International Communique No. 298 – 29th July 2021


Equity indices have soared to new records. In the US, stocks were kept at a high level last week by Jerome Powell’s dovish tone plus the announced bipartisan deal on infrastructure spending together with strong results by banks from their annual stress tests. If the world came to be blighted by a severe global recession affecting commercial real estate, corporate debt and employment levels, their capital buffers would be almost double the minimum required. Dividend payouts and share buybacks can therefore be resumed on 30 June. In Europe, indices rose modestly as many investors took a more cautious tack during the week amid the spread of the new ‘delta’ variant. Sector wise, commodity-related stocks made strong advances. Oil companies were boosted by a rise in the price of crude upwards of 3%.

Fed chair Jerome Powell said in his congressional testimony on the state of the US economy that the authorities would bide their time before ending their ultra-loose monetary policy. This gave rise to renewed optimism among many investors. Inflation is being fuelled by a handful of business categories affected by the reopening of the economy, while companies struggling to hire could find it easier to find employees in the remainder of this year. Job creation in May, is estimated at 700,000 additions. The average year-to-date number is 535,000. At that rate, it would take until the autumn of 2022 to return to pre-pandemic levels, which argues for keeping interest rates nice and low.

Joe Biden announced a bipartisan agreement with a group of ten Republican and Democratic senators for a five-year USD 1 trillion infrastructure plan, including USD 579 billion in new spending. A large part of the expenditure is earmarked for transportation, including upgrades to the road network, bridges and airports, and for developing power infrastructure and broadband, all of which would provide a small boost to GDP growth by supplying extra income to construction and manufacturing companies. Whether this will clear the US Senate is uncertain, as the Democrats want a separate plan for social infrastructure (health and education). Financing – which is still unclear – is probably the biggest obstacle. There has been talk of reducing the backlog of unpaid taxes by hounding tax evaders, or using some of the funds released for the pandemic. At this juncture, the red lines of each party, such as higher taxes for companies and the middle class, have not been touched upon.

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