COVID-19 Daily Update: March 24, 2020

S&P Global Ratings sees a growing downside risk to our macroeconomic forecasts, based on new data on the effects of social distancing and shelter-in-place orders. For the U.S., the year-on-year decline in GDP in the second quarter now looks to be at least double the 6% contraction we estimated just last week, and we now also expect a contraction in the first quarter. Europe's GDP decline for the first half may be similar to that of the U.S. but with a larger decline in the first quarter than the second. The spread of the virus appears largely contained in China and its economy seems to be stabilizing. S&P Global Ratings estimates that China's GDP contracted 13% (annualized) in the first quarter but should begin to grow again in the second quarter. While emerging markets like Brazil, India, and Mexico were the last globally to be hit by the pandemic—and thus there is less data to draw from—we now expect a similar shock to those countries, with possible double-digit percent GDP declines in the second quarter.

These downside risks are visible immediately. The Summer 2020 Tokyo Olympics have been postponed until 2021. India is implementing a lockdown of the country’s 1.3 billion people, ordering everyone to comply with “a total ban of coming out of your homes” for 21 days, Prime Minister Narendra Modi said. Poland, Egypt, and South Africa have announced plans to implement lockdown measures, albeit less strict by comparison. New cases are appearing fastest in Italy, the U.S., Spain, Germany, and Iran. African countries are reporting low case numbers but are responding forcefully to the pandemic. Brazil's Health Minister Luiz Henrique Mandetta said that "by the end of April, our health care system will collapse.”

In the U.S., the total number of confirmed cases topped 50,000—with all 50 states reporting instances of infection but only 20 enforcing some kind of shelter-in-place rule. President Donald Trump spoke today of his frustration with having to “close the country” with prevention efforts in place to address the pandemic, announcing that he “would love to have the country opened up, and just raring to go, by Easter” on April 12. The Trump Administration said a nationwide lockdown has never been under consideration. At the center of the country’s outbreak, New York Governor Andrew Cuomo reported that the number of cases in the state is doubling every three days. More than 25,000 cases have been identified in the state alone. “If it’s public health versus the economy, the only choice is public health. You cannot put a value on human life,” Cuomo tweeted last night.

The total confirmed cases worldwide surpassed 400,000 today, according to Johns Hopkins University data. However, China is lifting its almost two-month lockdown on the Hubei province, where the outbreak originated, although the city of Wuhan will be closed off through April 8. The only place untouched by coronavirus and COVID-19 is Antarctica.

Business is at a standstill in the U.S. and Europe as Asian economies start to slowly reignite their engines—particularly the restaurant, airline, and film industries. Restaurants are rethinking their sales and workforce strategies as public officials warn consumers about the hazards of leaving their homes. Global airlines need around $200 billion in financial aid in coming weeks because of the liquidity crunch resulting from the coronavirus pandemic, which will cost the industry over $250 billion in lost passenger revenue this year, International Air Transport Association officials said today. Months-long production delays and theater shutdowns due to the pandemic could reshape the movie business for years to come.

Oil and energy markets are still caught up in the combined tangle of the coronavirus outbreak and oil price war. Finance officials from the G7 major industrial nations today called on "oil-producing countries to support international efforts to promote global economic stability," as the collapse in crude prices threatens to exacerbate the effects of the coronavirus crisis. Saudi Arabia and the United Arab Emirates said they plan to significantly boost supplies of crude starting in April, after OPEC's alliance with Russia and other key producers fractured earlier this month.

The Trump Administration's plan to buy as much as $3 billion of U.S. crude oil to fill the Strategic Petroleum Reserve remains a bone of contention holding up Congress' economic aid package, with the possibility mounting that it could get cut for now to break the impasse. The administration and top Democrats are close to finalizing the overall economic stimulus package, reports say.

The coronavirus pandemic has created new challenges for the energy transition. As the financial fallout of the coronavirus pandemic continues to spread, America's solar power suppliers are calling on Congress to help them avoid a wave of pink slips by pumping cash into new project installations just as the federal government did during the global recession of 2008-2009. Climate activists are disrupted in their attempts to limit natural gas use in buildings and forcing pipeline opponents to retrench in the digital realm, as the COVID-19 response is consuming local lawmakers' attention from recent efforts to ban gas use or require electric heating in new buildings and restrictions on public gatherings hamper meetings required to craft the policies.

Today is Tuesday, March 24, and here is essential insight on COVID-19 and the markets.

THE GLOBAL RECESSION IS HERE AND NOW

Global Macroeconomic Update, March 24: A Massive Hit To World Economic Growth

It's now clear that the hit to global economic activity from the measures to slow the spread of the coronavirus pandemic will be massive. Indeed, analysts in the financial and official sectors are revising their estimates of global GDP growth for the first half of 2020 on a near-daily basis. Whether these new forecasts imply a corresponding large downward revision in annual GDP growth depends critically on governments' policy response--particularly fiscal policy.

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak between June and August, and we are using this assumption in assessing the economic and credit implications. We believe measures to contain COVID-19 have pushed the global economy into recession and could cause a surge of defaults among nonfinancial corporate borrowers (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

—Read the full article from S&P Global Ratings

Credit FAQ: Assessing The Coronavirus-Related Damage To The Global Economy And Credit Quality

The current situation is exceptional on three fronts: the sudden stop in the global economy, the collapse in oil prices, and the record volatility in the capital markets. Together, this is putting significant pressure on borrowers' creditworthiness globally and will undoubtedly lead to increased defaults. However, the magnitude of the effects will vary tremendously by industry, geography, and rating. The industries most exposed to the collapse in global demand--such as airlines, transportation, and retail--or those heavily dependent on cross-border supply chains are likely to suffer most, both from slumping cash flows and much tighter financing conditions. In terms of ratings, we expect that companies rated 'B' and below will come under the most pressure. These low ratings reflect higher vulnerability to adverse business financial and economic conditions.

There has been a significant increase in the number of these lower-rated companies in the past few years, particularly in the U.S. and Europe. In fact, the percentage of U.S. issuers rated 'B-' and below is at an all-time high of more than 30%. These companies are the most vulnerable to pressures on liquidity, from working capital needs or refinancing needs. They are also the most exposed to the risk of distressed exchanges or debt restructuring, which would qualify as a default under our criteria.

By contrast, we expect entities with investment-grade ratings to exhibit stronger resilience and have more flexibility to absorb the effects of a global recession. That is not to say we don't expect a certain number of rating actions on these companies, particularly for those in sectors most exposed to the economic disruption. As central banks and governments around the world implement policies that will soften the blow to liquidity, we don't believe this will prevent all deterioration of credit fundamentals, particularly in the most exposed industries.

—Read the full article from S&P Global Ratings

Countries in Middle East, Central Asia ask IMF for coronavirus financial aid

The International Monetary Fund is considering providing financial support to countries in the Middle East and Central Asia, a dozen of whom have requested help as the coronavirus outbreak takes a toll on their economies reeling from the oil price crash, a fund official said Tuesday.

—Read the full article from S&P Global Platts

'The game very much is survival' for US restaurants during coronavirus – experts

U.S. diners are used to getting their fill at restaurants across the country. But the ongoing coronavirus outbreak is forcing restaurants across the industry to rethink their sales and workforce strategies as public officials warn consumers about the hazards of leaving their homes. Full-service restaurants designed for people to dine in could fare worse than quick-service operations that focus more on drive-thru sales. But in an industry largely built on customer interaction, even the best-run restaurants will suffer sales losses amid social distancing and restricted operations, experts said.

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

COVID-19 and Film: Theater closures, production delays reshaping movie business

Monthslong production delays and theater shutdowns due to the coronavirus pandemic could reshape the movie business for years to come. The three largest U.S. theater chains — AMC Entertainment Holdings Inc., Cineworld Group PLC's Regal Cinemas and Cinemark Holdings Inc. — all recently closed their doors in response to guidance from health experts advising against large gatherings. Meanwhile, major studios postponed film release dates and decided to release some titles directly to sale or on-demand, eschewing the typical exclusive theatrical release window. As exhibition investors and analysts grapple with the implications, some expect a fundamental shift in consumer habits, while others are more optimistic about the resilience of the movie-going business.

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

As Coronavirus Shutters Theaters, How Low Will 2020 Box Office Go?

The domestic box office year started with great promise as weekly box office posted growth in six of the first seven weeks of 2020. While things were going well in the U.S., the coronavirus was severely impacting international markets, particularly in China, where billions of box office dollars have been lost amid theater closures. International theater closures prompted studios to delay releases of some of their major films. The most notable of these are "No Time to Die," moving from April 10, 2020, to Nov. 25, 2020, and Disney's "Mulan," which was pulled from its March 27, 2020, release date.

The tide began to turn in late February/early March when domestic weekly box office dropped about 12% in weeks eight and nine before falling 45.3% in week 10 as fear of the coronavirus began to spread. Finally, in week 11, the domestic box office plummeted 57.3% to $88.7 million and had one of the worst weekends in decades. Shortly after the box office drop, the government announced guidance regarding social distancing to help stop the spread of the coronavirus. Theaters responded by reducing auditorium capacity to 50%. The government then updated its guidance to keep gatherings to 10 people or fewer, and theaters were forced to make the difficult — and unprecedented — call to close all of their theaters. AMC Entertainment Holdings Inc., Regal Cinemas Inc., Cinemark Holdings Inc. and many other theater chains have closed their doors for an undetermined amount of time. AMC was the only theater chain to provide a possible timeline of six to 12 weeks.

This undoubtedly will lead to a significant loss in box office ticket sales. In 2019, weeks 12-17 garnered $1.34 billion in ticket sales. Weeks 12-25 put up $3.34 billion in box office ticket sales. With no clear timeline for reopening theaters and no sense of what the major studios will do with their films, the future of the box office is extremely murky.

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

CHART OF THE DAY

EU carbon price sinks on coronavirus

What’s happening?EU carbon allowance prices have fallen 30% since the start of March as the coronavirus pandemic took a heavy toll on generating fuels, power generation demand and the general economic outlook. EU Allowance futures for December 2020 on the ICE Futures Europe exchange fell below Eur16/mt ($16.89/mt) for the first time in 20 months, down 35% in a week before slightly rebounding above Eur16/mt on the back of massive monetary support packages announced by central banks March 19.

What’s next? Lockdowns hitting commercial business plus production halts for large consumer car, steel and other manufacturers are likely to continue to reduce power demand by up to 20%. Marginal gas and coal generation plants are most affected by this demand destruction, in turn reducing the need to buy carbon allowances. European aviation is also covered by the ETS, another bearish blow to EUA demand with most flights grounded. The carbon price fall is seen by some as overdone in relation to demand for the CO2 allowances and the self-correcting Market Stability Reserve, but these are unchartered waters for the ETS.

—Read the full article from S&P Global Platts

Pension Brief: Liquidity Is A Rising Concern For U.S. Public Pensions In Down Markets

Given the current market downturn, U.S. public pension plans may experience liquidity stress to cover benefit payments. Through periods of continued volatility, assets in plans with weak liquidity are likely to be sold at a loss and may contribute to decreasing funded ratios. In our opinion, poorly funded plans and high discount rates may be indicators of excessive liquidity risk. In the U.S., plans have an average of 1% of their target portfolios held in cash and short-term investments to pay ongoing expenses, such as benefit payments and administrative costs. A liquidity-to-assets ratio can be useful in determining the liquidity risk, if any, of a pension plan.

A negative liquidity-to-assets ratio indicates the pension plan requires additional money to maintain operations and make all benefit payments. The further the ratio is below zero, the higher the percentage of assets that may have to be converted to cash. In a typical year, cash flows may be supplemented by realizing positive investment returns. However, the selling of non-cash assets, as during the current severe market downturn, may lead to large losses.

—Read the full article from S&P Global Ratings

Low Volatility Strategies in Times of High Volatility

The week ending March 20, 2020, marked one of the worst weeks for the Indian equities market, with the S&P BSE SENSEX witnessing record lows. The index recovered 5% to close at 29,915 (price return [PR]) on Friday, March 20, 2020, but it was still 17% down as compared with the week before, when it was at 34,103 (PR) on March 13, 2020. Historically, the last time the S&P BSE SENSEX witnessed such large fluctuations was on May 18, 2009, when the index gained 2,110 in a single day, increasing 17.34%.

The effect of the coronavirus has transformed global and local markets, as well as their behavior. We are witnessing a similar pattern in equities markets across the world, be it the S&P 500® in the U.S., the S&P BSE SENSEX in India, the S&P/ASX 200 in Australia, the S&P Japan 500 in Japan, or the S&P Europe 350®.

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

Riding through Volatility with the S&P Balanced Global Bond and Equity Futures Index

The S&P Balanced Global Bond and Equity Futures Index (the S&P BEF Index) is designed to deliver consistent returns through various market cycles by exploiting the complementarity between equities and bonds during market crisis, and adjusting the allocation to component indices on a daily basis to achieve a stable risk level (what we call a dynamic volatility control mechanism). The components are rolled futures that are highly liquid and tradable, and are as follows: Equities Basket—The S&P-500 (SPX), Euro STOXX 50 (SXSE), and Nikkei 225 (NKY) Rolling Futures; and Bond Basket—U.S. Treasuries, Euro Bund, and JGB Notes Rolling Futures.

Over the past 20 years, S&P BEF 0.4% Decrement Index[1] posted an annualized return of 3.84%, a risk-adjusted return of 1.13, and a maximum drawdown of 5.55%. How did the index perform during historical crises? The S&P BEF 0.4% Decrement Index posted positive returns of 2.7% during the Dot-Com Bubble Crisis and 3.6% during the Eurozone Crisis. This is in stark contrast to the significant losses posted by the S&P 500® during those periods. Throughout the 2008 Global Financial Crisis (GFC), the S&P BEF 0.4% Decrement Index declined 2.3%, while S&P 500 lost 50% during the same period. The index recovered rather quickly within six months compared with the four years that the S&P 500 took.

How has the index performed so far in 2020? As of March 16, the S&P BEF 0.4% Decrement Index declined 1.5% YTD and was off 3.7% since February 19. In comparison, the S&P 500 plunged by 26% and 29.5%, respectively. What is special about the current market environment is that the levels of volatility varied among major regions, potentially because of the different phases of virus spread. The S&P BEF Index aims to deliver higher long-term risk-adjusted returns with a smoother wealth curve than a single asset might. Historically, it rode through the Dot-Com Bubble, 2008 GFC, and Eurozone Crisis. In 2020, the S&P BEF Index has worked well so far.

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

Why the S&P 500® VIX® Short-Term Futures Index Rose More than VIX in March

Markets are down over 20%, COVID-19 is a global pandemic, negative global growth is looming—all of that just in the first 20 days of March! During same time period, VIX rose 65%, while the S&P 500 VIX Short-Term Futures Index jumped 175%. With a long-term beta of 0.7 to spot, a question might be—why did the S&P 500 VIX Short-Term Futures Index jump more than the spot? The reason for this is that March was a time for catching up. In February, the spot jumped 113%, while the front two months’ futures lagged, rising 44% and 30%, respectively, thereby leading to a 134% and 146% respective catch-up in March.

Now, interestingly, the S&P 500 VIX Short-Term Futures Index, an unleveraged hypothetical basket of the first two VIX futures contracts, returned more than either of its constituents. This is because of “roll yield” due to the curve being in backwardation—where rolling an expensive first month to a cheaper second month adds to returns. VIX has been backwardated since Feb. 24, 2020, as shown in an earlier blog.

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

OIL & ENERGY MARKETS IN LIMBO

G7 ministers urge oil-producing nations to help stabilize world economy, amid price war

Finance officials from the G7 major industrial nations on Tuesday called on "oil-producing countries to support international efforts to promote global economic stability," as the collapse in crude prices threatens to exacerbate the coronavirus crisis. Saudi Arabia and the UAE have said they plan to significantly boost supplies of crude starting in April, after OPEC's alliance with Russia and other key producers fractured in discord earlier this month.

The looming flood of crude comes with the market already reeling from a contraction in demand caused by the virus outbreak, and has prompted many oil companies to slash budgets and warn of layoffs and bankruptcies. The price plunge is also stressing the economies of many countries reliant on oil revenues, including OPEC members, several of whom are already struggling to provide jobs and services to their citizens.

—Read the full article from S&P Global Platts

Plan to fill US SPR at risk in Congress' stimulus fight

The Trump administration's plan to buy up to $3 billion of US crude oil to fill the Strategic Petroleum Reserve remains a bone of contention holding up Congress' economic aid package, with the possibility mounting that it could get cut for now to break the impasse. House Democrats late Monday offered a new stimulus proposal that would scrap the SPR purchases, remove up to $450 billion in loans and loan guarantees that could potentially go to the energy sector, and only grant financial relief to airlines if they commit to sharp emissions reductions.

—Read the full article from S&P Global Platts

CFTC takes questions on regulatory relief after recent crude oil market swings

US Commodity Futures Trading Commission officials Tuesday voiced overall confidence in the performance of derivatives markets thus far during recent oil and equity market volatility, even as the CFTC faced questions about regulatory relief offered over the last week. The conversations occurred during a teleconference the CFTC's Energy and Environmental Markets Advisory Committee held Tuesday.

Energy sector and derivatives market representatives mostly praised the CFTC for flexibility and outreach during the unprecedented period of coronavirus precautions and global crude oil price wars, and commissioners highlighted their ability to set aside differences to act. Over the prior week, the CFTC offered temporary waivers of recording and recordkeeping requirements for a range of market participants, mostly through June, to avoid disruptions as traders and other key employees shifted to remote work. One action that drew questions during Tuesday's call was the CFTC's move Friday to relax through September a regulatory threshold for a large national bank that has loans and risks management business with small to midsize oil and gas producers.

—Read the full article from S&P Global Platts

PODCAST OF THE DAY

Listen: Oil price crash and COVID-19: A two-pronged impact on global petrochemical markets

S&P Global Platts market specialists Kirsten Hays, Eric Su, and Simon Price join associate director Vanessa Ronsisvalle to give a global view on how the impact of the coronavirus pandemic and the recent oil price crash are affecting petrochemical markets, with particular focus on blendstocks, olefins, and aromatics.

—Listen to the full podcast episode S&P Global Platts

Airlines face liquidity crunch amid $250+ billion lost passenger revenue: IATA

Global airlines need around $200 billion financial aid in coming weeks because of the liquidity crunch resulting from the coronavirus pandemic, which will cost the industry over $250 billion in lost passenger revenue this year, International Air Transport Association officials said Tuesday.

IATA more than doubled its estimate of lost passenger revenue -- compared with its previous estimate of $113 billion in a worst-case scenario -- as more countries close borders, impose flight restrictions and the global economy slides into recession. The revenue loss is due to a 38% fall in global passenger demand, IATA officials said.

This is "the deepest crisis we have ever had in our industry", IATA CEO Alexandre de Juniac said in a briefing.

—Read the full article from S&P Global Platts

Coronavirus threatens to hamper US LNG exports as demand falls overseas

The coronavirus pandemic presents a growing threat to U.S. LNG exports and the domestic gas market as countries shut down economic activity in an attempt to stop the spread of the virus, cutting demand for natural gas.

Significant uncertainty remains about the severity and duration of the demand destruction, which has intensified with lockdowns, experts said. It has yet to materialize in feed gas deliveries to the six major U.S. LNG export terminals, which remain strong at about 9.4 Bcf/d over the weekend ending March 22, according to pipeline flow data from S&P Global Market Intelligence. But there are mounting expectations that the economic fallout from the pandemic will ripple through U.S. LNG exports.

—Read the full article from S&P Global Platts

With half its workforce at risk, US solar industry seeks congressional aid

As the financial fallout of the coronavirus pandemic continues to spread, America's solar power suppliers are calling on Congress to help them avoid a wave of pink slips by pumping cash into new project installations just as the federal government did during the global recession of 2008-2009. The U.S. solar industry, which employed 250,000 people entering 2020, "could lose up to half its workforce as a direct result of COVID-19," Abigail Ross Hopper, president and CEO of the Solar Energy Industries Association, or SEIA, said in a March 23 statement.

In a letter to Congress sent the same day, more than 550 members of SEIA urged U.S. lawmakers to allow developers whose solar projects qualify for federal investment tax incentives to receive direct cash payments.

—Read the full article fromS&P Global Platts

Coronavirus slows gas ban momentum, creates obstacles for pipeline opponents

The coronavirus pandemic has created new challenges for climate activists, disrupting attempts to limit natural gas use in buildings and forcing pipeline opponents to retrench in the digital realm. Cities, towns and counties have spearheaded recent efforts to ban gas use or require electric heating in new buildings. But COVID-19 response is now consuming local lawmakers' attention, while restrictions on public gatherings hamper meetings required to craft the policies.

Meanwhile, environmentalists are scrambling to move meetings and public demonstrations to online venues as states order citizens to remain at home. The groups are simultaneously waging a new battle against oil and gas bailouts and positioning themselves to navigate the post-coronavirus landscape.

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

Bunker industry credit risks exacerbated amid COVID-19 outbreak

Credit risk in the bunker market is intensifying amid the coronavirus outbreak, even as dropping bunker fuel costs following the recent collapse in oil prices offer some respite to shipowners in a challenging market, industry sources in Singapore told S&P Global Platts this week.

—Read the full article from S&P Global Platts

Oman reevaluates oil, gas portfolio in low price environment

Oman is reviewing its oil and natural gas projects with a breakeven cost of more than $30/b but hopes the global economy will stabilize in the second half of the year, a finance ministry official told S&P Global Platts on Tuesday.

"We will look at different scenarios for $15/b, $20/b and $30/b oil," said the official, who spoke on condition of anonymity. "We expect further pressure on oil prices until this situation between Russia and Saudi Arabia is worked out. We have to revisit oil and gas projects that cost more than $30/b."

Last week, the Omani government announced it would slash 5% from 2020 budgets for all of its ministries. The decree issued urged all ministries to "review all types of spending, especially on consumer items on which the reduction is still available."

—Read the full article from S&P Global Platts

Written and compiled by Molly Mintz.