Daily Update: October 7, 2020

Subscribe on LinkedIn to be notified of each new Daily Update—a curated selection of essential intelligence on financial markets and the global economy from S&P Global.

Surprising investors and policymakers alike on Tuesday, U.S. President Donald Trump discontinued bipartisan stimulus talks until after the Nov. 3 election—halting hopes for additional pandemic aid that would provide help for struggling small businesses and civilians across the country. The action, which pushed the S&P 500 benchmark equities index down 1.4% lower, followed the Federal Reserve’s call to action for lawmakers to agree on new stimulus and could put the country’s recovery from the coronavirus-caused economic downturn in jeopardy.

Democrats and Republicans have been locked in a stalemate on Capitol Hill over the size, purpose, and possibilities of an additional stimulus package following the CARES Act in March. Last week, the House of Representatives passed a $2.2 trillion stimulus bill, to which Treasury Secretary Steve Mnuchin responded with a proposal for $1.6 trillion in aid.

“I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Business,” President Trump wrote on Twitter ahead of Mr. Mnuchin’s discussions with House Speaker Nancy Pelosi (D-CA), which the tweet canceled. President Trump said that the “economy is doing very well,” that “the Stock Market is at record levels,” jobs are “coming back in record numbers,” and that the U.S. is “leading the World in Economic Recovery, and THE BEST IS YET TO COME!”

Earlier in the day, Fed Chairman Jerome Powell warned of the risks brought on by limited fiscal measures and reiterated his desire for additional stimulus from Congress.

“Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses,” Mr. Powell said in an address to the National Association for Business Economics. “By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste.”

For the global economy, “fiscal policy remains key to the shape of the recovery,” according to S&P Global Ratings’ Chief Economist Paul Gruenwald, with the goal being “to cushion the blow, keep (or incentivize) workers and firms staying as connected as possible, and create a bridge to the eventual recovery.”

This was evident in the U.S. earlier in the crisis, when “federal stimulus was seen as a bridge to help American households and businesses. But the bridge seems to span only halfway, leaving many of the drivers of the economy stranded. And a second wave of coronavirus would almost certainly widen the recessionary ravine, requiring an even longer bridge,” S&P Global Ratings Chief U.S. Economist Beth Ann Bovino said in a Sept. 24 report.

Now, while economic activity in the U.S. rebounded in the third quarter and household spending rose, momentum has begun to weaken—and the economy is unlikely to return to pre-pandemic levels until the second half of 2022 without additional stimulus, according to Ms. Bovino. The “premature austerity” of legislators being unable to strike a deal ahead of a recovery in private demand could create the possibility of economic activity nosediving again.

In a statement after the president called off the coronavirus relief talks, Mrs. Pelosi said that “walking away from coronavirus talks demonstrates that President Trump is unwilling to crush the virus,” that “he refuses to put money in workers’ pockets, unless his name is printed on the check,” and that the White House is “rejecting the urgent warnings of Fed Chairman Powell today.”

Today is Wednesday, October 7, 2020, and here is today’s essential intelligence.

Uncertainty in the Global Economy

Economic Research: A Double-Digit Rebound Has Begun, But It’s No Time To Celebrate

The global economy continues to operate under the spectre of COVID-19, though the worst of the pandemic seems to have passed in most countries. The pandemic's epicentre has shifted to emerging markets, but second waves continue to appear in the advanced economies. In recent weeks, India has passed Brazil in the total number of cases and is now behind only the U.S. And it looks set to eventually overtake the U.S. at some point.

—Read the full report from S&P Global Ratings

Bristol-Myers $13.1b Deal Shows Industry's Hunger For M&A In H2'20

Bristol-Myers Squibb Co.'s intent to purchase heart-drug maker MyoKardia Inc. for $13.1 billion marks the fourth healthcare M&A deal of 2020 valued over $10 billion and the most recent in a string of acquisitions announced in the second half of the year. Of the sector's 17 deals with a transaction value above $1 billion, 13 have been announced in the second half of 2020, and only one — Gilead Sciences Inc.'s purchase of Forty Seven Inc. — was announced before May. The first half's stagnation coincided with the onset of the COVID-19 pandemic in the U.S., and analysts said at the time that while M&A drivers were expected to remain the same in the healthcare industry, the economic slowdown would likely warrant a temporary wait-and-see approach.

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

Broker Lawsuits Are Inevitable In Virus Claims War, But Their Success Is Not

Insurance brokers can expect to be sued if their clients' coronavirus-related business interruption claims are denied, according to lawyers and specialist insurers. But they add that policyholders and their representatives may struggle to make accusations of negligence stick.Court battles continue over whether insurers were right to deny policyholders' business interruption claims. In the U.K., the Financial Conduct Authority's test case is moving toward appeal following a mixed High Court judgment that favored policyholders in some circumstances and insurers in others. Whether the U.K. Supreme Court reverses the original decision or affirms it, some policyholders will be disappointed.

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

The Future of Credit

Global Credit Conditions: The K-Shaped Recovery

Macroeconomic and credit trends point to a widening gap in credit risks across regions and industries in the year to come. Downgrades have slowed but negative outlooks are at unprecedented highs for both nonfinancial corporates (37%) and banks (30%) globally. As a result, its forecasted the speculative-grade corporate default rate to double by June 2021. Banks can absorb the shock generally, but recovery will be slow and uneven.

—Read the full report from S&P Global Ratings

Default, Transition, and Recovery: Corporate Defaults Slow In The Third Quarter While The Oil And Gas Total Remains High

Global defaults in the third quarter of 2020 slowed considerably to 56, compared with 93 defaults in the second quarter. At the same time, the number of oil and gas defaults remained elevated, with 17 defaults in the third quarter--only one less than the sector's second-quarter tally of 18. Despite the high number of defaults in 2020, the sector's negative bias (the proportion of issuers with negative outlooks or ratings on CreditWatch with negative implications) remains above 60% as the effects of COVID-19 on the global economy and consumer behaviors have reduced long-term global oil demand by 2.5 million barrels per day.

—Read the full report from S&P Global Ratings

U.S. Private Auto Loss Ratio Falls To Historic Low In Q2 Amid Pandemic

A significant reduction in driving activity during the spring led to a sharp drop in private auto insurance claims and allowed the industry to post a historically low loss ratio in the second quarter. The industry's loss ratio in the second quarter was just 47.3%. S&P Global Market Intelligence analyzed quarterly loss ratios in the private auto segment since the first quarter of 2001; the next-lowest loss ratio in a three-month period was 56.3%, recorded in the third quarter of 2006.

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

Market Volatility

Market Caps Decline In Metals, Mining Due To US Dollar Strength, ESG Issues

BHP Group and Rio Tinto continued to dominate the list of top metals and mining companies by market capitalization in September, as the sector collectively lost value against a strengthening U.S. dollar and reports of numerous environmental, social and governance issues. The 25 largest companies in the space held a total market cap of US$817.07 billion as of Sept. 30. Rio Tinto and BHP Group had an aggregate market value of $220.39 billion, more than a quarter of the combined total of the 25 companies. Market cap percentage changes were calculated based on reported currencies, while the analysis bases company rankings on market values converted into U.S. dollars.

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

Is The S&P 500 Doing Its Job?

The changes attracted significant market attention and sparked a discussion around the names being added to the index, as well as those that were not. These updates also coincided with the S&P 500’s scheduled quarterly rebalancing. Changes to the index can be made at any time—they do not have to happen during quarterly rebalances. However, given the higher-than-usual attention, it’s worth revisiting the S&P 500’s purpose and objective, what the Index Committee does, and how the committee helps ensure that the index is doing its job.

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

Did Australian Active Funds Outperform Benchmarks Amid The COVID-19 Pandemic?

With the COVID-19 pandemic, equity markets around the world experienced massive declines with heightened volatility, and the Australian equity market was not immune. Various equity market segments experienced rapid market sell-offs followed by slow recoveries in H1 2020, with the S&P/ASX 200, S&P/ASX Mid-Small, and S&P/ASX 200 A-REIT decreasing 10.4%, 6.9%, and 21.3%, respectively. Due to the volatile environment, stock return dispersion in global equity indices rocketed to historic highs in March, providing fertile ground for stock picking. Return spreads across the S&P/ASX 200 Sector Indices and S&P/ASX 200 Factor Indices were widened to 45.5% and 26.8% in H1 2020, respectively. This market condition may prompt fund investors to question: did Australian active funds outperform benchmarks amid the COVID-19 pandemic?

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

Banking Sector Under Pressure

As The Deadline For The Transition From LIBOR Approaches, Work Remains For U.S. Structured Finance

The COVID-19-induced recession has distracted from the LIBOR transition, but the phase-out deadline is still approaching. U.S. structured finance still has significant work to do to minimize disruptions to markets in the transition. Significant variation exists in typical fallback language across major U.S. structured finance sectors and also between transactions within a given sector. Some of the largest challenges facing U.S. structured finance in preparing for the transition include the difficulty of amending transaction documents given the unanimous investor approval typically needed, the lack of clear fallback provisions and/or differences in fallback language between assets and liabilities, and the extensive logistics needed for amending LIBOR-based collateral in securitization.

—Read the full article from S&P Global Ratings

Large Nordic Banks 'Can Take Even More' Oil Losses, But One Lender Is Vulnerable

Large Nordic banks have booked significant provisions for their oil-related exposures amid the coronavirus pandemic but another oil price drop could pose further challenges for lenders due to the "inherent risk" in the sector, according to experts. While Norway's DNB ASA has the largest exposure to oil among big Nordic banks, Danske Bank A/S is the most vulnerable to another wave of credit losses, according to DBRS Morningstar. Meanwhile, one risk expert warns that a short-term "rush" to avoid losses could come at a larger expense in the future as the pandemic diverts attention away from the transition to green energy and regulatory risks faced by the oil sector in the longer term.

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

Technology & Innovation

Listen: The Essential Podcast, Episode 22: Trust No One — Cyber Risk, Cyber Security, & Cyber Insurance

How can you insure against human ingenuity? Joshua Motta of Coalition and Simon Ashworth of S&P Global Ratings join the Essential Podcast to discuss the challenges and rewards of cyber risk and cyber insurance. Listen and subscribe to this podcast on our podcast page, Apple Podcasts, Google Podcasts, Deezer, and Spotify.
—Listen and subscribe to the Essential Podcast from S&P Global

What Joe Biden's U.S. Tax Plan Could Mean For Big Tech

Joe Biden has vowed to get tough on big tech and tax breaks should he win the U.S. presidential race in November, but analysts and legal experts note current global uncertainties could hinder the Democratic challenger from shaking up Silicon Valley in the near term. Biden has pledged to raise the corporate tax rate to 28% from 21%, undoing some of the tax cuts implemented under the Trump administration. The former vice president also aims to set a minimum tax of 15% on companies' book income, or profits reported to shareholders, and to raise taxes on foreign earnings of U.S. companies located overseas — two policies that directly impact the U.S tech sector.

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

ESG in the Time of COVID-19

FACTBOX: Every UK Home To Be Powered By Offshore Wind By 2030: PM

Every home in the UK -- Europe's third-largest economy -- will be powered by electricity from offshore wind farms within a decade, UK Prime Minister Boris Johnson said in a speech to the Conservative Party conference Oct. 6. Johnson said the government would raise its target for offshore wind capacity by 2030 from 30 GW to 40 GW, providing funding of GBP160 million ($207 million) for offshore wind ports like Teesside and Humberside.

—Read the full article from S&P Global Platts

Mercedes-Benz To Expand EV Range, Step Up Research

Luxury carmaker Mercedes-Benz is expanding its electric vehicle (EV) range as part of a revamped strategy, with six new EVs using a new large EV architecture lined up to launch from 2021. The company said Oct. 6 at the launch of its new strategy that its EQS luxury sedan would be the first car to use the new dedicated architecture and would be available to the market in 2021 with an electric range of more than 700 km.

—Read the full article from S&P Global Platts

The Future of Energy & Commodities

Spotlight: The Economics For Floating Crude Are Not Compelling As A Contango Play, But It Is Competitive With Onshore Storage For Those Who Want To Avoid Prompt Sales

Although the pace of global oil stock drawdown is set to slow through November, S&P Global Platts Analytics does not believe the contango needs to steepen excessively, because there are no significant containment issues. However, the forward structure should continue in a solid contango until drawdowns occur sequentially. Platts believes short-term floating agreements can be executed at very competitive levels relative to the cost of onshore storage. A three-month time charter agreement could be inked at $20,000-$25,000/day for a VLCC, which equates to 30-35 cents/b/month (excluding the cost of capital and miscellaneous expenses).

—Read the full article from S&P Global Platts

US Gulf Of Mexico Oil, Gas Operators Continue Evacuations Ahead Of Category 4 Hurricane Delta

US Gulf of Mexico offshore oil and gas producers continued shutting in wells and evacuating crews on Oct. 6 as Hurricane Delta strengthened into a major Category 4 hurricane en route to a projected Louisiana landfall this weekend. Four days before the expected landfall, already almost 30% of the US Gulf's oil output was offline with much more expected to be shut down in the days ahead. As of Oct. 6, 540,495 b/d of oil output, and 232.71 Mmcf/d of natural gas output, had been shut in, roughly 29.22% and 8.59% of US Gulf of Mexico output, according to the US Bureau of Safety and Environmental Enforcement.

—Read the full article from S&P Global Platts

INTERVIEW: COVID-19 Recovery To Bring Metal Price Mini-Boom, Not Super-Cycle: EY

The current stimulus-led metals price recovery from COVID-19 lows won't result in a supercycle but rather a mini-boom, with heightened price volatility, Paul Mitchell, Global Mining & Metals Leader at consultancy Ernst & Young, told S&P Global Platts in an interview. This may bring more merger and acquisition activity in the sector, particularly in North America and among steel producers and then coal miners, as well as in the gold sector, Mitchell said.

—Read the full article from S&P Global Platts

Alaska Oil Output Tax Proposal Puts State’s Future Production At Risk: Fuel For Thought

Alaskans will vote in November on a ballot proposition that would hike taxes on large oil producing fields, more than doubling the state production tax and threatening future crude output in the state. The initiative would extract more than $1 billion a year from North Slope producers, state officials estimate, and includes a provision that make companies’ confidential financial information filed with tax returns public.

—Read the full article from S&P Global Platts

Listen: Structural Oversupply Weakens Freight Recovery Prospect

While a weak orderbook is seen with enthusiasm by tanker owners, who have suffered from increased competition amid structural overtonnage, floating storage enquiries and weaker scrapping prices have caused owners to refrain from scrapping their oldest tonnage in 2020. Platts shipping experts discuss the latest developments in an oversupplied freight market.

—Read the full article from S&P Global Platts

Written and compiled by Molly Mintz.