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In This List

Soft Brexit Hopes Temper UK Election Shock as May Hangs on as PM

S&P Global Ratings

COP24 Special Edition Shining A Light On Climate Finance

S&P Global Platts

Energy: What to Watch in 2019

S&P Dow Jones Indices

Considering the Risk from Future Carbon Prices

S&P Global Ratings

U.S. Bank Outlook 2019 Still Sunny, But The Good Times May Be Behind Us


Soft Brexit Hopes Temper UK Election Shock as May Hangs on as PM

The latest in a string of sensational political upsets to roil Western democracies has left the U.K.'s Conservative Prime Minister Theresa May clinging to power thanks to the support of a small Northern Irish party instead of boosting her parliamentary support as she had hoped. While market reaction, including the sharpest fall in the pound in eight months, has been tempered by hopes for a softer Brexit, she must now hold together a fragile majority as she tries to strike a deal on leaving the European Union with a hard-bargaining Brussels.

The Conservatives fell short of an overall majority in the June 8 election, losing 12 seats. The party secured 318 seats in the 650-seat parliament, with one constituency left to report, but indications June 9 that Northern Ireland's Democratic Unionist Party, with 10 seats, would support them allowed May to visit the Queen to receive assent to form a government.

While the DUP is pro-Brexit, it is opposed to the installation of passport controls on the border with the Republic of Ireland. Investors calculate this might lead May to soften her line in the exit talks, reducing the chance that the U.K. could walk away with no trade deal at all and increasing the possibility of an arrangement like that enjoyed by Norway, which has access to Europe's internal market in return for abiding by EU rules. On the other hand, May's hopes when she called a snap election in April of boosting her majority in order to give her more negotiating leeway by allowing her to ignore the more strident euroskeptic voices within her own party, have now been dashed.

"Political uncertainty has increased: the British negotiators will head to Brussels for talks due to begin June 19 without a clear agenda as consensus within parliament regarding the type of Brexit remains elusive," Barclays analysts Fabrice Montagne and Andrzej Szczepaniak wrote in a note, adding that it was premature to identify any other effect of the elections on the talks other than to inject additional uncertainty.

Brexit: Harder or Softer?

"It is still too early to say whether the outcome of the election would alter the probability of an orderly hard versus an orderly soft Brexit. In practice, slim majorities tend to water down policies as the government is not able to take strong positions," they said, adding that pro-government MPs might continue to support calls by May for exiting the European Court of Justice and cutting immigration which are incompatible with continued access to the single market.

The pound tumbled 1.7% against the dollar to $1.2742 at 8:44 a.m. ET, retracing earlier losses of as much as 2.3% in its worst trading day since October. London's FTSE 100 stock index, many of whose companies have foreign earnings, jumped 0.5%.

The currency has sunk from over $1.40 since last June's referendum vote to leave the EU, which proved to be the first of a series of global political developments which seemed to turn long accepted wisdom on its head, including Donald Trump's victory in the U.S. presidential race and the election of Emmanuel Macron in France at the head of a completely new political movement.

The pound's fall was broken as investors bet that the DUP's hopes for a soft Irish border might push May toward a softer Brexit, Nomura currency strategist Jordan Rochester said. Pro-Brexit Conservative MPs might now also moderate their positions, he added.

"I think they'll be doing a bit of soul searching, because if they don’t sort out their core message then whenever the next election is, it might not be them in No. 10," he said, referring to No. 10 Downing Street, the official residency of the prime minister.

Pound Fall Limited

Some strategists were surprised that the pound did not fall more on the loss of the Conservative majority, Rabobank currency strategist Jane Foley said.

"Whether Theresa May is prime minister or not, if the Tory party is forced to rely on non-Tory votes, the market is beginning to think that parliament is going to be a little bit softer on Brexit and that therefore she might have to make some compromises," she said, adding that if Conservative rivals try to displace the prime minister as punishment for her poor election campaign then the market will evaluate them according to their position on Brexit.

Any candidates such as Foreign Secretary Boris Johnson, or David Davis, secretary of state for exiting the European Union, would be seen negatively, due to their euroskeptic views, Foley said, while someone like Home Secretary Amber Rudd, seen as more moderate, would be welcomed by investors.

Senior Conservative voices including former minister Anna Soubry and former finance minister George Osborne have already said May should consider stepping down.

The European Union's budget commissioner Guenther Oettinger told German radio he was unsure if Brexit negotiations could begin on time, adding that a weak negotiating partner could result in a poor outcome for all sides.

Polls on the eve of the elections had predicted a Conservative lead of between 13 and 1 percentage points. The Labour Party, led by left-winger Jeremy Corbyn, added 31 seats to 261, in a result which made a nonsense of pundits' predictions after a campaign in which he appealed to young people with promises to abolish university tuition fees, re-nationalize major infrastructure and boost taxes on corporations and high earners. The result consolidated the control over the main opposition by Corbyn, for long a marginal figure within his own party but whose rise echoes support for fellow left-wing insurgents like Bernie Sanders in the U.S. and Jean-Luc Mélenchon in France.

While the election result may have unpredictable consequences for the U.K.'s relationship with the EU, it did however reduce one other key source of political uncertainty. The Scottish National Party lost more than a third of its seats, taking its total to 35 and sapping momentum toward another referendum on independence for Scotland.



COP24 Special Edition Shining A Light On Climate Finance

Highlights

− Green loans are evolving, with the Climate Bond Initiative forecasting nearly $1 trillion in green bond issuance by 2020.

− Despite the uptick in green bond and loan issuance, the market still remains relatively small, especially compared to the universe of assets comprising CLO 2.0 transactions.

− In our view, a green CLO market has large growth potential, boosted by regulatory initiatives and emerging interest from both issuers and investors in 2018.

− We built a hypothetical rating scenario for a green CLO to compare and contrast the underlying portfolio and structure with a typical European CLO 2.0 transaction.

− Our hypothetical green CLO analysis showed that green loans may have different fundamental characteristics to corporate loans, such as lower asset yields, higher credit quality, and higher recovery rates assumptions.

The global collateralized loan obligation (CLO) market has experienced a rebirth (2010 in the U.S. and 2013 in Europe). New issuance continues to increase due to investor familiarity with the product, as well as low historical default rates. While a market for green assets, such as green loans and bonds has been established for a while, although still of a relative size, a sustainable securitization market is still in its infancy. Considering the challenge in financing the amounts, S&P Global Ratings expects green CLOs to play a role in increasing the private sector presence in the sustainable finance market.

Following the Paris Agreement that came into force in November 2016, 184 parties have ratified the action plan to limit global warming. For this purpose, developed nations have pledged to provide $100 billion (about €87 billion) annually until 2025. As part of this deal the EU has committed to decrease carbon emissions by 40% by 2030. In March 2018 the European Commission (EC) proposed the creation of environmental, social, and corporate governance 'taxonomy', regulating sustainable finance product disclosures, as well as introducing the 'green supporting factor' in the EU prudential rules for banks and insurance companies.

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Energy: What to Watch in 2019

Highlights

S&P Global Platts Analytics Issues Two Special Reports

Pricing across the global energy markets will face headwinds in 2019, with a weaker and more uncertain macroeconomic framework deflating price formation in general, according to two special reports just issued by S&P Global Platts Analytics. Such headwinds will require the industry and portfolio managers to take a big-picture approach.

See the Executive Summary of the S&P Global Platts Analytics special report 2018 Review and 2019 here. Access the full S&P Global Platts Analytics Top Factors to Look Out For in 2019 for Energy here.

"One of the key lessons learned in 2018, painfully by some, is that market sentiment can shift violently without much change in fundamentals, requiring a steady, holistic perspective," said Chris Midgley, global head of analytics, S&P Global Platts. "It is clear that this volatility will remain a feature across the energy markets in 2019, particularly as IMO 2020 nears."

Particularly blustery headwinds are in store for markets where prices finished 2018 at elevated levels, and well above costs, such as North American natural gas and global coal. However, if the supply side can adjust to the reality of slowing demand growth, energy prices can find support. For natural gas liquids (NGLs), the ongoing logistical constraints at the US Gulf Coast are likely to manifest on continued price volatility, particularly for ethane and liquid petroleum gas (LPG), over the next year despite strong global demand.

LPG, such as propane and butane and used in transportation fuel, refrigeration, heating and cooking, is rapidly facing US export capacity constraints, especially along the US Gulf Coast. For LPG feedstock propylene, there is clear potential for high volatility globally over the next 12-18 months.

Analysts at S&P Global Platts see weakening prices of Henry Hub natural gas. The slowdown in US demand growth will exceed that of supply. But if winter temperatures prove to be colder than normal, near-term prices will need to move higher to bring on enough supply to replenish depleted storage levels.

For global liquefied natural gas (LNG), it will be end-user-backed LNG demand that faces particular struggle to cope with the speed and force of new supply entering the market in 2019. Non price-responsive demand in Asia will be easily met and JKM spot physical prices (reflecting LNG as delivered into Japan, Korea and China) will sag next year.

Access the full S&P Global Platts Analytics Top Factors to Look Out For in 2019 for Energy here. Among the 22 key take-away themes:

  • NGL supply growth will strain the North American energy system
  • Saudi Arabia will need to be nimble to balance 2019 oil supply
  • US oil supply limited by pipelines
  • Oil demand slowing: trade war, industrial slump
  • 2019 LNG supply additions largest since the Qatari mega-trains
  • US gas supply growth to exceed demand growth even with LNG exports
  • Global solar growth slowing
  • Shipping disruption looming - IMO 2020
  • New Russian gas pipeline advantage over Ukraine
  • US coal demand to decline again in 2019
  • Growth in new refineries and complex capacity likely to weigh on refinery margins especially in Asia

Year 2019 will certainly be one of transition for crude and refined oil products as it will lead into 2020 when roughly three million barrels per day of high-sulfur fuel oil must be “destroyed” (including enhanced usage of HSFO in power generation) due to the International Marine Organization (IMO) mandate of eco-friendly shipping fuels in use at sea. A similar amount of middle distillate/low sulfur fuel must be created (by refinery changes and by running more crude oil. The increase in refinery capacity between now and 2020 is large, but mostly needed to cover normal demand growth. Expect prices of light sweet crudes to be bid up in 4Q19.



Considering the Risk from Future Carbon Prices

Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change. Carbon prices are already implemented in 40 countries and 20 cities and regions. Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement.

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents.

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U.S. Bank Outlook 2019 Still Sunny, But The Good Times May Be Behind Us

Highlights

- S&P Global Ratings expects U.S. banks to face continued market volatility in 2019 stemming from a slowdown in economic growth, policy uncertainty, rising rates, and monetary tightening.

- Although it is not our current base, we believe we are incrementally closer to a turn in the credit cycle in 2019. When the credit cycle does turn, bank profitability will come under pressure as imbalances brought on by years of excess liquidity and low rates will flow through banks' income statements and balance sheets.

- Key areas of concern in credit are commercial and industrial (C&I) -- particularly leveraged lending, commercial real estate (CRE), and pockets of consumer credit -- credit cards, auto, and personal loans.

- Separately, fee income could come under pressure as the economy slows and if market valuations decline. Bank revenues in areas like assets and wealth management may also decline because they are tied, in part, to market valuations. Fees for originating and selling mortgage loans could also drop.

- Nevertheless, U.S. bank balance sheets are sound, with higher capital and liquidity levels, and we believe rated banks are well prepared to withstand potentially weakening credit conditions.

- New regulation may result in lower capital and liquidity levels for some (mainly regional) banks. On the other hand, the stressed capital buffer (SCB) proposal could prompt some global systemically important banks (GSIBs) to continue to face higher capital requirements.

- Longer term, from a business standpoint, it will be important for bank management teams to remain vigilant to disruption from technologically sophisticated competitors (fintechs), as well as to the threat of cyberattacks.

- Under our base-case scenario, we expect bank ratings to remain largely stable through 2019. 83% of our operating company ratings currently have stable outlooks, 8% have positive outlooks, and 9% have negative outlooks.

Our Fundamental Forecast For U.S. Banks In 2019 Remains Slightly Positive

Current U.S. Bank Ratings Distribution

Current Bank Ratings Outlooks

Bank Profitability Trends

Loan Growth Trends

Flattening Yield Curves And Rising Deposit Costs Should Lead To Decelerating NIMs

Asset Quality Is Excellent But Likely Will Deteriorate Incrementally As Rates Rise

Aggregate Net Charge-Off Rates Remain Below Historical Levels

Investment-Grade Loans Moving To Speculative-Grade Could Pressure Banks' C&I Portfolios

Low Interest Rates Have Helped Keep Debt Service Low For Consumers, But Trends Could Be Less Benign As Rates Turn Higher

The Evolving Composition Of Consumer Debt

Postcrisis Credit Card Loan Growth Has Been Robust

Capital Levels Are Likely To Decline For Regional Banks But May Increase For Some GSIBs

All Eight U.S. GSIBs Are Above Their Required Regulatory Minimums

Bank's Funding Profiles Remain In Good Shape

Liquidity Looks Decent, But Regional Banks' Liquidity Could Decline Due To A Recent Regulatory Proposal