International Communique No. 295 – 8th June 2021


Equity markets gained ground last week, particularly in Europe, on the back of better macroeconomic data across the board. The services sector improved its showing as lockdowns and other restrictions were eased. Sector wise, energy – helped by the 4.5% increase in crude prices on confirmation of OPEC production cuts – and automotive were particularly firm. Financials and tech were moreover helped by a downswing in bond yields, with the US 10-year yield dipping to 1.57%. Some believe that the stronger recovery in European equity markets is set to continue, underpinned by the estimate for 50% earnings growth this year, indices’ highly cyclical compositions and more attractive valuations compared with US equities.

Despite firmer macroeconomic indicators than expected, in turn boosting the prospect for higher interest rates, the spectre of inflation has been waning of late. It looks like central banks have succeeded in reassuring the markets of their willingness to keep policy nice and lose for the foreseeable future. The US employment report for May showed 559,000 new jobs, which in other circumstances might have caused an upset given that the forecast was for 671,000 (the unemployment rate fell to 5.8%). Yet the lower-than-expected data has cooled expectations of imminent monetary policy tightening. The US Fed is starting to unwind the corporate bonds facility put in place in March 2020 and will start selling down the fixed-income ETFs and corporate bonds it has acquired. But the amount of these sales is meagre, amounting to around USD 5 billion in corporate bonds and USD 8.5 billion in ETFs on a balance sheet approaching USD 8 trillion. The ECB is meanwhile expected to revise its GDP growth outlook
upwards amid record business indicators and imminent plans to launch the European stimulus fund. However, it will probably stick to its accommodative monetary stance as the current economic-recovery phase requires strong support.

G7 members this weekend agreed to a minimum tax rate of 15% on corporate profits. Under these plans, countries will be given the right to tax profits wherever they are generated. The OECD estimates that this could generate between USD 50 billion and 80 billion in additional tax revenues per year. After this agreement, aimed mainly at closing the loopholes that multinationals have been exploiting to reduce their tax bills, the road to genuine global tax reform will still be long.

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