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(values from the Friday preceding publication)
Latest figures have shown that the world economy is recovering from the pandemic-driven recession. As jabs become more widely available, vaccination rates are expected to reach 70% in the US and 40% in Europe by June. Advancement in vaccination programmes will lead to the shackles on economies being lifted, with a positive knock-on effect for corporate profits.
Minutes from the March Fed meeting merely echoed what was said in the policy statement. All in all, inflation is not an issue. The economic recovery is in full swing and benchmark interest rates will not rise until employment reverts to pre-pandemic levels. According to the latest weekly numbers, initial jobless claims rose again, with 16,000 more than expected. That was enough to reassure investors that monetary policy would remain nice and loose for some time to come.
At its meeting, the ECB stated that it will maintain an accommodative policy for as long as necessary but is considering scaling back asset purchases after the temporary surge planned for the second quarter.
Despite a series of better-than-expected US economic data prints, Treasury yields have seemingly reached a resistance level, at midpoint of the decline between 2018 and 2020. Ten-year yields have fallen by more than 10 basis points since the beginning of April after rising by more than 80 basis points in the first quarter of the year. In our view, this stabilisation is due to renewed investor interest in bonds.
Already aware of sector rotation and possible exorbitant valuations, traders have refrained from making big bets on stocks ahead of the first-quarter earnings season. Only 9.5 billion shares were traded in the US on Wednesday – the lowest volume this year. GAFAM stocks have continued to outperform, hoisting the S&P 500 to a record high. Last week Microsoft, Alphabet, Apple, Facebook and Amazon rose between 5% and 8%, despite being targeted by criticism and promises of new regulations to clip their wings.
Widespread concerns, ranging from the impending tax hike to the pace of economic recovery and rising inflation, have traders worried that the current calm in the stockmarket will be short-lived. The cost of protecting against a downswing in equities is currently very low, considering that the market is rising. This has sent some investors scurrying into hedging contracts.
Stronger demand for commodities plus rising commodity prices are a sign that some Asian countries as well as the US have returned to growth, which is a positive development for global exports and cyclical stocks.
US Treasury Secretary Janet Yellen has unveiled her pledge to fixing global cooperation on corporate taxation, enabling governments to capture a greater share of tax from the world’s most successful companies. The proposals, warmly received in Europe, could be agreed by the summer, according to the Organisation for Economic Cooperation and Development (OECD). The aim of the game is to replenish the funds of cash-strapped finance ministries, bled out by massive pandemic-related spending. The US proposals have two objectives: to set a global minimum tax of 21% and to ensure that the largest companies pay more where they actually do business. Questions remain about enforceability, the issue of dispute resolution and how the poorest economies might benefit. But the initiative restores momentum to a process that nearly sparked a trade war in the Donald Trump era and which has been stalled for several years.
Borderless companies have accumulated barely taxed profits while wages have stagnated, which in turn has fuelled political tensions. Getting more than 135 countries with their own priorities and tax systems to adhere to a standard set of corporate tax rules represents a major challenge. The average statutory tax rate among OECD members was 23.3% in 2020, down from 32.2% in 2000. The initiative has met with a better reception from larger countries such as France, whose treasuries have the most to gain from snagging income tax from global companies operating in their domestic market. By contrast, countries with attractive tax regimes and multinationals stationed in their territory such as Ireland, have expressed reservations.
According to the OECD, this agreement would redistribute about USD 100 billion, while the minimum tax – combined with existing US rules – would increase global government revenues by USD 100 billion annually. But there should be no illusions: those companies in the crosshairs will simply redouble efforts to keep their revenues away from the taxman; and the competition to attract multinationals will continue in any case, no longer via taxation but by other means.