Daily Update: July 29, 2020

The Federal Reserve announced on Tuesday that the emergency lending procedures it put in place to shore up the U.S. economy at the start of the crisis would continue through the end of the year.

The Fed wrote that such lending “provided a critical backstop, stabilizing and substantially improving market functioning and enhancing the flow of credit to households, businesses, and state and local governments.”

This week the U.S. dollar fell to a two-year low against the euro as concerns about Fed policies around quantitative easing and near-zero interest rates raise worries about inflation. Dallas Fed President Robert Kaplan has indicated a willingness to allow inflation to rise above the central bank’s 2% target in order to provide critical support to the economy.

In a country with a reserve currency holding large amounts of debt, a certain amount of inflation allows for repayment or service of debt with a devalued currency at a lower actual cost. But there is no indication that the Fed intends to move away from its mandate to control inflation.

Expanded balance sheets and money creation are creating fears of a debasement of the dollar, which makes it a less appealing store of value for governments, companies, and investors. Amid these concerns, gold has hit record highs as investors look to safer havens. There are few alternatives to the U.S. dollar as a global reserve currency although both the euro and the renminbi have been suggested in the past.

According to Goldman strategist Daniel Sharp, “Real concerns around the longevity of the U.S. dollar as a reserve currency have started to emerge.”

Part of the concern driving investors away from the dollar and toward the euro reflects divergent policy responses to the crisis. While both the U.S. States and the EU are engaging in aggressive fiscal stimulus, the European approach is perceived by some economists to be more supportive of long-term growth.

According to Economist Sylvain Broyer of S&P Global Ratings, “the COVID-19 pandemic has hit Europe hard, and the economic challenges ahead are significant. From a macroeconomic perspective, however, Europe's policy response appears encouraging, with its incentives for sustainable growth, solidarity, and economic stability.”

Today is Wednesday, July 29, 2020, and here is today’s essential intelligence.

Uncertainty in the Global Economy

Watch: Market Movers Asia, Jul 27-31: Escalating US-China tensions may hit recovering commodity trade flows

This week on S&P Global Platts Market Movers in Asia with Geetha Narayanasamy, head of Asia-Pacific Editing Desk: US-China tensions on the rise. China on US soybean buying spree. Chinese demand for Russia's ESPO blend wanes. Metals market await details on China's PMI. Clean tanker market hope for recovery.

— Watch the Video from S&P Global Platts

How US Transportation Credit Quality is Affected by COVID-19

The COVID-19 pandemic has been a disruptive force that has dramatically changed the US transportation industry. In four months, the precipitous decline in public transit ridership, air traffic, parking, toll road transactions, port container volumes, and overall mobility--up to 95% in some subsectors--has contributed to the current recession and the sharpest contraction in economic activity since World War II. At S&P Global Market Intelligence, we ran different transportation scenarios to better understand the potential impact on the credit quality of each sector. Leveraging our "Public Finance Automated Scoring Tool or PFAST", there appear to be five key risk factors that are now driving transportation credit quality.

— Read the Full Article from S&P Global Market Intelligence

Short-term rentals weathered COVID-19 better than hotels, data firms say

Short-term rentals have recovered their occupancy and pricing faster than hotels in the months since the COVID-19 pandemic first struck the U.S., as business travel dried up and vacationers gravitated to lodgings where they could minimize human contact. In hotels in 27 key markets worldwide, occupancy declined by an average of 77% from the week of March 31, 2019, to the low point of the pandemic, data providers STR and AirDNA said in a report. In contrast, occupancy in "hotel-comparable" short-term rentals fell 45%, and occupancy in rentals of two bedrooms or more fell 46%. Over similar time frames, average daily rates fell the most in urban hotels, with 53% declines, compared with 46% in regionally oriented hotels, 12% in urban and regional hotel-comparable short-term rentals, 8% in urban short-term rentals and only 3% in regional short-term rentals.

— Read the Full Report from S&P Global Ratings

The Health Care Credit Beat: Executive Orders On Drug Pricing Will Have Limited Effect But Underscore The Continued Pressure On The Pharmaceutical Industry

President Trump announced last Friday that he is planning to sign four executive orders aimed at lowering pharmaceutical prices. However, we view the likelihood that any of these proposals will be implemented in the near term as low. Therefore, we do not expect them to have any effect on the earnings of, or our ratings on, the pharmaceutical companies we cover in the near to intermediate term. Given that it is a presidential election year and health care spending is one of the top issues, it is likely there will be more such pronouncements. While we do not forecast any significant impact over the near to intermediate term, these frequent headlines underscore the elevated pressure the pharmaceutical industry is facing to address high drug pricing/spending.

— Read the Full Report from S&P Global Ratings

The Future of Credit

Credit Trends: Global Financing Conditions: Bond Issuance Is Expected To Finish 2020 Up 6% After A Strong Second Quarter

Typically, falling GDP equates to a decline in bond issuance--but that wasn't the case amid the COVID-19-driven recession in the first two quarters of 2020. The global pandemic has prompted a recession, characterized by a lack of demand for products and services, amid the enforcement of social distancing measures. This has thus far resulted in increased household savings rates, but also an increase in corporate debt--as a means for companies to service expenses in the face of the abrupt decline in their revenues.

— Read the Full Report from S&P Global Ratings

European Structured Finance Outlook H2 2020: Weathering The Storm

European securitization issuance now looks set to end the year substantially lower than in 2019, at about €60 billion-€70 billion, while benchmark covered bond volumes also look set to decline. Across Europe, central bank responses to the public health emergency have included renewed large-scale provision of cheap term funding for credit institutions, which is likely to stifle bank-originated structured finance supply.

— Read the Full Report from S&P Global Ratings

Changing Landscape Threatens Credit Quality Of U.S. Convention Centers, Arenas, And Stadiums

Introduction of COVID-19's "social distancing," cancellations of major sporting events and conferences, disruptions in local commerce, and material declines in business and leisure travel have and will continue to negatively affect convention center and sports authorities' revenue streams. This, in turn, has led to significant deterioration in hospitality related revenues such as hotel taxes and other special taxes leading to deterioration in budgets, reduction in debt service coverage, and weakened local economies. In many cases it has also drastically reduced liquidity available to pay debt service. Such a notable shift in a very short period has led to deterioration in credit quality for many issuers and resulted in downgrades (see table).

— Read the Full Report from S&P Global Ratings

Technology & Innovation

European box office down 65.7% YOY amid limited spring releases, openings

European box office revenue fell 65.7% year over year in the first six months of 2020 to US$1.16 billion, according to data from S&P Global Market Intelligence and OPUSData, with the limited number of recent theater reopenings hampered by strict health regulations and a lack of new film releases.

— Read the Full Article from S&P Global Market Intelligence

APAC box office down 91.9% YOY despite recovery in film releases

Asia-Pacific box office revenues fell 91.9% year over year in the first six months of 2020 to US$603.1 million, according to data from S&P Global Market Intelligence and OPUSData, despite the number of film releases seemingly beginning to recover. The number of films released in June was down 59.1% year over year, an improvement from April and May's respective 72.1% and 78.2% year-over-year declines. Releases in South Korea have remained relatively stable since January, when the spread of coronavirus began to impact local markets, while Australia and Japan are showing the clearest signs of recovery.

— Read the Full Article from S&P Global Market Intelligence

More tech in post-pandemic M&A, but in-person meetings still part of the deal

The sudden shift to remote work during COVID-19 has accelerated the use of technology in deal-making, and many digital tools are expected to stick after the crisis abates, according to market participants. The lockdowns imposed in the early stages of the pandemic forced M&A teams across investment banks, asset managers, consultancies and legal firms to switch from in-person meetings, due diligence visits and presentations to video conferencing and remote due diligence tools in a matter of days.

— Read the Full Article from S&P Global Market Intelligence

ESG in the Time of COVID-19

Path to net zero: In taking plunge, US utilities ahead of global oil, mining

Energy and mining companies are grappling with how to respond to growing pressure from investors, local and national governments, and the public to develop decarbonization strategies. While some of the biggest corporations in each sector have responded by setting ambitious net-zero emissions targets, not all have made the leap and decarbonization strategies vary greatly. Moreover, each sector, and even each company, faces its own set of challenges in navigating the clean energy transition.

— Read the Full Article from S&P Global Market Intelligence

Path to net zero: European oil majors outpace US companies on climate goals

The strong and growing pressure on oil and gas companies to dramatically reconfigure their core businesses to accept a lower-carbon agenda could soon lead to irreversible changes in the energy commodity markets. Investors and policymakers worldwide are rapidly increasing their focus on environmental, social and governance, or ESG, factors. Oil and gas companies risk losing billions of dollars in investor capital if they do not adapt.

— Read the Full Article from S&P Global Market Intelligence

Path to net zero: Cracks appearing in natural gas' role as bridge fuel

Cracks are starting to show in utility support for using natural gas as a bridge fuel to a low-carbon future. Some signs that the narrative is shifting include a recently canceled major gas pipeline project and a raft of utilities setting net-zero emissions targets amid changing customer preferences, new state mandates, and investor concerns that the recent glut of gas generation and pipeline investments could result in stranded assets. "Politically, natural gas is no longer seen as a bridge fuel," asserted Josh Price, a senior analyst on energy and utilities at investment research and advisory firm Height Capital Markets. "On the electricity side, there certainly appears to be a major shift away from gas due to public pressure from investors, from policymakers."

— Read the Full Article from S&P Global Market Intelligence

After IMO 2020, decarbonization in spotlight for shipping sector: Fuel for Thought

Shipping companies in Asia and around the globe are steaming ahead with efforts to minimize their carbon footprint as the urgency to decarbonize intensifies after a fairly smooth transition to the International Maritime Organization’s low-sulfur mandate for marine fuels. The IMO in April 2018 laid out its strategy to reduce the shipping industry’s total greenhouse gas emissions in 2050 by at least 50% from 2008 levels, and to reduce CO2 emissions per transport work by at least 40% by 2030.

— Read the Full Article from S&P Global Platts

The Future of Energy & Commodities

Watch: Market Movers Americas, July 27-31: ULSD's discount to RBOB narrows as diesel supply thins

In this week's Market Movers: an unusual discount held by NYMEX ULSD futures versus NYMEX RBOB is narrowing as a glut in US Atlantic Coast diesel supply thins, and US steel mill utilization is returning as automotive production recovers.

— Watch the Video from S&P Global Platts

Italian steel industry sees output down 15% in 2020 on coronavirus

Italian steel production will drop around 15% in 2020 on the slump in demand, particularly from the automotive sector, caused by the coronavirus pandemic and low output at ArcelorMittal Italia, Italian steel federation Federacciai President Alessandro Banzato told S&P Global Platts July 28. In 2019, Italian steel production fell 5.3% year on year to 23.192 million mt, below the EU average of a 4.9% drop to 159.4 million mt. According to the latest worldsteel data in the first half of this year the EU produced 68.3 million mt of crude steel, 18.7% less than a year earlier. H1 production in Italy, the second largest EU producer, fell 9.7% to 10.08 million mt. Italy shut all its steel plants with the exception of ArcelorMittal Italia and Arvedi for nearly two months from mid-March as it was the first country in Europe to be hit by the new virus. The Italian economy, brought to its knees by the coronavirus, is expected to contract by around 9.5% this year, according to the latest data released by the Bank of Italy, revising down a forecast of a 9.2% contraction made last month.

— Read the Full Article from S&P Global Platts

Crude oil futures steady to higher on a weaker US dollar

Crude oil futures were steady to higher during mid-morning trade in Asia July 28 as a weaker US dollar boosted risk appetites and provide support for the global crude complex. At 11:05 am Singapore time (0305 GMT), ICE Brent September crude futures was up 19 cents/b (0.44%) from the July 27 settle to $43.60/b, while the NYMEX September light sweet crude contract was up by 6 cents/b (0.14%) at $41.66/b. The US Dollar Index was at 93.64, down 0.02% from the close of the US trading session.

— Read the Full Article from S&P Global Platts

Listen: The Leading Edge Of Infrastructure: Midstream Energy Mid-Year Update

In this episode, the Energy Infrastructure Team discusses where midstream energy companies could be headed with second quarter earnings season upon us. We discuss our latest views on issuers including ET, OKE, MPLX and TRGP and Permian G&P companies.

— Listen to the full Episode from S&P Global Ratings

Written and compiled by Molly Mintz.