This week we saw the first hint that the great reopening might not go as planned. Increasing spread of the delta variant of Covid-19 has cast doubt on whether the country will be able to fully unlock in June as planned. Additionally, much of Joe Biden’s ambitious spending plan is on the rocks in the US Congress, meaning the prevailing assumption that a turbo charged recovery, fuelled by post-Covid euphoria and buckets of government spending, would boost inflation has taken a knock, even as inflation stats released this week show prices continuing to climb.
So far it has mainly been government bond markets affected by the news. Both US treasuries and UK gilts have had a good week, although a good week in government bond markets isn’t that exciting overall. Stock markets haven’t appeared too bothered, with no wild movements recorded on any of the major exchanges. If anything at all can be inferred from short-term market movements the message appears to be things are still expected to get better, but with a little more insurance just in case.
G7: PLAN FOR A GLOBAL CORPORATE TAX RATE ALREADY FACES HURDLES
G7 finance ministers have agreed a tax deal aimed at ending the ability of multinational corporations to move profits to the most advantageous locations and ensuring companies make a fair contribution to post-pandemic recovery. The agreement would end the practice of sending earnings offshore to a jurisdiction with a lower tax rate and force companies to pay tax in the countries where they make their sales.
The ministers pledged that company profits above an earnings margin of 10 per cent would be taxed, and a global minimum tax of at least 15 per cent to be set, on a country-by country basis. For the deal to be successful many countries will need to agree but there has already been dissent. The UK is seeking exemptions for financial services and Hungary and Poland are demanding the ability to exempt businesses based there. The share price for major companies, such as Amazon and Apple, have also showed a lack of movement which shows investors think the tax deal is not a threat to businesses any time soon.
BONDS: GOVT BOND MARKETS APPEAR RELAXED ABOUT RISING INFLATION
Accelerating UK economic growth and the faster than expected rise in US inflation failed to stir government bond markets this week. Headline US consumer price inflation increased to 5 per cent in May, while UK GDP growth in April was higher than expected at 2.3 per cent. This follows last week’s inflation figures for Europe which also came in higher than expected at 2 per cent.
Back in February government bonds sold off on concerns that inflation would begin picking up, as investors feared real returns could fall and central banks to raise interest rates. Although recent weeks show inflation is pushing up developed market government bond yields have been falling this week, meaning bond prices have been rising. The European Central Bank this week left interest rates unchanged and promised its bond buying programme will remain at its current level and it appears bond markets are happy with the narrative that inflation is temporary and that central banks will remain supportive of markets in the short term.
EQUITIES: FASTLY SHARES JUMP AFTER GLITCH TAKES WEBSITES OFFLINE
The key role that a small number of web service providers play in the smooth running of the internet was highlighted this week by problem at web infrastructure provider Fastly. The glitch took a large number of high-profile websites offline, including Amazon, Ebay and Paypal. The outage was caused by a single customer changing its account settings which cascaded the issue across Fastly’s network.
Fastly provides a content delivery network which uses a distributed group of servers to route traffic to websites in the most efficient way. The company has over 400,000 clients and is valued at more than $6bn but it is a relatively small player in this market. Its shares fell in the immediate aftermath of the problems on Tuesday but the company fixed the issue quickly and shares bounced back strongly to end the day up 11 per cent. Web traffic has increased dramatically during the pandemic and Fastly and rivals Akamai and Cloudflare have seen steep revenue growth over the last 12 months. Fastly’s share are down around 35 per cent this year on signs that some new business was temporary.