Equities trend lower on the back of delta variant concerns while we see strong action from the ECB and Bank of Japan to reward climate change tackling projects. All these stories and more are covered in this week’s insights update from BlackBee.
Rising inflation statistics were released again this week in both the US and the UK. US Consumer Price Index rose by 5.4% in June, the fastest monthly increase since August 2008. In the UK, the BOE revealed Britain’s June inflation rate of 2.5% which was the third consecutive month of above expectation inflation rates. Closer to home, the European Commission upwardly revised Ireland’s growth forecast for 2021 from 4.6% to 7.2%. Does this mean that western economies are hurtling towards a central bank interest rate hike? Well it depends on which policy makers that you listen to. The messaging from the US that this inflation period is transitory continued this week. While Jerome Powell, said that the Fed are prepared to intervene with monetary policy action if inflation moved “persistently beyond levels consistent with our [The Fed’s] goal” he stressed that the Fed anticipate an ease in price increases later this year. In contrast, two members of the BOE’s MPC (Monetary Policy Committee) have indicated this week that a rate hike might occur earlier than previously thought. However if we were to consider China as a bell weather for the post Covid-19 economic cycle, the recovery seems to be uneven. China’s economy grew 2.3% in 2020 as it suppressed the pandemic after Q1’s initial outbreak. Growth has continued as figures released this week show a year on year growth for Q2 of 7.9%. However, this was below estimates of 8.1% and the latest quarter of growth (1.3%) was slower than both Q3 and Q4 2020’s increases of 2.8% and 3.0% respectively. If we consider China’s gradual slow down in growth as a normalisation after a Covid “boom”, then perhaps the Fed are correct to repeatedly allay concerns that a tightening monetary policy is not imminent. Concerns over Covid-19 variants will continue for some time and until then, policy makers will keep their powder dry before committing to act on the initial recovery data. Lastly, we highlighted last week the G20’s push for a minimum 15% global corporate tax rate. So far 130 OECD countries and jurisdictions have signed up to the new tax deal, Ireland however is one of the nine countries to continue to hold out. Last week Minister for Finance Paschal Donohue said he is going to continue “to make the case for our [12.5%] rate”. We will watch with interest and see if and when the G20 ratchet up the pressure on Ireland to sign on the new tax deal’s dotted line
It was a bad week for equities, particularly in Friday’s trading session, as we saw prices retreat in the main US and European indices. Delta variants of the coronavirus outweighed positive earnings announcements in the US last week and the S&P 500 ended the week lower for the first time in four weeks. Despite delta variant concerns, it may simply have been an opportune time for investors to realize some profit after previous weeks’ price increases. The UK saw a 40% rise in Covid-19 infections and this, as well as the drop in oil prices, negatively impacted the performance of the FTSE 100 where companies including BP and Royal Dutch Shell are members. Dangerous flash flooding and tragic loss of life in western Europe is likely to have weighed on investor sentiment across the continent also.
Bond prices were up last week across the main indices. Yields trended lower across Europe as bond investors took reassurances from ECB President Christine Lagarde’s comments to the FT that the bloc’s central bank strategy is “intended to signal that we [The ECB] will not prematurely tighten [monetary policy]”. US Treasury 10 year yields ended the week relatively unchanged at around 1.30%. According to Bank of America data, hundreds of billions of US corporate debt is being upgraded by the ratings agencies in what appears to be a sharp return after last year’s downward revisions. When we consider cheap borrowing costs, consumers back spending and vaccinations ramping up, it is not hard to see the reasons for the more positive credit outlooks.
Oil prices were one of the noticeable declines in commodity markets last week. The pullback in prices was due to an agreement between OPEC+ members to increase oil supply. We highlighted previously the differences the UAE had with Saudi Arabia and Russia about increasing output levels. Prices had a resurgent 2021 thus far as production and consumer travel have risen post lockdowns. Average Brent price for 2020 was $43.3 so despite weaker trading last week, where prices traded on Monday at $75.16 and at $73.59 Friday, it has been a good year for investors who are long oil.
Reduce construction VAT and create national investment fund to boost apartment development – KPMG
A KPMG report commissioned by Cork Chamber and the Construction Industry Federation (CFI) to highlight the viability of apartment development in Ireland, and in particular Cork City, has raised some striking concerns. The research found that without government intervention to address adequate apartment delivery, the economic performance of Cork and Ireland’s other cities risk being compromised. Along with some of the concerning findings, including that Cork has not seen the creation of any private apartment schemes of scale since 2008, the report proposes five recommendations to support the viability and affordability of new apartment development in Ireland. The five suggestions are – a reduction to the rate of VAT on residential construction activity to 5%, the creation of an urban housing investment fund and the utilisation of the Urban Regeneration and Development Fund, a minimum tax depreciation of 4% per annum for apartment developments and for private investments in the build-to-rent and private rental sectors to be recognised as businesses for gift/inheritance tax purposes. Our view is that it is imperative that government implement a strategy that ensures that the delivery of apartments becomes viable in urban locations.
Ireland to receive €1 billion for infrastructure and Covid recovery spending
Ireland is to receive €1 billion in funding through the recently announced €750 billion European Union Covid-19 stimulus fund. The fund is designed to counteract the economic damage of the pandemic and overhaul economies to make them greener and more digital for the future. Notable allocations include €164 million for the electrification and upgrade of Cork commuter rail and €100 million for the retrofitting of public and residential buildings. In all, 42% of the money is to be used for projects that help reach Ireland’s climate objectives, with €108 million set aside for the rehabilitation of 33,000 hectares of peatlands degraded by Bord na Móna harvesting to restore them as carbon sinks. The €750 billion scheme is funded by joint borrowing by the EU 27. BlackBee welcome this announcement and believe that there is opportunity by aligning investment strategies with this continued “greener”, fiscal spending – one of the reasons we are excited to launch our first forestry bond this year.
Bank of Japan to offer zero interest rate for climate change projects
The Bank of Japan (BoJ) will offer zero-interest loans to lenders that finance climate change projects as it becomes the latest central bank to act on carbon emissions. Under the new scheme, expected to launch before the end of the year, banks will also be able to reduce the amount of deposits with the BoJ that are subject to a negative interest rate. The arrangement effectively creates a subsidy for commercial banks that invest in emissions reduction over other projects and could spur demand for green bonds. The loans will have a one-year tenor but can be rolled over an unlimited number of times, with the central bank pledging to run the scheme until at least 2031. In addition to paying a zero interest rate, the BoJ said commercial banks could add twice the amount of any borrowing under the scheme to their “macro add-on balance” with the central bank. The macro add-on balance pays an interest rate of zero instead of negative 0.1 per cent. Japan’s commercial banks hold large excessive reserves at the central bank, created as the balancing item to BoJ bond purchases. For an individual bank, the rule effectively means they will save 0.2 per cent — 0.1 per cent times two — when they make an environmental loan under the new scheme. Our view is that this is only the beginning of central bank policy taking action to mitigate climate change risk, one of the most significant risks facing global economies and the planet as a whole.