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 G7 Finance Ministers’ summit started on Thursday with revamping the international tax system a hot topic. The group reached a deal to make multinational companies pay more tax, and also agreed in principle to a global minimum corporate tax rate of 15%.
At the meeting, held in London and hosted by UK Chancellor of the Exchequer Rishi Sunak, finance ministers agreed the historic deal which is likely to impact tech giants such as Google, Amazon and Facebook.
Negotiated over many years, the announcement on Saturday will put pressure on other countries ahead of the G20 meeting next month and could generate billions of dollars for governments who desperately need to pay off debts incurred during the Covid-19 pandemic.
The UN Food Agency have reported global food prices rose at their fastest pace in over a decade and to register the 12th consecutive monthly increase. Crude oil is also up approximately 40% since the start of the year. Some emerging market central banks are begrudgingly increasing interest rates to try and contain price pressures. Brazil raised rates 0.75% in an attempt to bring inflation under control, Armenia hiked rates to 6%, while Ghana hiked them 1% to 13.5%. Raising interest rates is not a desirable action from the point of view of their business sectors. Raising them does, however, support the countries’ local FX which, in turn, lowers imports costs.
Norway’s $1.3trn sovereign wealth fund, has delivered annualised returns of 4.42% since 1998, versus a long-term target return of 4%. Much of this has come in the last decade. Initially it only invested in government bonds, but now also invests in corporate bonds, stocks and real estate, and in the last year took stakes in renewable projects. The challenge now faced is record low interest rates and record high stock markets. With the risk-return relationship now very different, it is unlikely to maintain this return profile. So what next for this and other sovereign wealth funds, which collectively make up around $8.4trn of the investing landscape? It’s not easy deploying such vast sums and some suggest the only way forward is to spend and invest via long-term infrastructure projects.
In the UK, May’s Nationwide house price index gained 1.8% m/m and the temporary reduced rates of Stamp Duty Land Tax which is due to end this month is certainly adding to increased buying activity.
Exports in South Korea boomed during May (up 45.6% y/y), with exports to China up 22.7% y/y. Countries like S. Korea are a good indicator of world activity and this result seems to endorse the view global commerce is picking up.