Top financial market stories of the week — Global tax reform, High Street woes & more…
Monday 28th June 2021 — Friday 2nd July 2021
1. Inflation may rise to 4% says Bank of England economists
Andy Haldane, outgoing Chief Economist for the Bank of England has stated that he expects UK inflation to be nearer 4% than 3% by the end of this year. If this was to occur, inflation would be double the Bank’s target of 2%. Last week, the Bank of England Monetary Policy Committee (MPC) stated in its meeting that inflation could peak at 3% by the end of this year and thus left interest rates unchanged at 0.1%.
Haldane also warned that this would have adverse consequences for everyone in the country as well as the economy itself: “If this risk were to be realised, everyone would lose — central banks with missed mandates needing to execute an economic handbrake turn, businesses and households facing a higher cost of borrowing and living, and governments facing rising debt-servicing costs.’’
Although, it can be argued a significant amount of the increase in inflation recently is attributable to the financial challenges and price drops when the pandemic first started in March 2020. As pent-up demand is gradually being released as restrictions are being eased, this is likely to lead to prices increases in the economy. Andrew Bailey, the Governor of the Bank of England, tried to calm concerns and stuck to his opinion that inflation is transitory.
2. Global tax reform
On Thursday, it was announced that 130 nations have agreed to enforce a global minimum tax rate on corporations. The US was pushing hard for these reforms and after the announcement, Janet Yellen (US Treasury minister) stated: “Today’s agreement by 130 countries representing more than 90% of global GDP is a clear sign: the race to the bottom is one step closer to coming to an end.”
When G20 countries were seeking this reform in April, Yellen was pushing for 21% as the minimum rate. However, she is now pushing for at least 15%. This global minimum tax rate is part of an overhaul of international tax reforms.
The reforms consist of two pillars:
- The first is aimed at addressing challenges posed by digitalisation and big tech firms operating across borders, and will be used to determine where taxes are paid. In an attempt to crack down on profit-shifting to low-tax jurisdictions, taxing rights could be granted to a portion of a multinational’s profits based on where its customers reside, regardless of the company’s physical presence in that location.
- The second pillar centres on creating a global minimum tax rate. This reform is where progress has typically stalled because many countries — including Ireland and the Netherlands — use low tax rates to attract international investment.
Several jurisdictions with low or zero corporate tax rates were signatories to the reform including the Cayman Islands. However, countries such as Ireland, Hungry and Estonia among others are yet to sign up.
Why have countries agreed to this?
Firms operating cross-border can easily shift their profits around to countries which have the lowest tax rate, thereby exploiting the tax system and paying minimal levels of tax. According to a tax campaign group, Tax Justice Network, tax abuse by multinationals and avoidance by rich individuals costs countries around the world $427 billion a year in lost revenues. It is evident that the tax system needs to catch up with the global businesses, and it is thought that a minimum global tax rate will help end profit shifting to low-tax countries.
The OECD said more than $100 billion (£73 billion) is expected to be raised by curbing profit shifting. About $150 billion is expected to be raised from the minimum tax rate itself.
Are there any cons?
One of the cons of introducing a global minimum tax rate is that it could hinder poorer countries in attracting investment, something which has been highlighted by the head of the World Bank, David Malpass. He stated: “The critical thing is to have growth for countries around the world. Tax rates matter for everyone and so there also needs to be a legal environment that attracts new investment into the poorer countries.” If every OECD country has the same tax rate, this may discourage firms from setting up in poorer countries that would have had lower tax rates.
3. Companies update
Didi Global IPO — Wednesday
On Wednesday, Didi Global held its IPO, listing on the Nasdaq Stock Exchange. Didi Global is a Chinese firm which offers ride hailing, bike-sharing, taxi and car-pooling services. The firm operates as China’s largest ride-hailing network. Founded in 2012, Didi has seen significant growth, especially in China. The firm 493 million active annual users, with 93% of its sales coming from China.
316.8 million American Depository Shares (ADRs) were offered at $14 each. Shares opened at $16.65 and the firm raised $4.4 billion from the IPO. The stock climbed to a high of $18 during its IPO.
The stock ended its debut day 1% higher than its offer price at $14.14. This gave the firm a value of $68.49 billion. This makes Didi Global the biggest offering by a Chinese company in the US since Alibaba debuted in 2014. In a Securities and Exchange Commission filing, Didi said it planned to use a third of the IPO funds to expand its business outside China.
The global IPO market has also surged this year. In the first six months of this year, a record $350 million has been raised through stock market debuts, with some of the biggest IPO’s being Coinbase, Coursera, and Darktrace. The market is also showing no signs of slowing down and funds raised are likely to beat a record in 2007 of $420.1 billion.
Gap to close all branches in the UK and Ireland — Thursday
US fashion retailer, Gap, has announced it plans to close all 81 of its stores in the UK and Ireland and move fully online by the end of September. The firm is looking to scale down its European business and has also planned closures in France and Italy.
The closures of 81 stores demonstrate the impact the pandemic has had on UK high streets which have suffered beyond repair. Other established high-street companies have also had to shut down as a direct result of the pandemic. These include Debenhams, Topshop and Oasis. Although retail spending has increased since restrictions have eased, it is unlikely that the high street will ever recover fully. One reason for this is because consumer preferences and expectations have shifted. The relative ease and reduced cost of online shopping that consumers have become accustomed to over the past year are likely to continue beyond the end of the pandemic.
4. Equities update
Stocks rise as US unemployment claims fall — Thursday
The Labor Department reported that jobless claims dropped by 51,000 to 364,000. This is likely due to the economic recovery in the US gaining momentum as the vaccine rollout has reduced Covid cases and consumers are gaining confidence to eat out, shop and travel. This drop in claims was greater than economists expectations of 390,000.
This led to an uptick in stocks as the S&P 500 rose 0.5% to new record highs and the Dow Jones edged 0.2% higher during the day. The Nasdaq finished 0.1% higher.
US Jobs report & UK furlough numbers plunge — Thursday/Friday
The US labour market added 850,000 non-farm jobs in June, compared with a forecast 720,000. The numbers are a significant increase on the 559,000 gain in May. Stocks rose in response to the announcement. The S&P 500 rose 0.2% at opening and the Nasdaq climbed 0.4%.
The number of people on furlough in the UK also fell to 2.4 million in May, plunging by 1.2 million from the previous month. UK stocks also gained in response with the UK’s FTSE 100 gained 0.2% on Friday.