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COVID-19 Daily Update: April 9, 2020

The U.S. Federal Reserve today announced plans to support speculative-grade debt markets and municipalities by extending $2.3 trillion in loans and accepting debt instruments as collateral. While Fed Chairman Jay Powell has insisted the institution intended to “put away” this unprecedented lending once “private markets and institutions are once again able to perform their vital functions of channeling credit and supporting economic growth”, it’s difficult to see what might signal an end to the crisis and, in turn, put an end to Fed support for debt. Following the global financial crisis of 2008, the Fed continued quantitative easing through asset purchases well into the second half of 2014. Purchases of securitized debt products like CLOs and noninvestment grade bonds reawaken questions of moral hazard and nationalized risk at a time of widespread downgrades of corporate debt.

S&P Global Ratings predicts that the unprecedented sudden stop of the global economy amid the coronavirus pandemic and the recent plunge in oil prices will lead to a significant pickup in 'BBB' rated companies falling into spec-grade in the U.S. and EMEA. Approximately $640 billion of corporate nonfinancial 'BBB' category rated long-term debt is vulnerable to “fallen angel” status, according to our scenario analysis.

Another 6.6 million Americans filed for first-time unemployment benefits in the past week, bringing the total for the past three weeks alone to almost 17 million people. Cuts were particularly acute in service jobs like retail and food service, but most sectors have seen substantial job losses.

The International Monetary Fund has resolved to double lending capacity to $100 billion to meet increased demand from countries in the midst of the coronavirus pandemic. IMF Managing Director Kristalina Georgieva has left open the possibility that further actions may be contemplated in the near future as the crisis develops. “We anticipate the worst economic fallout since the Great Depression,” Ms. Georgieva said.

In New York, new hospitalizations have declined, but the death toll from coronavirus increased today. U.K. Prime Minister Boris Johnson was removed from intensive care, but will remain in the hospital. As Europe and the U.S. hope for a flattening curve of new infections, the epicenter of the pandemic may shift to emerging markets. Without strong institutions or modern healthcare facilities, the possibility of a humanitarian tragedy appears increasingly likely across some Latin American and African nations.

As the pandemic has spurred a flight to safety in financial markets and battered economic-growth expectations, foreign investors are yanking funds from emerging markets and driving up default-risk spreads, creating an increasingly uncertain future for some developing countries, according to S&P Global Market Intelligence. The current view is that the outlook for sub-Saharan Africa is particularly grim.

The OPEC secretariat's analysis of the oil market anticipates a 6.8 million b/d contraction in global oil demand for the full year, including close to 12 million b/d "and expanding" for the second quarter. "These are staggering numbers," said OPEC Secretary General Mohammed Barkindo. "For the current quarter, around 15% of global oil consumption has evaporated and this huge market imbalance needs to be urgently addressed."

OPEC+ succeeded in reaching a deal on a production cut late today after Russian Energy Minister Alexander Novak indicated an increased willingness to roll back production to reflect falling demand.

Today is Thursday, April 9, 2020 and here is essential insight on COVID-19 and the markets.





UNITED STATES

Assessing The Impact Of COVID-19 On Businesses: Changes Happening With More On The Way

The outbreak of the novel coronavirus is forcing companies and organizations around the world to rapidly adapt and change their businesses. A recent survey conducted by 451 Research, part of S&P Global Market Intelligence, was designed to measure the impact of the coronavirus outbreak on businesses. The results of this survey are essentially a snapshot of a specific period of time when events and opinions were changing rapidly. For example, in the U.S., a state of emergency was declared on March 13, a few days after the start of the survey. It is very likely that among U.S.-based respondents their organizational actions, and their overall view on the potential severity of the crisis, evolved during the time the survey was conducted.

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



CARES Act: Why Quality Screening Is Now More Important Than Ever

The U.S. stimulus bill (the CARES Act) enacted on March 27, 2020, received significant attention for its support payments to individuals. However, it also has a significant impact for large corporations because of two lending programs.

The first program is for loans and guarantees made through the U.S. Treasury or Federal Reserve for up to five years, at prevailing market rates prior to the outbreak. While this is welcome liquidity, it comes with a few restrictive covenants. The second program is how the U.S. Treasury will also provide financing to lenders to make direct loans at rates of 2% or less to businesses with 500-10,000 employees. The distinction here is that the second program could significantly enhance the borrowing capacity of high-quality mid-sized companies, without needing to change their financing policies or signaling distress (given its accessibility through lenders or intermediaries).

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



GLOBAL ECONOMY

Credit Trends: 'BBB' Pulse: U.S. And EMEA Fallen Angels Are Set To Rise As The Economy Grinds To A Halt

S&P Global Ratings expects the unprecedented sudden stop of the global economy amid the coronavirus pandemic and the recent plunge in oil prices to lead to a significant pickup in 'BBB' rated companies becoming fallen angels in the U.S. and EMEA. They have performed a hypothetical scenario analysis and estimate approximately $640 billion of corporate nonfinancial 'BBB' category rated long-term debt is vulnerable to fallen angel status in 2020 between the U.S. and EMEA.

Sectors that have experienced the immediate and acute economic and business impact of the pandemic, such as airlines, transportation, retail, lodging and leisure, gaming, oil and gas, and autos, are more vulnerable to downgrades than others. Within the 'BBB' category, higher-rated companies are expected to continue to experience lower rates of downgrade into speculative grade than 'BBB-' companies, particularly in recessions.

—Read the full article from S&P Global Ratings



COVID-19: Coronavirus-Related Public Rating Actions On Nonfinancial Corporations And Affected European CLOs

In response to investors' growing interest in the COVID-19 coronavirus and its credit effects on companies and European collateralized loan obligations (CLOs), S&P Global Ratings is publishing a regularly updated list of rating actions we have taken globally on nonfinancial corporations, which have had an effect on European CLOs, and a summary table. These are public ratings where we mention the COVID-19 coronavirus as one factor or in combination with others.

—Read the full article from S&P Global Ratings



EMERGING MARKETS

'Grim outlook' for sub-Saharan Africa with few policy tools amid coronavirus

Africa's two largest oil exporters, Nigeria and Angola, have little in their policymaking arsenal to limit the impact of the coronavirus pandemic on state revenues and the domestic economy, while South Africa is hampered in its own ability to use policy tools.

Expectations for a global recession have made investors more risk-averse and prompted them to withdraw money from emerging markets. This, along with deteriorating financing conditions, are pressuring emerging market currencies and widening credit spreads.

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



The Mexican Peso: Liquid, Volatile, but Can We Hedge?

With oil prices falling and the spread of the COVID-19 pandemic, volatility is back in action. In Latin America, Forex valuations are a key barometer. Local currency depreciation is one of the most common reactions to uncertainty. But there are possible ways to mitigate the risk of the recent volatility in the Mexican peso.

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



OPEC+

OPEC+ seals output cut deal, will court more countries at Friday's G20 meeting: sources

OPEC and its allies on Thursday forged a historic agreement to claw back 10 million b/d of crude production, according to sources involved in the negotiations, under political and financial pressure to try and stem a bruising rout in oil prices caused by the coronavirus pandemic.

The deal would see the 23 members of the OPEC+ alliance, led by Saudi Arabia and Russia, coordinate the world's largest production cut ever, just a month after the two countries launched a vicious price war that upended the oil industry and exacerbated fears of a global recession.

The coalition will now seek to widen the deal with more countries, including the US and Canada, at Friday's G20 energy ministerial, though neither country is expected to offer more than forecasts of economically driven shut-ins as their contributions.

—Read the full article from S&P Global Platts



INFOGRAPHIC OF THE DAY

Global refining in logjam as lockdowns slash demand for fuels


Global refining outages have surpassed 14 million b/d and are expected to get worse as coronavirus lockdowns sideline up to 25% of global oil demand and storage tanks fill to capacity.

April and May will likely see the worst of the demand impact, with declines expected to be around 16 million b/d, according to S&P Global Platts Analytics. Other forecasters predict a more acute demand collapse of more than 25 million b/d. Jet and gasoline have been the most negatively affected fuels and refiners have responded by shifting yields to maximize diesel production.

—Read the full article from S&P Global Platts



Oil demand fall 'staggering,' OPEC's Barkindo says, as Russia calls on all producers to join cuts

With oil demand crashing due to the coronavirus pandemic, the world's producers need to cooperate to rein in supply, Russian energy minister Alexander Novak said Thursday, urging countries outside the OPEC+ alliance to contribute output cuts.

—Read the full article from S&P Global Platts



Russia in favor of coordinated cuts to stabilize oil market: Kremlin

Russia's position at the forthcoming OPEC+ video conference will be for a joint action to stabilize the oil market, Kremlin spokesman Dmitry Peskov said Thursday.

Late Wednesday, an energy ministry spokesperson confirmed to TASS that Russia was ready to cut crude output by 1.6 million b/d if others followed suit and cut proportionally.

Russian production was 11.29 million b/d in March, mainly staying flat throughout Q1. Based on Russia's estimates, global oil demand may fall by 15 million-20 million b/d, or about 20%, in the coming weeks because of the coronavirus pandemic.

—Read the full article from S&P Global Platts



PODCAST OF THE DAY

Listen: Coronavirus hits North Sea crude production and prices

COVID-19 has crushed crude prices and is now closing North Sea oil fields. S&P Global Platts reporters Nick Coleman and Emma Kettley share their views with Joel Hanley, explaining the key logistical dependencies, and the differing impacts on Dated Brent and ICE Brent futures.

In fuel oil, Britt Russell-Webster gives an update on the coronavirus's role in changing bunker fundamentals, and how ship-owners might be reconsidering their scrubber options.

—Share the Oil Markets podcast from S&P Global Platts



Written and compiled by Nathan Hunt.