masks continued divergence
between relatively elevated loan growth for house purchases (4.2%
y/y in July) and the collapse in consumer credit (just 0.2% y/y in
July, down from over 6% in February
Passenger car production in the United Kingdom continued to
fall in July compared with the corresponding month last year.
According to the latest data published by the Society of Motor
Manufacturers and Traders (SMMT), passenger car output last month
dropped by 20.8% year on year (y/y) to 85,696 units. Of this total,
72,262 units were designated for export, a decline of 16.8% y/y,
and 13,434 units were for domestic sale, down 37.1% y/y. This means
that year-to-date (YTD) volumes are now down by 39.7% y/y at
467,053 units due to the stoppages caused by the coronavirus
disease 2019 (COVID-19) virus earlier in the year. However, the
SMMT has also announced that commercial vehicle production
witnessed a stronger month in July with a gain of 3.6% y/y to 5,234
units. Of this total, the number of vehicles built for export
increased by 4.8% y/y to 2,905 units, while those for domestic sale
rose 2.1% y/y to 2,329 units. However, output of vehicles in this
category remains down 21.2% y/y in the YTD at 31,655 units. (IHS
Markit AutoIntelligence's Ian Fletcher)
According to France's National Institute of Statistics and
Economic Studies (Institut national de la statistique et des études
économiques: INSEE), French business confidence index stood at 91
in August, thus continuing a gradual climb back from the all-time
low of 53 in April. The employment climate has also improved to 88,
from an all-time low of 49 in April. (IHS Markit Economist Daniel
Kral)
Confidence across all the main sectors continued to improve in
August. Business climate in services and retail trade was up by 5
points to 94 and 93, respectively. Business climate in
manufacturing was up by 10.5 points to 93.
Compared with February, prior to the COVID-19 virus outbreak,
confidence in manufacturing experienced the shallowest decline and
staged the largest recovery. This is consistent with the crisis
having the largest impact on the services sector, such as
hospitality, travel, and entertainment.
Despite the gradual improvement, all the business confidence
indices remained well below the long-term average of 100.
In a separate quarterly survey, INSEE reports that business
managers in the manufacturing industry in July further lowered
their nominal investment forecast for 2020 compared with April.
They now expect a contraction of 11%, compared with 7% in
April.
The 2020 investment forecast has been downgraded in every
sub-sector, most notably in the electrical, electronic, and
machinery and equipment sector (growth rate updated from +1% to
−5%) and in the transport equipment sector (updated from −16% to
−20%). The agrifood industry has registered the slightest revision
(from −3% to −5%).
German generics and over-the-counter (OTC) medicines major
Stada has announced that its sales grew on a reported basis by 16%
year on year (y/y) in the first half of 2020 to EUR1.465 billion
(USD1.731 billion). Organic sales growth - which does not include
the new product lines acquired during the reporting period -
amounted to 9% y/y. Sales of generics during the period increased
by 12% y/y to EUR833.4 million, while sales of "branded products"
(OTCs) were up 22% y/y at EUR631.9 million. The company has
reported that the first quarter of 2020 showed particularly strong
growth resulting from stockpiling by wholesalers, pharmacists, and
patients, while the second quarter was characterized by
considerable purchasing restraint, which particularly affected
Stada's large markets in which the self-payor model dominates
(including Russia and Serbia). (IHS Markit Life Sciences' Brendan
Melck)
Mercedes-Benz is set to open its new Industry 4.0 'Factory 56'
digital production facility on 2 September, according to a company
statement. The new facility is near Mercedes-Benz's existing
facility at Sindelfingen and will use the latest Industry 4.0
manufacturing technology to create the most modern and flexible
plant in Mercedes-Benz's current production network. The
traditional production line will be replaced at Factory 56 by
driverless transport systems in selected production areas - which
are referred to as "TecLines" - for example at the beginning of the
trim line. This moves from the traditional assembly operation to
cycle operation, whereby the vehicle remains in position and is not
continuously moved along the line. This makes automated activities
such as installing sun roofs easier and means individual assembly
units can be expanded and altered without interfering in the
building's physical structure. In addition the plant's systems and
equipment and fully linked and networked and can communicate with
each other using a high-performance wireless network and mobile
network form the basis for this with 5G-mobile phone technology
having been tested in trial production. (IHS Markit
AutoIntelligence's Tim Urquhart)
Pony.ai has collaborated with Bosch's Automotive Aftermarket
division in North America for maintenance of its autonomous
vehicles (AVs). This partnership will enable Pony.ai to use Bosch's
Car Service network in more than 20,000 locations across the world,
of which more than 1,000 are in North America. The new maintenance
solutions will enable efficient and scalable operation of
commercial autonomous fleets. Pony.ai said it began piloting a
maintenance program with Bosch in the San Francisco Bay Area in
early July. Matthias Tan, director of product and partnerships at
Pony.ai, said, "Autonomous vehicles are incredibly complex and
continuously evolving systems which need to be maintained to the
highest standards possible. We needed a partner who was capable of
delivering high quality fleet maintenance services, and wanted to
seize the opportunity for joint innovation in fleet management
solutions for autonomous vehicles." (IHS Markit Automotive Mobility
Surabhi Rajpal)
According to the first estimate by the State Secretariat for
Economic Affairs (Secrétariat d'État à l'économie: SECO) of the
Swiss Federal Department of Economic Affairs, the country's real,
seasonally, and calendar-adjusted GDP declined by 8.2% quarter on
quarter (q/q) in the second quarter, sharply extending the
first-quarter drop of 2.5% q/q. (IHS Markit Economist Timo Klein)
This follows average quarter-on-quarter growth of 0.6% during
2019 and full-year growth of 1.2% in 2019 (revised up from
1.0%).
The year-on-year (y/y) rate - based on the same seasonally and
calendar-adjusted series - had strengthened during 2019 to an
interim peak of 2.2% in the final quarter, but deteriorated to
-0.8% in the first quarter and -9.4% in the second quarter. This is
the largest drop by far in the history of the current series that
goes back to 1980.
The second-quarter breakdown of expenditure components reveals
an above-average decline in domestic demand (including a depressing
impact from destocking) and a somewhat surprising offsetting boost
from net exports.
Noting that we regularly track external trade numbers that
exclude valuables (most importantly non-monetary gold) to remove
their distorting effect from the analysis of cyclical developments,
exports did not fall quite as steeply as we had anticipated and
imports concurrently posted an even larger decline than
projected.
The resulting positive contribution of net exports to q/q GDP
growth is 1.1%. However, these data often experience large
revisions: the initial first-quarter result for net exports had
been a positive contribution of 1.2% and has now been revised to
-0.6%.
A closer look at the external sector reveals that exports of
goods and services (excluding valuables) declined by 11.2% q/q in
the second quarter, extending the previous quarter's -1.3%. This
was driven less by goods (-9.4% q/q) than by services (-15.9%).
This applies similarly to imports of goods and services (excluding
valuables), with their overall decline of -16.9% q/q being divided
into -14.3% for goods and -22.2% for services. Goods trade,
especially with respect to exports, was supported by the resilience
of Switzerland's largest sector, chemicals and pharmaceuticals. In
contrast, services suffered from the restrictions imposed on all
activities involving public gatherings. This includes tourism, but
the SECO points out that Switzerland's dependence on tourism is
smaller than in most of its neighboring countries (this alludes to
Austria and Italy in particular).
The trend of European farmers rarely going online to buy feed
additives could be declining, according to McKinsey. While farmers
in Europe are early adopters in the areas of yield improvement,
sustainability and animal welfare, McKinsey suggested their general
view of online purchasing has previously been skeptical. The
company surveyed over 1,000 farmers across Belgium, Denmark,
France, Germany, the Netherlands, Poland and Spain in 2019. The
firm found only 13% of respondents had made online purchase of
seeds, fertilizer, crop protection, animal feed/feed additives,
farm equipment or software/agritech in the previous 12 months. Only
3% had bought animal feed additives in the last year. However, a
follow-up survey in May 2020 found a much higher percentage of
respondents now prefer to purchase agricultural products online.
McKinsey noted: "There is an opportunity for companies in the
agriculture industry to accelerate their online presence, work out
omnichannel strategies and maybe even change their business models
entirely to meet farmers' needs better." While many farmers do not
purchase much online, more than half of dairy and livestock farmers
use animal health optimization software - a clear sign of their
willingness to take on new technologies. McKinsey estimated the
European online agriculture market is currently worth only €150
million to €200 million ($177 million to $236 million). "The slow
development of the online agriculture retail market in Europe is,
in many ways, a self-inflicted wound," the firm explained. "It just
isn't easy enough for farmers to go digital. Indeed, at a number of
points along the customer decision journey, it is almost painful.
(IHS Markit Animal Health's Joseph Harvey)
Türkiye Petrolleri A.O. (TPAO) has made the largest gas
discovery ever in the Black Sea, according to Turkish President
Recep Tayyip Erdoğan. TPAO, the Turkish state-run oil and gas firm,
said that the Tuna-1 exploration well in the western Black Sea had
discovered a gas deposit with the potential to yield more than 320
Bcm using its Fatih drillship. Erdoğan himself announced the
discovery on live television on 21 August, reflecting the potential
importance of the discovery for Turkey, which relies on imports for
more than 95% of its gas demand. Erdoğan said that the deepwater
find in the Sakarya Block license would be fast-tracked for
development, with a target production start date in 2023. The
Tuna-1 exploration well, drilled to a depth of 4,525 m, is a
significant gas discovery, with a reported 100-meter gas-bearing
reservoir, although developing the find presents a number of
operational challenges for TPAO. The deposit is located in 2,115 m
of water in the Sakarya Block license, which lies 160 km north of
Turkey's Zonguldak province, close to the Bulgaria-Romania border.
Moreover, the target 2023 start date for first production as laid
out by President Erdoğan - geared to correspond with the 100th
anniversary of the founding of the Republic of Turkey - represents
an extremely ambitious timetable, particularly given TPAO's
relative lack of deepwater experience. The state company, which
holds 100% of the license, may need to bring in external partners
for financial and technical assistance in order to convert the gas
find into production. (IHS Markit E&P Terms and Above-Ground
Risk's Andrew Neff)
The Belarusian and Chinese agreement is part of a project of
the Caofeidian collaborative development demonstration area
(Caofeidian District) within the framework of the Belt & Road
initiative, according to the Belarus' Ministry of Agriculture. The
agreement envisions the development of mutually beneficial
cooperation between the two countries, the completion of contracts
for the mutual supply of products, along with investment
cooperation and participation in joint projects in both Belarus and
China. During the ceremony, Deputy Minister Igor Brylo noted a
positive trend in the development of cooperation in the
agro-industrial complex between the two countries. In the first
half of 2020, the exports of Belarusian foodstuffs to China were
pinned at USD110.9 million, 2.7 times higher than in the same
period last year. More than half of exports (52.5%) are supplies to
the Chinese meat market products with over 18,0000 tons shipped in
the past 6 months. Meanwhile, more than 85,000 tons of dairy
products were exported to China this year valued at USD32.5
million, it indicated. To date, 56 milk processing organizations,
17 meat processing plants, 9 poultry factories, 7 fish processing
organizations and 4 beet pulp production plants have been
accredited for the right to supply products to China, it added.
(IHS Markit Food and Agricultural Policy's Louisa Sabin)
The National Bank of Tajikistan (BMT) reported that the
country's GDP grew by 3.5% year on year (y/y) in January-June 2020.
The negative impact of the spread of the COVID-19 virus slowed
growth sharply from reported 7.0% y/y expansion in the first
quarter. (IHS Markit Economist Andrew Birch)
The report pointed to lost remittance inflows from migrant
workers and lost investment from China because of closed borders as
the reason for the deceleration of growth. Additionally, COVID-19
restrictions within Tajikistan would also have undermined domestic
economic activity.
In a separate announcement, the BMT reported that labor migrant
remittances were down by USD174 million from a year earlier, a fall
of about 14.8% y/y.
The Russian central bank, meanwhile, reported remittance flows
to Tajikistan had dropped by 23.3% y/y. While Tajik workers are
also prevalent in Kazakhstan and elsewhere, the bulk of Tajik
workers are in Russia.
On 26 August, Fitch downgraded the long-term issuer default
rating of HSBC Oman (BB), Ahli Bank (B+), and Bank Muscat (BB). The
downgrades stem from a sovereign-level downgrade and credit risks
resulting from the COVID-19-virus pandemic. The agency also revised
the outlook for Sohar International Bank from Stable to Negative,
owing to the bank's reliance on less stable funding sources. The
ratings of BB and B+ are equivalent to ratings of about 50 and 55,
respectively, on IHS Markit's 0-100 rating scale. (IHS Markit
Banking Risk's Gabrielle Ventura)
These rating changes follow a similar move by Moody's in
March.
As noted previously, amid the global shock of the spread of the
COVID-19 virus and the oil-price war between Saudi Arabia and
Russia, the rating downgrades will make funding costs for Omani
banks higher relative to regional peers, weighing on
profitability.
IHS Markit agrees with Fitch's assessment of increasing credit
risk and the potential withdrawal of government deposits from local
lenders during the COVID-19-virus pandemic. However, given the size
and state ownership of Bank Muscat, which accounts for about 34% of
the total banking sector assets, the Sultanate will provide
liquidity and capital support for the bank if necessary.
HSBC Oman and Ahli Bank each account for around 7% of the total
banking sector assets. Given their smaller size and foreign
ownership, it is less likely that the Sultanate will provide
support for these lenders. However, the banks are likely to receive
funding from their foreign parent banks if necessary.
Asia-Pacific
APAC equity markets closed mixed; South Korea -1.1%, Hong Kong
-0.8%, Japan -0.4%, India +0.1%, Australia +0.2%, and Mainland
China +0.6%.
Chinese industrial profit rose 19.6% year on year in July, the
third consecutive expansion since May and the fastest growth in two
years, according to the release by the National Bureau of
Statistics (NBS). (IHS Markit Economist Yating Xu)
The continuity of the recovery growth came from narrowing
industrial deflation, declining unit operating cost and fees as
well as sharp increase in investment revenue. However, revenue
growth moderated in July.
The year-to-date industrial profit remained in 8.1%
year-on-year contraction, narrowing by 4.7 percentage points from
the previous month.
By sector, 32 among the 41 surveyed sectors reported
year-on-year profit increase in July, up from only 23 in June.
Profit performance varied across sub-sectors with equipment
manufacturing leading the growth while upstream mining and raw
materials deteriorated.
With the strength of infrastructure investment, home appliance
exports as well as the environment protection standard upgrade,
equipment manufacturing profits expanded 44.3% in July, up from
14.3% year-on-year growth in June, driving up headline industrial
profits by 13.8 percentage points.
Particularly, profits in auto and special-purpose equipment
rose 12.5% year on year and 44.3% year on year respectively.
Meanwhile, daily necessities, such as tobacco and agricultural
foods registered profit growth of 14.9% year on year and 53.9% year
on year respectively.
Inventory pressure continued to ease as the increase in
inventory of finished goods slowed for the fourth consecutive month
to 7.4% year on year at the end of July, but it remained at high
level since 2015.
Industrial profits improved across ownership, with state-owned
sector leading the recovery. The average liability-to-asset ratio
at 56.7% was 0.1 percentage points down from the end of June.
Dongfeng and its partners plan to build China's largest
autonomous vehicle (AV) fleet in Wuhan, reports China Daily.
Dongfeng said it will operate a fleet of at least 200 AVs by 2022
in the city. This initiative is part an investment deal between
Dongfeng and local authorities in Wuhan. The automaker plans to
scale production of high-level AV technology and explore business
models using its mobility platform for commercial AV operations.
Dongfeng Motor is accelerating its efforts on developing
intelligent connected vehicles. Recently, Dongfeng has announced
that its 5G-based driverless vehicle, named Dongfeng Sharing-VAN
1.0 plus, has entered mass production. This year, port terminal
operator COSCO Shipping Ports partnered with China Mobile and
Dongfeng Commercial Vehicle to demonstrate driverless trucks
loading and delivering containers around the terminal. The
automaker has also collaborated with Chinese technology company
Tencent to jointly build a new ecosystem of "automobile industry
Internet". Last year, Dongfeng Motor led a USD100-million Series A
funding round for autonomous car startup AutoX. (IHS Markit
Automotive Mobility's Surabhi Rajpal)
Hyundai Mobis plans to build a new plant for manufacturing
components for electrified vehicles in South Korea with an
investment of KRW35.5 billion (USD29.9 million), reports Korea
JoongAng Daily. The plant will be located on 16,726 square metres
of land in Pyeongtaek. Construction of the plant is scheduled to
start in September, and Hyundai Mobis aims to begin mass production
in the second half of 2021. It plans to use the new plant to
produce core electric vehicle (EV) components, including motors,
inverters and power electronics modules. Referred to as PE modules,
they are a combination of components that power EVs in place of an
engine. The report highlights that the Pyeongtaek plant will mainly
supply Kia, as it is relatively close to Kia's Hwaseong plant in
Gyeonggi, only 13 km away. This will be Hyundai Mobis' third plant
in South Korea for electrified vehicles. The first plant is in
Chungju, where it produces components for fuel-cell electric
vehicles and EVs. The second plant, in Ulsan, is currently under
construction, will produce components for electrified vehicles from
the first half of 2021, but for Hyundai (see South Korea: 28 August
2019: Hyundai Mobis begins construction of new EV parts plant in
South Korea). The South Korean component maker is witnessing strong
demand for electrification parts amid growing demand for EVs.
During the second quarter of 2020 (April-June), Hyundai Mobis
recorded a robust 40.9% y/y increase in sales in the
electrification business to KRW990 billion. To meet this rapidly
increasing demand, Hyundai Mobis plans to secure production
capacity of 150,000 units next year and gradually expand facilities
to reach a maximum of 300,000 units by 2026. (IHS Markit
AutoIntelligence's Jamal Amir)
The Volkswagen (VW) Group plans to test its first fleet of
autonomous cars in China's eastern city of Hefei, reports
Automotive News. VW will roll out 10 units of Audi's e-tron
electric sport utility vehicle (SUV) in the city's Haiheng district
from September. The cars will be open to the public from next year
and residents can hail the ride using the VW app. Weiming Soh,
executive vice-president of VW China, said, "This is our first-ever
pilot project in China. We are very close with the Hefei
government. They have the desire to do this and we jumped in.
Imagine if you want to build cars, you're going to need a lot of
suppliers, and that creates employment and so on. If we pick it as
our base, we're starting to do that." (IHS Markit Automotive
Mobility's Surabhi Rajpal)
Mahindra & Mahindra (M&M) signed a non-binding
memorandum of understanding (MoU) with Israeli e-mobility company
REE Automotive on 26 August to explore development and
manufacturing of electric commercial vehicles (CVs) for global
markets, according to a filing to the Bombay Stock Exchange (BSE).
M&M and REE plan to hold discussions over the next few months
to finalize technical, commercial, and other terms of the
collaboration. The strategic collaboration, when finalized, will
use M&M's design, engineering, sourcing capability and
manufacturing assets and REE's electric vehicle (EV) corner module
and platform technology of integrating powertrain, suspension and
steering components in the arch of a vehicle wheel. The companies
added that production could be scaled further to support additional
volume in the global and Indian market. The partnership is expected
to support REE's global customer need for 200,000-250,000 electric
CV units over a few years, including potential M&M's domestic
and international volumes. (IHS Markit AutoIntelligence's Isha
Sharma)
Honda plans to launch its first electric vehicle (EV), the
'Honda e', in Japan on 30 October, according to a company press
release. The Honda e will be available in two output versions, a
100 kW and a 113 kW, both with maximum torque of 315 Nm. The 100-kW
version has a driving range of 283 km on a single charge on the
Worldwide-harmonized Light vehicle Test Cycle (WLTC) and is priced
at JPY4.51 million (USD42,450). Meanwhile, the 113-kW version has a
driving range of 259 km on a single charge and is priced at JPY4.95
million. The Honda e is equipped with various advanced safety and
technological features. The automaker aims to sell 1,000 units of
the vehicle per year in Japan. The Honda e is an important part of
the Japanese automaker's strategy, as it seeks to accelerate its
vehicle electrification plan. The e is based on Honda's first
standalone EV platform, which has its battery positioned centrally
at a low level, giving both 50:50 weight distribution and a low
center of gravity. The model will be sold only in Europe (where it
was launched earlier this month) and Japan, and Honda has no plans
to market the vehicle in other regions, including North America and
China. IHS Markit expects that the e's sales will be about 3,800
units in Europe in 2020 and about 1,000 units in Japan. (IHS Markit
AutoIntelligence's Nitin Budhiraja)
Posted 27 August 2020 by Chris Fenske, Head of Fixed Income Research, Americas, IHS Markit
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