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 US Federal Reserve is exploring the potential development of a digital version of the US Dollar. Federal Reserve Governor Lael Brainard referenced the need for Americans to have access to “safe central bank money”. The challenges posed include ensuring a digital FX does not encourage a run on banks. Arguably, however, a digital currency that is properly constructed, regulated, monitored and eco-friendly via a country’s central bank will offer far more confidence than anything that tries to remain outside these parameters, such as cryptocurrencies.
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China Crack Down
China attempted to crack down on commodity trading and speculation this week by summoning top executives and threatening them with “severe punishment for violations ranging from excessive speculation to spreading fake news”. Although prices in some commodities fell as a result, the real question is whether this approach will have a longer-term impact. Commodity producers and processors have pricing power and can pass these prices on. We saw this with the announcement of industrial profits which are rising at a healthy pace, especially among companies in the commodity sector.
Expect Property Markets To Soar
A recent Reuters poll expects residential property markets in many major economies (US, UK, Canada, Australia and Dubai) to soar this year. US house price indices, for example, are rising at a rate of 12% to 13% year-on-year. There are different drivers depending on country and region but one common theme to have emerged from Covid is the desire to move from urban to less urban. Quite simply, you can buy more house for the same price or you can buy something smaller and free up equity.
G7: the G7 is close to reaching an agreement on the taxation of multinationals. It paves the way for a global deal later this year. The US agreed to accept a minimum rate of at least 15%. Nearly 140 countries aim to reach broad agreement this summer on the taxation of MNCs and big technology companies
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UK: April public finances are healing faster than expected. A £39.0BN deficit was forecast, while the actual was £31.7BN, a 20% undershoot. The stronger-than-expected economic recovery has boosted receipts while debt interest payments are coming in lower than expected. With GDP forecast to rise 7%, the OBR’s own rule of thumb implies a £30BN lowering in debt.
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Travel: IATA (the global airline industry body) is forecasting total air passenger numbers will be -52% in 2021 vs 2019 with an expectation they will recover to 88% of pre-pandemic levels in 2022.
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