Where Are We Headed?
This weekly is on the early side and I am wary of what Friday brings, especially as the debt ceiling saga gives rise to further bond market volatility.
The Biden administration is to raise the US corporate tax rate from 21% to 28% (to help pay for its expenditure plans) but has also proposed to set a global minimum corporation tax rate of 21% - no matter where the taxable income is earned. The idea is to discourage multinational companies from shifting profits and tax revenues to low-tax countries regardless of where their sales are generated.
Under this scheme, countries would be at liberty to set their own rates. However, if a company in that country then sells to another, the latter can ‘top-up’ to the minimum rate agreed. France has already received this warmly while Ireland has expressed reservations, arguing it hinders poorer countries from attracting investment. It’s too early to say what impact this will have on stock markets. UBS has said a 28% tax rate in the US will hit S&P500 earnings by 7.4%. Overall, the success of this idea is in its widespread acceptance.
The Bank of Japan is experimenting with a new scheme that rewards commercial banks for lending, on an interest rate-tiered basis. The idea has been years in the making but it isn’t clear when it’ll begin. It’s a subtle move away from Japan’s negative interest rates. The BoJ owns a staggering percentage of Japanese Government Bonds as part of its QE (quantitative easing) programmes and has even been actively buying exchange-traded funds (ETFs) to shore up its markets. Some argue this new scheme is an admission its QE policy was a failure.
The US Federal Reserve has been shoring up bond markets with the purchase of investment-grade corporate bonds. The European Central Bank has been accepting high-quality corporate bonds as collateral. This week, Brazil’s Central Bank announced it’s permanently offering liquidity to banks in exchange for private-sector credit as collateral – instead of public debt. This has the impact of making loans to the private sector cheaper, aiming to spur economic growth.
In the UAE, March’s composite PMI rose to 52.6 (Feb: 50.6). This is a 20-month high though still a little below trend. Firms are struggling to contain costs due to supply constraints but are choosing to offset this via staff reductions.
Last Friday’s March Non-Farm Payrolls in the US were impressive – the economy added 916,000 jobs, and Q2 should be similarly impressive.
The RBA in Australia as expected, kept rates steady and reiterated it will do so till CPI returns to its target range of 2%-3%.
While in Switzerland; Credit Suisse is estimated to lose $4.7BN from the fallout of the Archegos Capital fire sale of Bill Hwang.