Daily Update: July 22, 2020

Amid the unprecedented events spurred by the coronavirus pandemic’s grip on the global economy, the European Union’s unanimous consensus on a historic €750 billion ($857 billion) stimulus deal is an extraordinary first.

As part of the recovery package, named Next Generation EU, European countries will for the first time offer bonds collectively to raise capital to fund the bloc’s recovery. The countries hardest-hit economically by the crisis will benefit from €390 billion in grants from next year through 2023 under the package’s Recovery and Resilience Facility. This will benefit Italy, Spain, and other southern countries devastated by the coronavirus and the economic collapse. For better-capitalized nations in need of assistance, €360 billion will be paid out in low-interest loans.

EU leaders did not change the total of the recovery fund from the European Commission's initial proposal in May. They did, however, increase the share of the Recovery and Resilience Facility within the overall stimulus to €672.5 billion, up from €560 billion. Governments are able to access the grants by submitting national plans to the EC detailing how the funds would be utilized to stimulate a recovery in their countries.

Proposed by Germany and France in May and fought by the bloc’s “frugal four”—Austria, Denmark, the Netherlands, and Sweden—the deal signals the EU’s solidarity against the backdrop of the continuing health crisis, devastating economic downturn, and Britain’s exit from the bloc.

“Europe has shown it is able to break new ground in a special situation. Exceptional situations require exceptional measures,” German Chancellor Angela Merkel said at a July 21 news conference after her leadership propelled the agreement into fruition. ‘‘A very special construct of 27 countries of different backgrounds is actually able to act together, and it has proven it.”

“This agreement sends a concrete signal that Europe is a force for action,” EC President Charles Michel said at a press conference. “I believe this agreement will be seen as a pivotal moment in Europe’s journey.”

During the negotiations, budget-conscious member states took issue with the fact that they would be underwriting loans for less fiscally-strict nations. Concessions were made to allow member states to raise objections and temporarily block transfers if they feel other nations are misappropriating the funds received from the EC. At the final hour, provisions on requiring eastern European nations to abide by democratic standards and rule-of-law were weakened to finalize and pass the package.

EU leaders negotiated a €1 trillion seven-year budget alongside the Next Generation EU deal. Denmark, Germany, the Netherlands, Austria and Sweden will pay reduced rebates, or reimbursements to the bloc, during the budgetary period.

Approximately one-third of budget funds, totaling more than €550 billion, are slated to support the EU’s climate goals, marking the greatest green stimulus in history. The money will be spent on reducing emissions, expanding the electric vehicles market, and investing in sustainable technology, among other projects.

The EU has a binding 2030 target to cut its emissions by at least 40% from 1990 levels, and the EC plans to propose raising this ambition to a 50-55% cut in September. Additionally, next year the EC plans to propose changes to the EU's climate and energy legislation to support the more ambitious 2030 CO2 target, according to S&P Global Platts.

“I believe this agreement will be seen as a pivotal moment in Europe's journey. It will launch us into the future. The first time in our history the budget will be clearly linked to our climate objectives,” Mr. Michel said on Twitter on July 21.

Oil prices climbed overnight on news of the EU stimulus package, following July 20 reports that the Oxford University-AstraZeneca vaccine produced an immune response with minimal side effects.

Today is Wednesday, July 22, 2020, and here is today’s essential intelligence.

Uncertainty in the Global Economy

Economic Research: China's Deflating Recovery Still Needs Stimulus

China's real GDP growth in the second quarter was an upside surprise for us and the markets. At 3.2% compared with the same quarter in 2019, it suggests that China's economy is well on the road to recovery and could grow above 2% for the full year. This clearly poses upside risks to S&P Global Ratings' 1.2% forecast for 2020.

—Read the full report from S&P Global Ratings

Global Securitization 2020 Issuance Forecast Trimmed By A Quarter, Now At $830B

Global securitization issuance volume for the first half of 2020, at roughly $420 billion equivalent, was down 20% by just over $100 billion from approximately $525 billion during the same period one year ago. China, Japan, and Latin America were relatively flat, while the U.S. (-30%), Europe (-25%), Canada (-28%), and Australia (-42%) all experienced considerable declines. S&P Global Ratings’ issuance forecast for 2020, which in January was over $1.1 trillion, has been trimmed by about 25%, and stands at $830 billion. The impact of COVID-19 on global macroeconomic growth and the knock-on effects on market sentiment, interest rates, credit, etc. remain the key factors for the second half.

—Read the full report from S&P Global Ratings

Latin American Equity Markets Staged Recovery in Q2 2020 despite Continuing Battle with COVID-19

We have made it through the first half of 2020. Despite the continued spread of COVID-19 wreaking havoc on public health and the global economy, the markets did surprisingly well during Q2. In the U.S., the equity market rebounded from Q1, driven by government stimulus packages and the easing of restrictions imposed during the pandemic. The S&P 500® gained 20.5%, while the S&P Latin America 40, which is designed to measure the 40 largest, most liquid companies in the region, followed close behind, gaining 19.5%. However, Latin America was still deep in the red YTD, down 35.9%.

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

Healthcare M&A value sees sharp fall in Q2 as COVID-19 impacts dealmaking

The aggregate value for healthcare M&A fell sharply in the second quarter, both compared to the first three months of the year and the year-ago period, as the COVID-19 pandemic dampened dealmaking. Aggregate transaction value was $12.26 billion in the second quarter, compared to $29.31 billion in the first quarter and $137.29 billion in the year-ago quarter. As of June 30, the aggregate transaction value for healthcare deals in 2020 was $37.68 billion, based on 903 deals tracked by S&P Global Market Intelligence.

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

The Future of Credit

Watch: Capital Markets View - July 2020

This month Taron and Chris talk together about relatively strong issuance figures in the leveraged bond and loan market for both Europe and the US, tightening pricing, the strength of cross-border issuance, primary and secondary pricing, and CLO issuance trends.

—Watch and share this video from S&P Global Ratings

Loan default rate reaches 3.7% as oil, gas sector tops record

The default rate of the S&P/Loan Syndications Trading Association Leveraged Loan Index is nearing 4% as large oil and gas companies California Resources Corp. and Seadrill Partners LLC collectively missed payments on nearly $5 billion of term loans this month, which sent the sector-level default rate to a record high. The leveraged loan default by issuer count is 3.88%, a near 10-year high. By amount, the rate is currently at a five-year high of 3.70%.

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

What To Expect When U.S. Insurers Report Second-Quarter Results Amid COVID-19 Pandemic

S&P Global Ratings expects to see a greater impact from the COVID-19 pandemic on U.S. insurers' financial statements in the second quarter of 2020 versus the first-quarter. The infection rate and deaths related to COVID-19 have grown significantly in the second quarter. The shutdown of businesses were also more pronounced. "Fallen angels"--issuers downgraded to speculative grade ('BB+' or lower) from investment grade ('BBB-' or higher)--within insurers' bond portfolios will have increased, while bond market spreads tightened and equity markets rebounded during the quarter.

—Read the full report from S&P Global Ratings

Technology & Innovation

Facial recognition tech tests the limits of Europe's data privacy laws

Regulators in Europe are stepping up their scrutiny of live facial recognition technology after recent events drew attention to the ways its use can exceed the scope of the region's data protection laws. The European Union and the U.K. are separately exploring new guidelines for the tech, which pairs surveillance equipment with visual-recognition software so images can be analyzed, for example by searching a database of suspects for matches — known as remote biometric identification.

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

COVID-19 vaccine makers urge trust in US FDA, note many global watchdogs at work

Americans should feel confident that COVID-19 vaccine makers will not bring their products to the U.S. market unless they are safe and effective because there will be many global regulatory eyes watching to ensure standards are not lowered, biopharmaceutical executives told Congress. A number of lawmakers raised concerns at a July 21 Capitol Hill hearing that the U.S. Food and Drug Administration will be pressured by President Donald Trump to authorize COVID-19 vaccines for emergency use or grant full approval before the products have demonstrated they work and are safe.

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

ESG in the Time of COVID-19

'Green stimulus' to plug wells, could create oil jobs, cut emissions – report

The U.S. government could cut methane emissions and provide jobs for hundreds of laid-off oil rig workers by using some coronavirus aid to plug abandoned oil and gas wells across the country, a new report said. "A significant federal program to plug orphan wells could create tens of thousands of jobs, potentially as many as 120,000 if 500,000 wells were plugged," Columbia University's Center on Global Energy Policy and energy and environmental economics think tank Resources for the Future said in a July 20 report urging what the authors called a "green stimulus for oil and gas workers.”

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

INTERVIEW: Integrated power markets key to EU climate goals: ACER director

Implementing last year's EU clean energy package to integrate large-scale renewables remains key to achieving the bloc's climate goals, according to EU energy regulatory agency ACER director Christian Zinglersen. EU policy-makers are now looking at technologies like hydrogen to help the bloc cut carbon emissions, but they still expect renewable power and energy efficiency measures to achieve the bulk of the EU's goal to be climate neutral by 2050.

—Read the full article from S&P Global Platts

Southwest Power Pool could add more than 5 GW of wind generation capacity by end-2020

Southwest Power Pool could add more than 5 GW of wind generation capacity by the end of 2020, on top of the nearly 650 MW already added to the grid this year, according to grid operator data. Wind-powered generation has been the lead fuel source for the last six months across the SPP footprint, after first surpassing coal-fired generation during two months in 2019 and consistently since January. SPP set a new wind peak record of 18.343 GW on July 17. The rise in wind generation as part of a national energy transition toward renewable sources has pulled down wholesale power prices.

—Read the full article from S&P Global Platts

The Future of Energy & Commodities

Chevron's bid for Noble Energy could trigger more Permian mergers, analysts say

Chevron Corp.'s $13 billion bid to buy independent producer Noble Energy Inc. could trigger a wave of consolidation activity in the Permian Basin if oil prices continue to rebound from historic lows, analysts said. "We continue to expect more Permian consolidation as the basin remains very fragmented and the transition to full-field 'manufacturing style' development requires large, contiguous blocks of acreage to drill two-mile laterals and take advantage of economies of scale," CreditSights said in a July 20 research note to clients.

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

Spotlight: Oil production not significantly impacted post-bankruptcy of US E&P companies

The combination of the oil price collapse and the coronavirus pandemic has decimated the industry in the first half of 2020 to a level where Exploration & Production (E&P) and Oilfield Service (OFS) companies may never fully recover. Eighteen E&P companies filed for bankruptcy protection in 2Q2020 bringing the 2020 total to 23 companies with over $30 billion in debt, according to Haynes and Boone LLC. On the OFS side, 15 companies filed for Chapter 11 in 2Q2020 bringing the total to 19 companies with another company, Hi-Crush, planning to file this month.

—Read the full article from S&P Global Platts

Analysis: South Texas cash basis rises as exports, lower production tighten regional balances

Cash basis at South Texas natural gas hubs is at significant premiums to year-ago levels in July as strong export demand from Mexico and lower production from the Eagle Ford help to buoy the market. At key trading locations in South Texas, including Tennessee Zone 0, NGPL South Texas and Texas Eastern STX, basis prices are up about 7 to 8 cents this month to date, compared to the same three-week period last July, S&P Global Platts data shows. At the three trading locations, cash prices have remained largely discounted to the Henry Hub but are now much closer to price parity with the benchmark index. At the NGPL and Texas Eastern hubs, cash prices are averaging just a 1 cent discount. At the Tennessee location, the cash price discount to Henry Hub is a bit steeper, averaging about minus 5 cents/MMBtu this month.

—Read the full article from S&P Global Platts

Iraq's tussle with semi-autonomous Kurdish region seen complicating energy policy

Iraq's federal government has a complicated energy relationship with the Kurdish region that is unlikely to be resolved due to differences within the semi-autonomous entity itself and Baghdad's own struggle with OPEC+ compliance, according to analysts. While the 28-year old Kurdish region has its own parliament and government, differences between the two dominant parties -- the Patriotic Union of Kurdistan and the Kurdistan Democratic Party -- on how to deal with Baghdad over the oil portfolio is standing in the way of a lasting agreement. Kurdistan Regional Government officials often visit Baghdad to try to resolve the standoff over oil sales and revenue distribution, which has long been a stumbling block for the OPEC producer to have a unified energy policy.

—Read the full article from S&P Global Platts

US was top contributor to global natural gas flaring growth in 2019

Global gas flaring — the controversial practice of burning off natural gas associated with oil extraction — climbed in 2019 to a level last seen a decade earlier, with the U.S. contributing the most to global growth, according to a July 21 report from the World Bank. According to the organization's "Global Gas Flaring Tracker Report," which estimates the oil and gas industry's flaring activity using satellites, the volume of gas flared globally in 2019 climbed by 4.98 billion cubic meters from the 2018 level to 149.99 billion cubic meters, with the U.S. contributing 3.22 billion cubic meters to that growth.

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

Written and compiled by Molly Mintz.