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Daily Update: October 12, 2021

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Daily Update: October 12, 2021

Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy.

Europe’s economic recovery is faster than expected, but pervasive supply chain disruptions are bringing new risks that could upset favorable credit conditions. Will the current energy crisis be the variable that derails the region’s rebound?

Eurozone GDP swelled 2.2% from April-June even with coronavirus-containment restrictions in place, surprising market observers and resulting in S&P Global Ratings raising its full-year growth outlook for the region to 5.1%, from the previous 4.4% forecast. As this rate, GDP could return to its pre-crisis level before the end of this year. European labor markets have improved, and “there is more evidence that the COVID-19 crisis has done limited damage to the overall economy—likely a result of the swift government and monetary policy response put in place to avoid layoffs and bankruptcies,” according to S&P Global Ratings’ fourth-quarter economic outlook for Europe.

Supportive and targeted fiscal policy, alongside economic growth, have kept European banks’ asset quality strong. However, profitability remains weak and many banks are inefficient, according to S&P Global Market Intelligence. European banks may need more resolvability, consistency, and credibility in the future.

However, the strong and welcome resurgence of activity has created earnings and cost pressures, shortages of materials, supply chain disruptions, and soaring commodities prices. Such conditions may squeeze margins for many companies and contributed to S&P Global Ratings’ increasing its 2021 inflation forecast for Europe to 2.2% from 1.8%. The ratings agency maintains its expectation that European inflation will decelerate below the European Central Bank’s target next year.

“The unexpectedly stronger economic recovery is broadly supportive of credit quality but is reckoning with balancing high demand against constraints in global supply chains,” S&P Global Ratings said in its fourth-quarter credit conditions outlook for Europe. “If these elements persist longer than we currently expect, and major central banks take first steps to taper bond purchases, it could presage tighter financial conditions for borrowers, including a rise in interest rates sooner than we now forecast. Higher borrowing costs could hurt weaker borrowers, given the huge step-up in aggregate debt since the pandemic, even though debt-servicing costs remain historically very low.”

Gas and power prices have surged across Europe for weeks due to energy dependencies, market constraints, and extreme weather events—creating an energy price crisis that has sent shockwaves through the region’s energy and industrial industries. As the European Commission explores different strategic approaches to external policy and investigates potential anti-competitive conduct in light of the ongoing situation, S&P Global Platts believes a rebalancing of Europe’s gas and power markets is unlikely before the end of the year.

This brings the threat of prolonged destabilization to energy markets and broader economic outcomes. The upheaval has prompted some market participants to question natural gas’s viability in Europe’s energy transition.  Companies have canceled new gas projects and some have even shut down their businesses entirely. Power prices are likely to remain elevated in Europe for 2022-2023, according to S&P Global Ratings.

“Given the size of the current supply-demand gap, we don't expect a permanent solution to be found soon. Some contributing pressures may gradually subside, but we believe others represent structural shifts. These include Europe's dependence on imports and increasing exposure to global gas markets amid regulatory and technical uncertainties stemming from the energy transition,” S&P Global Ratings said in a report this week on the energy crisis. “Europe's so-called gas bridge for its energy transition may therefore prove quite costly …  With the EU currently debating the role of gas in the Green Taxonomy and likely new decarbonization pledges at COP 26 in November, extremely volatile gas prices raise questions about how well gas can support security of supply during the energy transition, and at what cost.”

“This situation makes it hard for investors to engage in any new long-term gas investment in Europe,” S&P Global Ratings said.

Today is Tuesday, October 12, 2021, and here is today’s essential intelligence.

Uncertainty in the Global Economy

Economic Research: U.S. Biweekly Economic Roundup: Job Gains Come Up Short

With a record number of job openings, the expiration of extended unemployment benefits, and less need to stay home and oversee online school, expectations were high heading into the September jobs report.

—Read the full report from S&P Global Ratings

Listen: The Upgrade Episode 15: The Medline Industries LBO

This episode of The Upgrade podcast focuses the recent large LBO of healthcare sector company Medline. Topics include views on the company’s business, financial, and debt recovery prospects, as well as how Medline compares to existing CLO collateral.

—Listen and subscribe to The Upgrade, a podcast from S&P Global Ratings

Market Dynamics

Chubb Ticks Up After Deal; Allstate Down As California Pushes For More Rebates

Chubb Ltd. shares moved up after the company announced plans to buy Cigna Corp.'s personal accident, supplemental health, and life insurance business across six markets in the Asia-Pacific region and Turkey for $5.75 billion in cash.

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

Banking Industry Under Pressure

Lloyds, L&G, Goldman Seek Inflation-Proof Returns In U.K. Build-To-Rent

Lloyds Banking Group PLC is leading the charge, with plans to build 50,000 homes within a decade, according to an August report in the Financial Times. That could make the London-based lender's Citra Living unit Britain's largest residential landlord.

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

Afghanistan Banks Risk Losing Years Of Gains After Regime Change

The takeover of Afghanistan by the Taliban has raised questions about the future of modern banking in the war-torn nation after two decades of progress under the previous U.S.-backed government.

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

Technology & Media

E-Commerce Retailers, Government Sharpen Focus To Combat Counterfeit Goods

The Information Technology and Innovation Foundation will host a webinar Oct. 14 that focuses on the growing problem of counterfeit goods promoted on e-commerce platforms and opportunities for the public and private sector to reduce fraud.

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

ESG in the Time of COVID-19

General Criteria: Environmental, Social, And Governance Principles In Credit Ratings

These criteria articulate the principles that S&P Global Ratings applies to incorporate environmental, social, and governance (ESG) credit factors into its credit ratings analysis.

—Read the full report from S&P Global Ratings

Listen: Beyond the Buzz - Climate Litigation & The Case For Better Climate Disclosure

The latest episode covers what climate litigation is, how corporations could find themselves increasingly liable, and why the rise in these cases matters.

—Listen and subscribe to Beyond the Buzz, a podcast from S&P Global Ratings

Boston Marathon Can Teach Us About The S&P 500 ESG Index Methodology

To be included in an index or a marathon, one must first be eligible. Both begin with a broad universe of constituents and whittle things down from there.

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

The Future of Energy & Commodities

Commodity Tracker: 4 Charts To Watch This Week

Gas prices in Europe are experiencing wild swings, while analysts keep an eye on how prices could impact inflation. In China, ongoing power curbs means lower chances for another round of oil product export quota allocation.

—Read the full article from S&P Global Platts

China's ENN Signs 13-Year Contract With Cheniere For 900,000 Mt/Year LNG

A subsidiary of China's ENN Natural Gas has signed a 13-year deal to buy LNG from Cheniere Energy amid plans by the U.S. exporter to advance the proposed mid-scale liquefaction expansion project at its Texas terminal, the companies said Oct. 11.

—Read the full article from S&P Global Platts

OPEC+ Crude Oil Production Rises In September, But Remains Below Target: Platts Survey

OPEC and its allies boosted crude oil output by 470,000 b/d in September, but with many members still struggling to reach their quotas, the coalition is producing far below what it said it would.

—Read the full article from S&P Global Platts

Listen: 'Seller' LNG Market Makes U.S. Exporters Flexible On Indexation

Amid a crowded field of U.S. liquefaction projects, Commonwealth LNG is looking to build momentum for its proposed 8.4 million mt/year facility in Louisiana as it targets a final investment decision in late 2022 and shipping its first LNG in 2025.

—Read the full article from S&P Global Platts

Written and compiled by Molly Mintz.