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G-7 Tax Deal, Yellen’s Inflationary View, Hot Housing - What's Moving Markets

EconomyJun 07, 2021 17:51
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By Peter Nurse -- G-7 deal on corporate taxation, Janet Yellen’s view on higher inflation and interest rates, Wall Street edging lower, lower crude prices and hot housing markets. Here's what's moving markets on Monday, June 7th.

1. G-7 tax deal 

The Group of Seven advanced nations agreed over the weekend on a minimum global corporate tax rate of at least 15% as part of a broader deal on how to tax multinational companies such as Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOGL).

"The seven most important industrial nations have today backed the concept of minimum taxation for companies. That is very good news for tax justice and solidarity and bad news for tax havens around the world,” said German Finance Minister Olaf Scholz.

This landmark deal, eight years in the making, marks a major step forward in re-writing a global system that many have said allowed big companies to save billions of dollars in tax bills by shifting jurisdictions. The deal paves the way for levies on multinationals in countries where they make money, instead of just where they are headquartered.

"There are a number of very large multinational U.S. companies that will end up paying more tax in countries around the world, where perhaps at the moment that is not the case," said OECD Secretary-General Mathias Cormann, in an interview with BBC radio.

According to the communique after the London meeting, countries where big firms operate would get the right to tax “at least 20%” of profits exceeding a 10% margin. That would apply to “the largest and most profitable multinational enterprises.”

However, these multinational companies are unlikely to take major hits to their stock prices Monday as there are many hurdles still to be climbed before this accord comes into effect.

Focus will now shift to a July meeting of the Group of 20 finance ministers in Italy, as well as long-running talks between about 140 countries at the Organization for Economic Cooperation and Development.

Additionally, the 10% margin could rule out Amazon, which has lower profit margins than most tech companies. U.S. Treasury Secretary Janet Yellen said that she expected the e-commerce giant would be included, something OECD’s Cormann agreed with.

However, this quickly illustrated the difficulty of putting actual figures to broad agreement, and the final details still need to be presented to a deeply-divided Congress for approval.

2. Stocks consolidate near record levels

U.S. stocks are set to open marginally lower Monday, consolidating near record levels after another positive week.

By 6:25 AM ET (1025 GMT), Dow Jones futures were down 15 points, or 0.1%, S&P 500 futures were 0.2% lower and Nasdaq 100 futures dropped 0.4%.

The major indices closed higher Friday, after the latest employment report showed that 559,000 nonfarm jobs were added in May. This was slightly less than expected, alleviating the pressure on the Federal Reserve to rein in its easy monetary policies while still pointing to a recovering economy.

The broad-based S&P 500 index lies just 0.2% from its intraday record high set in May, and climbed 0.6% last week to bring its 2021 gains to more than 12%. The Dow Jones Industrial Average and NASDAQ Composite also posted gains last week, and are also up 13% and 7% this year, respectively.

The economic data slate is largely empty Monday, and the main focus will be on Thursday’s inflation release (see below) for clues of Federal Reserve thinking.

In corporate news, the major tech giants have barely batted an eyelid at the news of a G-7 tax deal (see above), with Amazon announcing plans to take on 3,000 new employees on permanent contracts this year in Italy as part of its aim of increasing its investments in the country.

The so-called meme stocks are likely in focus Monday, as the likes of GameStop (NYSE:GME), AMC Entertainment (NYSE:AMC) and BlackBerry (NYSE:BB) closed Friday in the red despite massive gains in volatile trading over the week.

3. Inflation’s turn in the spotlight

The market focused last week on the U.S. labor market - this week it’s the turn of inflation to take the spotlight.

All eyes will be on the May CPI data, due for release on Thursday, after a much stronger than expected inflation number sparked a selloff last month, as many worried rising price pressures could force the Fed to begin unwinding stimulus earlier than they had previously guided.

The annual CPI figure climbed to 4.2% in April, the sharpest climb since September 2008, as the U.S. economic recovery kicked into gear and energy prices jumped higher. May’s release is expected to show another substantial increase, up 4.7% on the year.

U.S. Treasury Secretary Janet Yellen added another talking point over the weekend when she said that President Joe Biden's $4 trillion spending plan would be good for the U.S., even if it contributes to rising inflation and results in higher interest rates.

"We've been fighting inflation that's too low and interest rates that are too low now for a decade," Yellen said, in an interview with Bloomberg News. “We want them to go back to" a normal interest rate environment, "and if this helps a little bit to alleviate things then that's not a bad thing - that's a good thing."

The inflation reading is one of the last major pieces of economic data ahead of the next Fed meeting on June 15-16 and Fed officials will be in their traditional blackout period during the coming week ahead of that meeting.

4. Hot housing market

One of the earliest beneficiaries of the Covid-19 outbreak was the U.S. housing market. Limited inventories, low interest rates and bidding wars quickly drove prices sky-high. 

By some measures, the market is even hotter than it was during the peak prior to the financial crisis, to the extent that some homeowners are now becoming reluctant to sell for fear of getting involved in a bidding war for a replacement, limiting the available stock even more.

The U.K. market has not quite reached that level, but the latest figures from Halifax Building Society showed house prices there grew at their strongest pace in almost seven years.

Prices grew 1.3% in May, driving the annual pace of growth to 9.5%, the mortgage lender said in a statement on Monday, with the market benefiting from a temporary tax break on property purchases, a buildup in savings by consumers and confidence in recovery from the virus.

With the U.K. finances in such poor shape, perhaps this is a tax break that the Chancellor can take another look at pretty quickly.

5. Crude weaken ahead of Iran talks

Crude oil prices weakened Monday, slipping from fresh multi-year highs as traders banked profits ahead of the restart of talks between Iran and world powers later in the week over a nuclear deal.

By 6:25 AM ET, U.S. crude was down 0.8% at $69.05 a barrel, after earlier touching $70 for the first time since October 2018. Brent was down 0.9% at $71.25, after earlier hitting $72.26, the highest since May 2019.

A 14.6% year-on-year drop in China's crude oil imports in May, as seen in data released earlier Monday, weighed on prices, but most market participants are concentrating on the fresh set of talks between Iran and global powers in Vienna over a nuclear accord, starting on Thursday.

A successful conclusion could include Washington lifting economic sanctions on Iranian oil exports, potentially resulting in 500,000 to 1 million barrels of crude per day reentering the global market.

There have been positive noises emerging from European sources about a deal being struck this week. But we’ve heard this before and many of the most difficult decisions still lie ahead, particularly as the most fraught relationship is between the U.S. and Iran, not the European powers.

Still, oil prices have jumped over 40% this year due to demand rebound in the U.S., Europe and China as governments lift Covid-19 restrictions, even with the major oil producers, a grouping known as OPEC+, gradually adding more supply into the market.

“The strength in the market last week comes despite noise from Russian oil producers that they would expect OPEC+ to agree on increasing output further when they meet in July,” said analysts at ING, in a note. “Clearly the market remains focused on demand indicators, which continue to improve.”


G-7 Tax Deal, Yellen’s Inflationary View, Hot Housing - What's Moving Markets

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