Daily Update: July 17, 2020

Surging coronavirus case totals and subpar economic data sent U.S. stocks lower on July 16. Chinese equities plummeted to their biggest drop in five months. European markets sank on news that the European Central Bank will not modify its crisis stimulus.

Despite U.S. retail data showing that sales jumped 7.5% in June, the S&P 500 dipped 0.3% and the Nasdaq Composite closed 0.7% lower. New unemployment data revealed that 1.3 million Americans applied for unemployment benefits during the previous week. The U.S. reported 70,000 new coronavirus cases in a single day.

China’s economy grew 3.2% in the second quarter. However, the CSI 300 index listing Shanghai and Shenzen companies sunk 4.8% and Hang Seng index of Hong Kong companies sank 2% due to investors’ weakened confidence in the country’s organic growth.

Following policy meetings, the ECB said it will maintain its interest rates at “present or lower” levels and will continue to operate its €1.35 trillion euro ($1.54 trillion) Pandemic Emergency Purchase Program in a “flexible manner,” pausing the ramping up of monetary policy seen over the past four months. The Stoxx Europe 600 dropped by 0.5%. London’s FTSE 100 fell by 0.6%. Today, EU leaders will discuss the prospects of the €750 billion recovery fund proposed by France and Germany.

The unprecedented market volatility seen during the past six months paints a mixed portrait for current and future conditions. Financial markets have reflected the turns in economic conditions faster than economic data could be reported during the crisis.

“Market data and investor risk tolerance are fast indicators of impending gloom,” S&P Global Ratings said in a July 16 report. “The sharpness of the subsequent market recovery now poses the question as to whether market exuberance is consistent with future economic fundamentals… While market liquidity conditions have increasingly normalized in recent weeks, we see risks that could further upset and materially constrain market liquidity over the next 100 days while the health threat from COVID-19 remains.”

In the U.S., “COVID-19 cases have risen by 60% since mid-June, and if cases continue to rise at the current pace, it is only a matter of time before states shut down more parts of their economy in fear of overwhelming hospital capacity,” S&P Global Ratings Chief U.S. Economist Beth Ann Bovino said in a July 16 report. “Mobility has started to weaken with increasing new restrictions, and the fear is that the once hopeful bounce-back in the third quarter—22.2% annualized growth in real GDP in S&P Global Economics’ June forecast—is now at risk of weakening.”

Trading revenues for the biggest banks on Wall Street— JPMorgan Chase., Citigroup, Goldman Sachs, Morgan Stanley, and Bank of America—experienced double-digit spikes during the second quarter.

"Trading revenues benefit from uncertainty and high volatility," Stephen Biggar, director of financial institutions research at Argus Research, told S&P Global Market Intelligence in an interview. "A whole slate of asset classes went for a wild ride in the second quarter."

"The recovery in the stock market has been quicker and swifter than in previous recessionary periods," Juan Carlos Artigas, head of research at the World Gold Council, told S&P Global Market Intelligence. "I think this kind of raises a risk, because unless the fundamentals catch up — if they do, then that's great — but if the fundamentals do not catch up, investors may be in for a period of turmoil that will last a little bit longer."

Today is Friday, July 17, 2020, and here is today’s essential intelligence.

Uncertainty in the Global Economy

Economic Research: U.S. Real-Time Economic Data Suggests Hopeful Signs Of A U.S. Recovery Could Be Short-Lived

With reemergence of virus transmission rates nationally, uncertainty is elevated again; high frequency real-time indicators of activity suggest momentum may be losing steam, with mobility, in particular, beginning to weaken. If COVID-19 cases continue to rise at the current pace, it is only a matter of time before states shut down more parts of their economy. The bounce-back in the third quarter real GDP growth—of 22.2% (annualized)—in S&P Global Economics’ June forecast is now at risk of weakening.

—Read the full report from S&P Global Ratings

Dining out: June marks 2nd month of tenuous recovery for US restaurants

Sales and employment at U.S. restaurants improved for the second month in a row, but the industry still trails pre-pandemic growth levels. June sales dropped more than 25% from the year-ago period, likely pushing the total shortfall for restaurants and food service sales past $145 billion over the last four months, according to the National Restaurant Association. The June sales decline was an improvement from the revised 38% drop in May, and the sector added 1.5 million workers back to its payrolls in June. Shares of most of the biggest publicly traded restaurant companies rose in the month ended July 15 as smaller players struggled to stay afloat.

—Read the full article from S&P Global Market Intelligence

July retail market: US sales jump 7.5% in June; bankruptcies hit 3-year high

Retail and food services sales jumped 7.5% during the month, surpassing the consensus estimate of economists polled by Econoday of a 5.2% rise. Meanwhile, nine retailers went bankrupt in late June through mid-July period, including vitamin seller GNC Holdings Inc. and retailer RTW Retailwinds Inc. The year-to-date bankruptcy count has already surpassed the number of filings in 2019 and 2018, according to an S&P Global Market Intelligence analysis.

—Read the full article from S&P Global Market Intelligence

Economic Research: Canadian House Prices Are Likely To Decline Sharply Into Next Year; Strong Fundamentals Restrain Broader Housing Market Risks For Now

With Canada's economy facing a patchy recovery from the steep, COVID-19-induced recession, the country's housing market looks set to suffer sharp price declines and an overall challenging period into next year. Although borrowing rates will likely remain historically low and recent data on a housing rebound have been encouraging, the combination of elevated unemployment this year and next, uncertainty about the pandemic's duration, stricter lending rules, and slower near-term flow of new immigrants will create headwinds for housing activity and prices. S&P Global Economics expects home prices (as measured by the MLS Home Price Index[MLS HPI]) will be down 8.7% year over year in the first quarter of 2021, before starting to recover as the labor market finds its footing and pandemic-related uncertainty fades. Despite S&P Global Economics’ expectation for lower house prices and elevated unemployment, we believe credit risk in the Canadian banks' mortgage exposures and in securities backed by residential mortgages will remain muted.

—Read the full report from S&P Global Ratings

Market Volatility

Market Liquidity In A Crisis: Five Key Lessons From COVID-19

As the COVID-19 pandemic took hold, investors rapidly sought to reduce risk and stockpile cash. Market confidence receded very quickly, and liquidity came under significant strain. Only when central banks and governments took considerable measures to support the economy and lending environment did market liquidity start to flow again. Can credit markets learn anything from this sudden liquidity squeeze? S&P Global Ratings highlighted five key lessons to consider for any future periods of volatility and liquidity strain in credit markets.

—Read the full report from S&P Global Ratings

As ETF Fund Flows Surge, Don’t Fight the Fed’s Passive Investing Philosophy

Back in March 2020, S&P Dow Jones Indices discussed the liquidity impacts on fixed income ETFs. S&P Dow Jones Indices also recently looked at how the Fed’s intervention changed the structure of the secondary credit markets’ ETF assets and how trade volumes stepped in for declining broker-dealer balance sheets. The Fed outlined several asset purchase schemes to stabilize the market; the fastest one put into action was direct purchases of fixed income ETFs that track major indices. Focusing on corporate bonds, the Fed committed to purchasing first investment-grade bonds, then high-yield bonds that comprised the ETFs. This drew a strong bid from the market, as investment-grade and high-yield bonds had their best quarter since 2009. This is precisely where many investors had taken the late Marty Zweig’s advice and simply followed the same passive approach by not fighting the Fed.

—Read the full article from S&P Dow Jones Indices

Utility stocks see modest recovery in Q2; CenterPoint regains footing

Electric and multi-utility stocks covered by S&P Global Market Intelligence saw a modest recovery in the second quarter of 2020, after the sector grappled with market volatility toward the end of the first quarter. Adjusted first-quarter earnings by energy and water utilities were up 2.9% year over year, a reflection that most utilities had not yet been significantly impacted by the pandemic. The electric sector posted the highest average earnings expansion for the first quarter, at 4.7%, while the multi-utility sector average was largely flat. At the end of the second quarter, the S&P 500 Utilities Index rose 1.8%, the S&P 500 Electric Utilities Sub Index was virtually unchanged, and the Dow Jones Utility Index ticked up 1.5%.

—Read the full article from S&P Global Market Intelligence

Gold expected to remain strong as investors hedge against COVID-19

Investors are embracing gold in 2020 as they seek to hedge their portfolios against the volatility created by the COVID-19 pandemic, according to a midyear outlook on the commodity. The new outlook from the World Gold Council evaluates how gold is doing as expectations of a faster, or V-shaped, recovery are shifting toward a slower, U-shaped recovery. Even under a potential W-shaped recovery, comprising setbacks from new waves of infection, investors are reinforcing gold's role as a strategic asset, the group said in the July 14 analysis.

—Read the full article from S&P Global Market Intelligence

In trading results, Wall Street's big banks find some relief from tumultuous Q2

JPMorgan Chase & Co., Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. all saw double-digit spikes in trading revenues during the second quarter as financial markets around the world reacted to the continued fallout from the COVID-19 pandemic. In the U.S. equity market, for instance, the Cboe Volatility Index, a widely used gauge of implied volatility based on the S&P 500, had an average daily closing value of 34.49 in the second quarter. That was the highest quarterly average since the first three months of 2009, according to Cboe Global Markets Inc. data.

—Read the full article from S&P Global Market Intelligence

Banking Sector Under Pressure

US banks' foreign exposure jumped 18% in Q1

As corporations began struggling amid the coronavirus pandemic, U.S. banks' balance sheets started to swell at the end of the first quarter, including their exposure to foreign countries. Foreign exposure at U.S. banks reached approximately $4.5 trillion during the first quarter, up $691.56 billion or 18.2% from the previous quarter, according to the Federal Financial Institutions Examination Council's E.16 Country Exposure Lending Survey. The exposure figure includes any cross-border claims such as loans made to foreign-based borrowers, securities or credit derivatives. As of March 31, U.S. banks' foreign exposure represented 23.1% of total claims, up from 22.0% at year-end 2019.

—Read the full article from S&P Global Market Intelligence

Small business loan data shows waning PPP demand as legislators consider revamp

Loan-level data released July 6 shows subsiding demand for the U.S. government's signature small business pandemic rescue program. Aid distributed under the Paycheck Protection Program topped out at a little over $500 billion at the beginning of May, less than a month after the program launched. Following a rocky start — many businesses were frozen out when an initial, $350 billion round of funding ran out in about two weeks — small business lobbyists have said that most potential borrowers who want a loan have gotten one. Government officials and public scorn have also pressured public companies and other enterprises with access to substantial resources to return money they received or stay away from the program, although the amount of money returned in such instances appears to be a relatively small sliver of the program's overall size.

—Read the full article from S&P Global Market Intelligence

ESG in the Time of COVID-19

The ESG Pulse: Social Factors Could Drive More Rating Actions As Health And Inequality Remain In Focus

S&P Global Ratings believes the COVID-19 pandemic has further raised the importance of environmental, social, and governance (ESG) factors for credit quality--especially the "S" factor. In our 2015-2017 ESG lookback study for corporates, social factors only accounted for 18% of ESG-related rating changes versus 47% for environmental and 34% for governance. The 2016-2018 lookback for financial institutions showed social factors represented 23% of all ESG-related rating actions, while governance dominated with 68%.

—Read the full report from S&P Global Ratings

ESG comes into focus for some pipeline firms seeking new investors

CEOs of some mid-sized U.S. pipeline companies said attracting new money to the midstream sector requires a bigger emphasis on environmental, social and governance issues as investors increasingly scrutinize energy companies' employee diversity and sustainability practices. Pipeline firms were already struggling to attract capital before the COVID-19 pandemic and low oil prices forced several management teams to slash spending and investor payouts. While stock prices have moderately recovered, the prospect of further coronavirus outbreaks and anticipated production declines next year overshadows any recent operational gains, particularly as investors wait for second-quarter earnings reports to reveal the oil price shock's impact. Any incremental shareholders midstream companies can cultivate in the immediate term are key.

—Read the full article from S&P Global Market Intelligence

FERC deals potential blow to renewables with PURPA overhaul cheered by utilities

The Federal Energy Regulatory Commission approved a draft order July 16 that gives states far more leeway in setting the rates that utilities are required to pay under a decades-old law aimed at boosting small renewable and cogenerating facilities. Utilities applauded the final revisions as common-sense reforms that will shield customers from overpaying for electricity while recognizing the falling cost of renewable energy. But clean energy advocates and one partially dissenting commissioner asserted the overhaul runs contrary to congressional intent and will stymie small-scale renewable energy development.

—Read the full article from S&P Global Market Intelligence

The Future of Energy and Commodities

Analysis: Asia remains cautious not to overcommit on crude imports after OPEC+ eases output cut

Middle Eastern sour crude supply is expected to increase from August after OPEC+ members on July 15 pared back their production cut commitment, but Northeast Asian refiners are determined not to abruptly boost crude imports and refinery run rates as fuel demand recovery remains fragile across Asia. The 23-country OPEC+ coalition enacted a 9.7 million b/d production cut accord in May in response to the coronavirus crisis, but will roll the deal back to 7.7 million b/d in August through to the end of the year, maintaining the terms of the agreement laid out in April.

—Read the full article from S&P Global Platts

US oil, gas rig count rises for first time in over 4 months, up 9 on week: Enverus

After more than four months of weekly decreases, the US oil and gas rig count rose by nine to a net 288 the week ending July 15, rig data provider Enverus said, signalling a a widely awaited trough to a difficult year for the upstream industry grappling with the coronavirus and its devastation of crude demand. The rise in rig activity marked a cessation of weekly rig count decreases which from early March to July reached a total loss of nearly 560 rigs from domestic fields. For the week ended July 15, oil rigs rose by 10 on week to 202, while rigs chasing natural gas fell by one to 86.

—Read the full article from S&P Global Platts

Nord Stream 2 developer slams latest US sanctions move on Russian gas links

The developer of the Nord Stream 2 gas pipeline on July 16 again criticized US measures against the project following a new move by Washington to harden its stance with changes to guidance on the Countering America's Adversaries Through Sanctions Act (CAATSA). The US State Department on July 15 updated part of the CAATSA legislation from August 2017 so that companies involving in building the Nord Stream 2 link from Russia to Germany and the onshore extension of the TurkStream pipeline -- which both remain under construction -- can now be targeted. "We are aware of a new CAATSA guidance announced by Secretary of State [Mike] Pompeo yesterday," a Nord Stream 2 spokesman said.

—Read the full article from S&P Global Platts

Interview: Global aluminum sector 'challenged' by climate targets: IAI

The rate of change needed for the global aluminum industry to meet existing net-zero carbon emissions targets is "challenging" and is it unclear at present whether these targets will be reached, according to Miles Prosser, secretary general of International Aluminum Institute (IAI). Depending on the region, the targets require companies to achieve net-zero carbon emissions between 2050 and 2070 in line with Paris Agreement principles. However, the aluminum sector sources nearly half its electricity supplies from countries' grids and energy infrastructure, which first need to be decarbonized, Prosser said in an interview with S&P Global Platts.

—Read the full article from S&P Global Platts

Written and compiled by Molly Mintz.