COVID-19 Daily Update March 17, 2020

While the spread of the coronavirus appears to be stabilizing in much of Asia, the long-awaited initial figures from China for January and February were much worse than feared. The increasing restrictions on person-to-person contact in Europe and the U.S. have sent markets reeling as risk-aversion rises and views on economic activity, earnings, and credit quality deteriorate sharply.

S&P Global Ratings believes the effects of the COVID-19 pandemic have likely pushed the world economy into recession, dragging full-year GDP global growth down to just 1-1.5%.

We project China's economy to expand 2.7%-3.2%, and the eurozone economy to contract 0.5%-1.0% in 2020.

For the U.S, the effects of social distancing on consumer spending activity and a knockdown effect on business investment, together with the oil-price hit on capital investments in energy infrastructure and expanded travel bans, likely means a -1.0% GDP reading in the first quarter and a large contraction of 6.0% for GDP growth in the second. In other words, the U.S. is already in recession.

Combined with the collapse in oil prices and extreme capital markets volatility, this will likely mean a surge in defaults among borrowers.

The sudden economic reversal will bring intense credit pressure as a cash flow slump and much tighter financing conditions, as well as the simultaneous oil price shock, will hurt creditworthiness. These factors will likely result in a surge in defaults, with a default rate on nonfinancial corporates in the U.S that may rise above 10% and into the high single digits in Europe in the next 12 months.

Today is Tuesday, March 17, and here is essential insight on COVID-19 and the markets.

COVID-19 Macroeconomic Update: The Global Recession is Here and Now

As the coronavirus pandemic escalates and growth heads sharply lower against a backdrop of volatile markets and growing credit stress, we now forecast a global recession this year, with 2020 GDP rising just 1.0%-1.5%. The risks remain firmly on the downside.

The initial data from China suggests that its economy was hit far harder than projected, though a tentative stabilization has begun. Europe and the U.S. are following a similar path, as increasing restrictions on person-to-person contacts presage a demand collapse that will take activity sharply lower in the second quarter before a recovery begins later in the year.

Central banks have swung into action and are undertaking some combination of sharply reduced policy rates, resumed assets purchase and liquidity injections. Fiscal authorities have generally lagged but have begun to loosen the purse strings; we suspect that larger and more targeted spending to the most affected groups is forthcoming.

— Read more from S&P Global Ratings

The Sudden Economic Stop Will Bring Intense Credit Pressure

The sudden economic stop caused by COVID-19 containment measures will lead to a global recession this year. A cash flow slump and much tighter financing conditions as well as the simultaneous oil price shock will hurt creditworthiness. These factors will likely result in a surge in defaults, with a default rate on nonfinancial corporates in the U.S that may rise above 10% and into the high single digits in Europe over the next 12 months.

The magnitude of the impact will vary significantly by industry and asset class. A severe but relatively short-lived economic contraction (our base case) will mostly affect the weaker credits or those in the most directly exposed sectors. But a prolonged recession, beyond our base case, would have broader implications.

— Read more from S&P Global Ratings

U.S. Recession Takes Hold As Fallout From The Coronavirus Spreads

While economic data for March is just starting to be released, the severity of the blow from the coronavirus leads us to believe that the U.S. is entering recession--if not already in one. The impact of social distancing on consumer spending activity and a knockdown effect on business investment, together with the oil price hit on capital investments in energy infrastructure and expanded travel bans, likely means a -1.0% reading in the first quarter and a large contraction of 6.0% for GDP growth in the second, signaling recession for the U.S.

For the year, we now forecast real GDP is likely to be flat in 2020 (versus our 1.9% forecast before the virus). We continue to expect a slow U-shaped recovery in the second half following a second-quarter slump. Uncertainty to our estimates of growth in 2020 is higher than usual.

— Read more from S&P Global Ratings

Stress Scenario: The Sovereigns Most Vulnerable To A COVID-19-Related Slowdown In Tourism

COVID-19 will take a major toll on the world's largest tourism exporters. We have run 122 of our rated sovereigns through three scenarios—limited", "extensive", and "extreme"—under which tourism receipts decline by 11%, 19%, and 27% as per similar stresses modelled by the International Air Transport Association (IATA). Despite the uncertainty, under our baseline expectation that this is a one-year shock, most sovereign ratings would be resilient to a temporary slide in tourism flows.

Our scenario analysis suggests "Sun, Sea, and Sand"-focused island economies in the Caribbean and elsewhere would be the most heavily exposed to a uniform slowdown in global tourist footfall. The second heaviest-affected region globally would be the Balkans, where even under the lower stress scenario, falling tourism arrivals would shave 1.9-2.2 percentage points (ppts) off headline GDP growth (excluding second-round effects).

Even larger more diversified exporters of tourism, such as Portugal, Turkey, Spain, and Australia could see negative GDP contributions to tourism of between 0.9-2.5 ppts from full-year GDP growth under the extreme shock scenario, which is less unrealistic than a few weeks ago in light of national quarantines and travel bans.

— Read more from S&P Global Ratings

The VIX Futures Curve Is in Backwardation

Backwardation is incredibly uncommon in the VIX futures curve. Since 2005, there have only been four periods where the roll yield was wider than 1%—during the financial crisis, when the U.S. lost its ‘AAA’ credit rating in 2011, in February 2018, and now. There are different ways to measure VIX futures backwardation: by using the relationship between the VIX level and the front-month futures, between the first- and second-month futures, or between points further out on the curve.

The implication of this is that when VIX futures are backwardated, exchange-traded products that track the S&P 500 VIX Short-Term Futures ER MCAP Index may earn a positive return from rolling into a cheaper contract before expiry, independently from the futures price change. If the VIX level is unchanged, the index can still provide positive returns through the roll yield. For example, this roll yield averaged 1.2% per day last week (March 9-13, 2020). We have been in backwardation for three weeks (as of March 13, 2020), and VIX is approaching an all-time high; if the markets continue to be volatile, we could be in this situation for some time.

— Read more from S&P Dow Jones Indices

Utility spending plans at risk as coronavirus sparks industrial slowdown

As the novel coronavirus spreads across Europe, lower power prices and the suspension of consumer bills are set to squeeze utilities and could lead companies to scale back their ambitious growth plans, at least temporarily.

The spreading pandemic has already put countries such as Italy, Spain and France on lockdown, with other governments in Europe also tightening their borders and EU member states set to approve a temporary bam on nonessential travel in the bloc. Industrial producers have also responded to rising infections, with several steel mills in Italy stopping production and automakers shutting down their factories across the continent.

— Read more from S&P Global Market Intelligence

CHART OF THE DAY

South Korean banks sufficiently capitalized to absorb virus shock

Major South Korean banks, although highly exposed to the coronavirus-hit services and manufacturing sectors, are likely well positioned to absorb the shock as they have sufficient capital buffer and relatively low levels of bad loans.

The COVID-19 outbreak, which triggered a cut to the benchmark interest rate at an unscheduled monetary policy meeting March 15, is expected to exert pressure on certain industries. Tourism, hospitality, manufacturing and retail are among sectors likely to be most affected by the pandemic. The exposure of South Korea's four biggest banks — KB Kookmin Bank, Shinhan Financial Group Inc., KEB Hana Bank and Woori Bank — to these sectors totaled 215 trillion South Korean won as of September 2019, according to Financial Supervisory Service data.

— Read more from S&P Global Market Intelligence

Asian petrochemical prices nosedive to historic lows amid COVID-19 pandemic

Asian petrochemical prices nosedived to historic lows Monday, crippled by plunging crude oil values amid the havoc caused by the COVID-19 pandemic and an oil price war between Saudi Arabia and Russia. The plunging petrochemical prices were largely triggered by collapsing crude oil prices, led by an ongoing price war between Saudi Arabia and Russia as well as volatile global financial markets amid the COVID-19 pandemic.

— Read more from S&P Global Platts

DOE, other US agencies embrace 'social distancing' to weather coronavirus

The coronavirus pandemic is pushing U.S. federal agencies focused on energy to maximize the number of employees working remotely, including staff at national labs run by the U.S. Department of Energy. However, agency representatives stressed that the modified work plans should not deter them from upholding agency missions.

In an emailed statement, the DOE said it "will practice 'social distancing' and transition to maximum telework flexibilities for employees across the DOE enterprise," including the agency's headquarters, national labs and other sites across the country. Among other things, the DOE conducts federal research on energy technologies, helps coordinate emergency response efforts for the energy sector, and authorizes LNG and crude exports.

— Read more from S&P Global Market Intelligence

Pipelines, utilities guard against coronavirus but keep gas flowing

North American natural gas transportation and distribution companies are taking measures to reduce the spread of COVID-19 and limit their employees' exposure to the coronavirus that causes the disease, but companies said they do not expect it to affect the operation of their pipelines and utilities.

— Read more from S&P Global Market Intelligence

Iraq calls for emergency OPEC+ meeting amid oil price crash

Iraq's oil minister, Thamir al-Ghadhban, on Tuesday called on OPEC and its allies to convene an extraordinary meeting to address the recent plunge in prices. In a letter to OPEC Secretary General Mohammed Barkindo seen by S&P Global Platts, Ghadhban asked for the OPEC+ coalition to meet "to discuss all possible ways to come up with serious and immediate actions for the purpose of rebalancing the market and mitigate the current deteriorating situation."

— Read more from S&P Global Platts

Slowdown in construction of new North American liquefaction supply expected amid outbreak

North American liquefaction terminals currently being built may see reduced construction activity for an indefinite period due to health officials' recommendation to avoid assembling large groups of people to guard against further spread of the coronavirus.

Limiting the size of work crews would lengthen construction schedules and could delay startup of projects. Before the respiratory illness that was first observed in China in December became a global pandemic, affecting trade flows and commercial efforts, the LNG industry was already under pressure from low international prices and weaker-than-expected demand in key end-user markets.

— Read more from S&P Global Platts

PODCAST OF THE DAY

Listen: Energy Evolution: Coronavirus pandemic, oil price crash shake up energy sector

As the coronavirus pandemic drives crude oil prices into the $30-per-barrel range, the Energy Evolution team takes a look at what the global economic slowdown means for fossil fuels, utilities and renewable energy.

Data from Panjiva shows that oil represented about 6.4% of global exports in 2018. Oil exports from the U.S. had been on the rise, growing by about 88.3% annually for the past three years, but the drop in prices is likely to remove a significant driver of U.S. export growth.

While U.S. oil drillers brace for spending and production cuts and a potential wave of bankruptcies after OPEC and Russia failed to reach agreement March 6, regulated utility stocks have not fallen as sharply given the nature of those companies' earnings, which rely more on consistent cash flow and profits controlled by state regulators.

Coronavirus fears have also cratered expectations that China would significantly step up its purchases of metallurgical coal, used in steelmaking, to fulfill its obligations under the first phase of a trade deal with the U.S. The disruptions to renewable energy supply chains, meanwhile, seem to be temporary, but could be problematic later in 2020 if companies cannot procure equipment from China for solar and wind projects.

— Listen to the episode from S&P Global Market Intelligence

Written and compiled by Molly Mintz.