Daily Update: July 1, 2020

Starting today, people from 15 countries around the world will be able to visit the European Union.

Residents of the U.S., Brazil, and Russia won’t be among them.

“European countries’ measures to contain the spread of the pandemic have so far successfully flattened the curve, enabling them to reopen their economies,” S&P Global Ratings said in its European Credit Conditions report released yesterday. “A key feature of the pandemic in Europe is that, although the virus knows no boundaries, policy responses have been inherently national. This means that the imposition of containment measures, the severity of the pandemic, and the degree of government support to cushion the economic effects of locking down the economy have differed among countries.”

As “guidance on travel differs from country to country,” S&P Global Ratings said, “we expect the flow of international tourists coming to Europe will be below normal this year.”

The bloc lifted nonessential travel restrictions for nations whose new case rate per every 100,000 people in the past two weeks was near or below the EU’s average. Approved countries have an overall stable or declining number of new cases and are implementing testing, contact tracing, and other containment measures. The list of approved countries includes Algeria, Australia, Canada, China (if it reciprocates), Georgia, Japan, Montenegro, Morocco, New Zealand, Rwanda, Serbia, South Korea, Thailand, Tunisia, Uruguay, four European microstates, as well as Iceland, Norway, Switzerland, and Liechtenstein. The EU requires reciprocal relaxing of restrictions and said it would consider additional countries for approval in two weeks.

S&P Global Ratings expects the eurozone economy to contract 7.8% this year, with a rebound of 5.5% next year, due to social-distancing measures’ effects on activity. Three years from now, in 2023, the eurozone economy is likely to be 2% smaller than the pre-pandemic baseline.

Eurozone economies heavily dependent on tourism will recover more slowly than their counterparts whose economies aren’t rooted in this sector. Italy likely won’t retain growth levels seen last year until 2022, as it is reliant “on open borders and the ability to attract holiday makers without excessively restricting social interaction” to fuel its tourism, according to the report. Germany will recover relatively quickly because the nation has a low per-capita infection rate, a strong manufacturing sector, and government fiscal support equivalent to more than 30% of GDP.

As for the U.K., S&P Global Ratings anticipates GDP will decrease 8% this year, followed by a 6.5% recovery next year.

“The health scenario is the biggest risk to growth” for all eurozone economies, S&P Global Ratings said. “Another surge in COVID-19 cases followed by renewed lockdowns in Europe or its largest trading partners would hurt the economic outlook. While Europe has flattened its curve, the all-clear has not sounded yet… [as] we are seeing a resurgence of new infections in some small European countries.”

While European Commission officials assessed the situation through an epidemiological, rather than political, perspective in their criteria and recommendations, declining to include the three countries with the highest coronavirus case counts could be considered an admonition of certain leaders’ handling of their national outbreaks.

“We are now having 40-plus thousand new cases a day,” U.S. top infectious disease expert Dr. Anthony Fauci said during a Senate hearing yesterday. “I would not be surprised if we go up to 100,000 a day if this does not turn around. And so I am very concerned.”

The U.S. is “going in the wrong direction,” Dr. Fauci said, regarding the world’s largest economy’s coronavirus-containment capabilities.

Today is Wednesday, July 1, 2020, and here is today’s essential intelligence.

Uncertainty in the Global Economy

Credit Conditions Europe: Curve Flattens, Recovery Unlocks

Supported by stimulus measures, European economies are tentatively reopening since the first wave of the coronavirus has passed its peak. Credit conditions may enjoy some respite over the summer before difficult policy and business decisions need to be made, as the shape of recovery and the timelines for ending support schemes for corporate and household borrowers become clearer.

—Read the full report from S&P Global Ratings

Credit Conditions North America: Rolling Out The Recovery

As corporate borrowers confront both operating constraints due to social distancing and diminished consumer demand, the recovery path will likely be rocky and uneven, and many in the industries hit hardest by the severe economic shock will be lucky to escape default—especially if we see a significant pull-back in federal stimulus.

—Read the full report from S&P Global Ratings

Credit Conditions Asia-Pacific: China First To Recover

Credit conditions in the second half of 2020 will remain very difficult. While signs of an economic recovery in China and some developed countries in Asia-Pacific have appeared, some emerging markets (e.g. India) are still struggling with a large and rising number of COVID-19 cases. Thanks mainly to government and regulatory actions, financing conditions have eased compared with that in late Q1 to early Q2. However, highly leveraged borrowers may still face challenges.

—Read the full report from S&P Global Ratings

Credit Conditions Emerging Markets: Slow Recovery, Prevalent Risks

Credit conditions in EMs show some improvement thanks to better financing conditions, the expectation of a global economic recovery in the second half of 2020, and the stabilization of--in some cases, increasing--commodity prices. Economic activity is also slowly picking up in many EM economies, which brings relief to some sectors. There's still a long way to go for recovery and the deep economic shock has had a severe impact in several sectors of the economy, while consequences of the pandemic will reflect in higher debt levels for most issuers and magnified risks. Higher leverage will probably limit investment levels going forward.

—Read the full report from S&P Global Ratings

Economic Research: Latin American Economies Are Last In And Last Out Of The Pandemic

Latin America is now the global epicenter of the COVID-19 pandemic, with the number of new daily reported infections increasing, or remaining close to recent peaks, in most major countries. In some countries, this has meant the extension of stringent lockdowns, and in others, it has meant a slower relaxation of those measures. Across the board, households and businesses are more cautious. As a result, S&P Global Economics has lowered its GDP projection for Latin America by just over 2 percentage points to a contraction of roughly 7.5% in 2020. We expect growth to be just shy of 4% in 2021. Risks are mostly to the downside and tied to the evolution of the pandemic.

—Read the full report from S&P Global Ratings

ESG in the Time of COVID-19

Vatican's call for fossil fuel divestment could have long-term impacts

The Roman Catholic Church's call for 1.3 billion Catholics to unload their fossil fuel investments and put their money behind renewable energy resources will have little immediate effect on investment flows because most Catholic institutions have already sold their coal, oil and natural gas holdings, fund managers and analysts said.

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

From waste to fuel: the prospects for renewable natural gas in the US

While hydrogen initiatives have been grabbing headlines thanks to large-scale national plans and projects at corporate level, renewable natural gas (RNG) also deserves attention as an emerging tool for decarbonization. RNG comes from capturing biogas from areas like landfills and farms and then cleaning and upgrading that gas to remove excess carbon dioxide to then turn it into biomethane, which is more commonly referred to as RNG. This process is needed to bring the methane portion of biogas to a level that can then be blended with conventional natural gas on existing pipeline infrastructure, to avoid diminishing the quality or heat content of the pipeline. As in the case of hydrogen, policies will be critical for RNG to be a competitive alternative to fossil fuels.

—Read the full article from S&P Global Platts

Democrats' blueprint for fighting climate change sees FERC playing key role

The Federal Energy Regulatory Commission would be given sweeping new authorities to help address climate change under the recommendations of a plan the Democratic majority on the U.S. House Select Committee on the Climate Crisis released June 30. Formed in early 2019, the committee was due to deliver a set of policy recommendations for congressional climate action by March. However, the release of the panel's 547-page plan, "Solving the Climate Crisis," was delayed as lawmakers grappled with the federal response to the COVID-19 outbreak.

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

Shareholders quiz LVMH on climate, animal welfare, biodiversity

LVMH Moët Hennessy - Louis Vuitton Société Européenne on June 30 was quizzed by shareholders on a range of ESG-related issues including climate and biodiversity, indicating investor interest in pushing highly profitable luxury companies to operate in a more sustainable way. At the company's annual general meeting, held as a closed session at its Paris headquarters, LVMH noted that 2019 had been an "outstanding" year in terms of sales and profit while acknowledging that the COVID-19 pandemic had hurt operations substantially in the first and second quarter of 2020. But the bulk of shareholder questions, sent in via letter or email, appeared to focus less on the pandemic and LVMH's core luxury business and more on ESG matters.

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

California developer moves carbon-negative hydrogen project toward 2021 startup

Hydrogen developer Ways2H on June 30 took a major step toward construction of its carbon-negative H2 production facility in California, announcing a joint partnership with engineering, procurement and construction contractor Ford, Bacon & Davis. The nascent business venture is now moving aggressively toward construction of the hydrogen plant with plans to break ground in Kern County, California by the fourth quarter. A startup to production is tentatively planned for early 2021.

—Read the full article from S&P Global Platts

Listen: UK’s Net Zero drive: hydrogen’s potential and challenges

In the UK, the drive toward Net Zero 2050 makes hydrogen an attractive investment, but questions remain about how markets will develop and the associated costs. Hydrogen has vast potential to decarbonize hard-to-abate sectors such as heavy transport, home heating and industry, but the path to decarbonisation is still not entirely clear. Jeffrey McDonald speaks with Corin Taylor, principal consultant in DNV GL and Tony Smith of Peel, to dive further into these questions and the potential for a hydrogen hub to emerge in the UK.

—Listen to Commodities Focus, a podcast from S&P Global Platts

The Future of Energy and Commodities

Watch: Market Movers Europe, June 29-July 3: Russia and Germany in the spotlight, as Platts Global Metals Awards go virtual

In this week's highlights: OPEC, Russia and the production cut laggards in focus; Germany's energy ties with Russia will be the focus at a session of the Russian-German chamber of commerce; political negotiations on Germany's coal exit law are entering the final stage; and access to Ukrainian storage will pre-occupy the European gas market.

—Watch and share this video, from S&P Global Platts

Japan's May crude imports fall to 53-year low as COVID-19 cuts oil demand

Japan's crude imports dropped 25% year on year to 2.28 million b/d in May, the lowest for the month in 53 years as refiners had slashed their crude throughput in the wake of the coronavirus pandemic, which sank domestic oil products demand. The May crude imports, which were the lowest for the month since 1967, also dropped 17.3% from April as refiners had reduced their crude throughput by 25.6% year on year and 19.9% month on month to 2.07 million b/d, according to preliminary data released June 30 by the Ministry of Economy, Trade and Industry.

—Read the full article from S&P Global Platts

Europe to absorb cargoes as China ends crude buying spree

After months of stocking up on oil cargoes, China is pausing its crude buying spree, which could result in a greater number of European and West African cargoes heading into local markets, an analysis by S&P Global Platts showed. China's appetite for North Sea, Urals and West African streams was fueled by the crude oil collapse at the start of the coronavirus panic.

—Read the full article from S&P Global Platts

Shell to write off up to $22 billion after cutting post-pandemic oil, gas price outlook

Shell said it plans to write down the value of its assets by up to $22 billion after slashing its near-term oil and gas price assumptions to reflect a weaker, post-pandemic energy market outlook. In a statement, Shell said it now assumes Brent crude prices will average $35/b in 2020, rising to $40/b in 2021 and $50/b in 2022, all down from $60/b under previous assumptions given at year-end 2019. From 2023 onwards, Shell said it assumes Brent prices of $60/b, unchanged from previous guidance.

—Read the full article from S&P Global Platts

Written and compiled by Molly Mintz.