Daily Update: July 9, 2020

United Airlines warned nearly half of its domestic workforce—approximately 36,000 front line employees—on Wednesday that potential furloughs are coming as the pandemic continues to temper travel demand.

“The United Airlines projected furlough numbers are a gut punch, but they are also the most honest assessment we've seen on the state of the industry—and our entire economy,” Sara Nelson, international president of the Association of Flight Attendants, said on Twitter following the announcement. “The COVID-19 crisis dwarfs all others in aviation history, and there's no end in sight. Demand was just barely climbing back to 20% of last year's levels and even those minimal gains evaporated over the last week due to surging COVID-19 cases across the country.”

A day earlier, the Chicago-based carrier announced that its flight schedule for next month will operate at 35% of year-earlier levels due to diminished demand. This is down from the 40% decrease in flights United announced last week.

United’s action comes after other U.S. airlines, including Delta and American, urged employees to voluntarily leave the companies’ workforces. U.S. airlines that received portions of the federal government’s $25 billion stimulus to the industry are forbidden from furloughing, laying off, or cutting employees’ wages until Oct. 1. Europe’s phased rolling-back of its international travel restrictions will increase flight demand, but won’t return the industry to pre-pandemic levels. Latin America’s airline industry may face a future of weak competition and connectivity after the pandemic pushed the region’s two largest airlines, Latam and Avianca, into insolvency. In emerging markets, India won’t consider resuming international flights until the end of this month. Saudi Arabia and the United Arab Emirates have lost $7.4 billion in estimated passenger revenue as the number of air travelers has declined 53%, according to the International Air Transport Association. In Asia, data from the Association of Asia Pacific Airlines showed that air passenger traffic declined in May for the fourth consecutive month.

The sky is the limit when it comes to the pandemic’s implications for the aviation sector. Economic activity is rebounding and joblessness rates are declining, but the virus’s transmission risks have kept travelers from flying.

After contracting 94% in April, global travel demand shrunk 91% in May compared to the same month last year, according to International Air Transport Association data last week.

"A more significant uptick in demand is expected in June as many countries—notably in Europe—ease their lockdowns and airlines partly restore some of their seat capacity," IATA said. "The restart period will be challenging for airlines… While showing improvement compared with April, the level of bookings in late June is still [approximately] 80% lower than the level of a year ago. Moreover, the risk remains that the recent demand gains could be reversed if there is a second wave of infections.”

The demand recovery story may be driven by long-lasting, tighter controls on international passenger movements coupled with populations’ reduced appetite for air travel, according to S&P Global Platts.

Despite a rapid recovery in noncommercial flights since May, S&P Platts Analytics predicts that global jet and kerosene demand will average almost 800,000 barrels per day lower next year than during 2019.

Of the industries that have suffered most during the coronavirus-caused downturn, aviation has taken a hard hit. At least 14 airlines worldwide have filed for bankruptcy protection since the start of the pandemic.

Four prominent carriers—Virgin Australia, Avianca Holdings, Latam Airlines, and Grupo AeroMexico—defaulted in the first and second quarters, according to S&P Global Ratings.

S&P Global Ratings expects credit measures for some sectors, including aviation and airlines, will take longer to fully recover even if the health effects of the pandemic dissipate next year due to long-term disruption. Additionally, “many airlines are also reconsidering their fleet composition, and the general projection is that airlines will cut 20% of their fleet amid this pandemic,” S&P Global Ratings said.

Still, the threat of defaults is diminishing. Airlines’ probability-of-default score, considered the most vulnerable sector by S&P Global Market Intelligence’s Credit Analytics probability-of-default model, fell to 12.7% as of June 28, down from a peak of 26.9% on April 2.

Today is Thursday, July 9, 2020, and here is today’s essential intelligence.

Market Volatility

The Essential Podcast, Episode 15: Safe Haven — Gold Shines Through the Crisis

Fiona Boal, Global Head of Commodities & Real Assets at S&P Dow Jones Indices, joins The Essential Podcast to discuss the performance of gold through the crisis — looking specifically at gold supply, gold demand, and how "the currency of last resort" has appealed to investors over the past six months. Listen and subscribe to this podcast on Spotify, Apple Podcasts, Google Podcasts, Deezer, and our podcast page.

—Listen to this episode of The Essential Podcast, from S&P Global

Indices Made Remarkable Recovery in Q2

After a volatile start to 2020, many investors were looking at double digit declines and were probably re-evaluating their 2020 expected returns. But while COVID-19 continued to determine market sentiment, Q2 hosted a remarkable recovery. The S&P 500 (+20.54%) and the S&P MidCap 400 (+24.07%) posted their highest quarterly total returns since 1998, while the S&P SmallCap 600 (+21.94%) recorded its largest ever quarterly gain. More broadly, the overwhelming majority of sector and style indices across the market capitalization spectrum also recovered in Q2: 14 posted their best quarterly total return ever as stimulus packages and tentative indications of a reopening U.S. economy offered tailwinds. Energy led the way, helped by gains in commodity markets, followed by Consumer Discretionary and Information Technology.

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

Commodity Indices in Unprecedented Times

Perhaps no other investable asset has been as severely affected by the COVID-19 pandemic as oil—not equities, not bonds, not currencies, and not even other commodities. While other asset classes have felt the pain of the once-in-a-lifetime decline in global economic activity, their prices have been held up in part by unprecedented levels of fiscal and monetary support. In contrast, we witnessed a dramatic collapse of prices in the oil market during March and April 2020, reminding investors once again that commodities are not anticipatory assets; they reflect current, real-world, “spot supply and demand” conditions. Extreme volatility and a brief period of negative prices in the WTI crude oil market over recent months have highlighted that modern-day benchmarks are more than market barometers. As the asset management industry evolves and the demand for index-linked passive investment products grows across asset classes, indices also take on the role of rules-based, systematic, and transparent strategies.

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

Mining companies book increase in market cap for 3rd month in June

The market value of mining companies rose for the third consecutive month in June, logging median growth of 10.7% compared to the prior month, according to an S&P Global Market Intelligence analysis. Metals prices saw an uptick in June amid recovering Chinese demand and COVID-19 lockdown measures easing in the U.S. and Europe as major economies started gearing back up. Industry indexes also trended higher month over month, with the SNL Metals & Mining Index up 4.6% between May 29 and June 30. The SNL Precious Metals Index climbed 7.2% over the same period, the SNL Base Metals Index rose 9.8%, and the SNL Diversified Mining Index gained 6.7%.

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

Fridson on Finance: Vindication of the fallen angels; Energy boosts June returns

In a June 24 commentary, “Why high yield investors should welcome fallen angels” S&P Global Market Intelligence wrote, “Historical returns indicate that over the longer term the greatly feared influx of BBB downgrades will raise the high-yield market's total return while also improving its credit quality.” It did not take long to obtain some corroboration of that thesis. For June, the ICE BofA US Fallen Angel High Yield Index pulled up the all-high yield return substantially, scoring an attention-grabbing total return of 3.35%. With a 15.47% share of the ICE BofA US High Yield Index’s market value on May 31, 2020, fallen angels enabled the ICE BofA US High Yield Index to achieve a 0.98% total return. Without their contribution, the all-HY return would have equaled the much lower 0.54% produced by the ICE BofA US Original Issue High Yield Index.

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

The Future of Credit

How COVID-19 Will Change Covered Bonds

While fiscal and monetary responses to the COVID-19 pandemic have headed off a liquidity crisis, they may have weakened credit quality by increasing overall indebtedness. In this report, S&P Global Ratings analyzes how the pandemic and the policy response to fight it will affect the covered bond market. In our opinion, residential mortgage market performance should generally be better than in recent crises due to support measures for workers and the expected limited correction in house prices. Certain segments of the commercial real estate market could be hit harder, such as retail and lodging, but cover pools' exposure to them tends to be limited. S&P Global Ratings expects COVID-19 related rating downgrades of covered bond programs in 2020 to be limited by credit protection features of covered bonds, and by the outlook on banks and sovereigns.

—Read the full article from S&P Global Ratings

Credit Trends: How ETFs Contributed To Liquidity And Price Discovery In The Recent Market Dislocation

Secondary trading in credit markets has changed meaningfully in the last 10 years, including the retreat of traditional providers of liquidity, such as broker-dealers, and the rise of exchange-traded funds (ETFs). ETFs are playing an increasing role in providing secondary market liquidity, which was on display during the recent volatility. As both primary and secondary bond markets faced illiquidity, record ETF volumes helped to support liquidity and, importantly, provide price discovery.

—Read the full article from S&P Global Ratings

Retail groups press Trump Administration for credit insurance backstop

Retail groups are asking the Trump Administration to create a backstop for insurance that retailers and suppliers use to protect inventory purchases made on credit, a move the industry organizations say would prevent more supply chain headaches going into the key holiday shopping season. Organizations including the American Apparel and Footwear Association, or AAFA, and the National Retail Federation, or NRF, have sent letters to U.S. Treasury Secretary Steven Mnuchin and Federal Reserve Chair Jerome Powell over the past month, asking the federal government to create a temporary backstop for trade credit insurance. Brands that make a range of consumer goods often purchase coverage for sales made to retailers on credit in case the store operators go bankrupt or are otherwise unable to pay.

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

Banking Sector Under Pressure

US banks get pass on stress tests, at least for the next few months

Anyone expecting a definitive statement on the health of the largest U.S. banks from the 2020 stress tests may have come away disappointed. Capital actions banks announced in the days after the Federal Reserve published results on June 25 were roughly in line with analyst expectations. Wells Fargo & Co. said it would cut its dividend, while most others said they would maintain theirs.

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

Bank Q2 earnings to shine light on COVID deferrals as charge-offs hit

Banks that offered payment deferrals to borrowers struggling through the coronavirus pandemic now face one key question: How many of these borrowers will make it through, and how many will default? The answer will determine the level of loan losses that U.S. banks ultimately have to absorb during the current credit cycle. Second-quarter earnings reports will begin to provide some perspective, although analysts say it could be many months before there is full visibility.

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

European banks' initiative to challenge Visa, Mastercard could be a stretch

A group of 16 European banks plan to launch a payments system that could rival Visa Inc. and Mastercard Inc. in the EU. Although a challenge to the hegemony of the two U.S. payments giants is long overdue, according to industry insiders, the jury is still out on whether the club of lenders can successfully bring a viable alternative to the table. The European Payments Initiative, or EPI, includes some of Europe's largest banks, such as Deutsche Bank AG, ING Groep NV, and UniCredit SpA. The banks said in a July 2 statement that they were preparing to launch a pan-European payments system that they expect to be up and running by 2022.

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

Major shift in Commerzbank's strategy expected after CEO, chairman step down

The sudden resignations of Commerzbank AG CEO Martin Zielke and supervisory board Chairman Stefan Schmittmann are likely to be followed by a major shift in the lender's restructuring plan, according to credit analysts. While there is agreement among credit analysts that another revamp is needed, the departures of Zielke and Schmittmann could create complications in the near term. Commerzbank will have to find a chairman who can "mend the strained relationships with shareholders and trade unions," Dierk Brandenburg, head of the financial institutions group at Scope Ratings, said in a written comment. S&P Global Ratings said in a bulletin that the resignations will make the restructuring more difficult and that it expects the bank to continue with the same strategy until a CEO is appointed.

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

As leaders depart, COVID-19 complicates picture for Lloyds' future strategy

Lloyds Banking Group PLC is set to continue its push into wealth management and insurance following the forthcoming departure of its leadership team, but the coronavirus pandemic may curtail its immediate ambitions. Lloyds' chairman, Norman Blackwell, will be replaced by Robin Budenberg, the London chairman of banking advisory firm Centerview Partners LLC, in early 2021. Lloyds also said long-standing CEO António Horta-Osório will step down at the end of June 2021 after more than a decade in charge.

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

ESG in the Time of COVID-19

'Banning' natural gas is out; electrifying buildings is in

Local governments around the United States are making it more difficult to include natural gas as a fuel option in new building construction. S&P Global Market Intelligence senior reporter Tom DiChristopher joins the podcast with interviews about the varied approaches communities are taking on natural gas infrastructure and how the industry is responding.

—Listen and subscribe to Energy Evolution, a podcast from S&P Global Market Intelligence

EC wants 6 GW of electrolyzers for green hydrogen in EU by 2024

The European Commission wants the EU to install at least 6 GW of electrolyzer capacity able to produce up to 1 million mt of renewable hydrogen by 2024, it said in an EU hydrogen strategy published on July 8. The EC sees renewable hydrogen as making a key contribution to the EU's efforts to become climate neutral by 2050, which means decarbonizing its energy sector and phasing out unabated fossil fuels.

—Read the full article from S&P Global Platts

The Future of Energy and Commodities

Infographic: Middle East grapples with historic oil output cuts

The Middle East has taken center stage in the OPEC+ agreement to cut 9.6 million b/d through July, with Saudi Arabia leading the way and Iraq being put to the test on its compliance. Some refineries took extended maintenance after COVID-19 and output cuts. Oil trading and bunkering hub Fujairah built up record stockpiles. Middle East spending on field developments and infill drilling will be $52 billion this year, down 28% from 2019 as a result of the COVID-19 crisis, S&P Global Plans Analytics says.

—Read the full article from S&P Global Platts

Analysis: US crude stocks race higher as exports flag, imports surge

A steep decline in US oil exports and a flood of imports pushed crude inventories higher last week, even as refinery inputs and refined product demand edged higher, US Energy Information Administration data showed July 8. US commercial crude inventories surged 5.65 million barrels to 539.18 million barrels during the week ended July 3, Energy Information Administration data showed July 8, putting stockpiles nearly 18% above the five-year average for this time of year.

—Read the full article from S&P Global Platts

Analysis: OPEC+ oil cuts fail to stem widening discount for FOB Arab Gulf propane differentials

Asian LPG importers, especially Indian and Chinese end-users, preferring cheaper US cargoes on the delivered market has widened the discount of FOB Arab Gulf propane cash differentials against front-month Saudi Aramco contract price swaps, brushing aside a tight Middle East market on OPEC+ oil cuts. A supply-led pull on Middle East LPG production would typically see FOB AG cash differentials strengthen as Asian end-users compete to secure limited spot supply. However, more competitively priced US cargoes widened the differential to minus high-teens/mt in the week started July 5, S&P Global Platts data showed.

—Read the full article from S&P Global Platts

European steel industry looks for way forward amid coronavirus demand blow

The coronavirus has dealt the European steel sector a heavy blow. Coming on the heels of Brexit and global trade tensions, the crisis has also highlighted the region’s overcapacity problem, raising the possibility of previous merger and divestment plans being revived. As much as 18.9 million mt of steelmaking capacity was taken offline in Europe during the market slump caused by the pandemic – more than in any other region. This comes on top of 2019’s marginal contraction in production. By mid-May, steelmakers across Europe had restarted production, but the industry faced an unprecedented situation as the sector organization Eurofer was unable to offer a production outlook, while mills still had very little clarity about their order bookings. The collapse in demand brought about by widespread lockdowns is not the only worry for steelmakers.

—Read the full article from S&P Global Platts

Listen: US corn prices ride high with bullish acreage report, but for how long?

The annual acreage report from the US Department of Agriculture saw a 5 million acre drop in corn planting from the Prospective Plantings report at the end of March. The resultant rise in corn prices coupled with low ethanol stocks lifted ethanol prices. The S&P Global Platts benchmark Chicago Argo terminal ethanol price reached its highest level in seven months on July 7. Join Sophie Byron, associate pricing director for agriculture in the Americas; Pete Meyer, director of agriculture analytics; and Rafael Savoia, pricing specialist covering Latin American corn, as they discuss what is happening to Americas corn crop and how the Brazil and Argentina export programs are shaping up.

—Listen to Commodities Focus, a podcast from S&P Global Platts

Written and compiled by Molly Mintz.