Market update: Opec, US payrolls and global corporate tax rates
The start of the month has not been free of drama, there has been a divergence in daily performance, with European markets outperforming their US counterparts on the back of a surging oil sector on Thursday. The Opec + meeting has agreed to gradually increase oil production, the cautious route forward for Opec + has been welcomed by the oil bulls with the energy sector the top performer, helping to drive the Brent crude oil price to a near 3-year high above $76.
The outperformance of European stocks vs. their US counterparts is a shift from Q2, when US stocks, led by growth stocks like Tesla, Amazon and Google, surged by 8.2% in Q2 vs. a 5.4% increase for the Eurostoxx 600. US markets are largely rangebound as the market waits for the June payrolls report, which we will talk about in more detail below. To top things off the world’s leading economies including China and India, have signed up to a historic minimum global tax rate of at least 15%, which should see the major global multinationals paying more tax in the future than they currently do at present.
Global minimum tax rate a reality sooner than expected?
Looking at the global corporate tax rate first, we have argued that this issue may not have a big impact on stock prices in the short to medium term, largely because we expected it to take a long time to get 130 countries to agree to the OECD tax deal. The OECD surpassed our expectations and did a better job than we thought to get 130 countries to sign off on the tax deal less than a month after the G7 meeting. Only 9 countries refused to sign up, and huge US pressure could see the global minimum tax rate implemented sooner than we had originally expected. However, we would still argue that the definition of “multinational” has not been agreed, we also don’t know if special pleading from some countries will work to exempt some sectors from this deal. Thus, without more information about the companies included in the deal it is hard to work out the impact on individual companies’ stock prices. For example, the UK has worked hard to lobby for the financial services sector to be exempt from the deal. As it stands, we think that the US stock indices could be the most impacted from the global minimum tax rate as they have the largest number of growth companies (some may say tax dodgers), who this deal is trying to force to pay more tax globally. Overall, it could be a tough week for US stocks, particularly if US payrolls and wage growth pick up and stoke fears that the US Federal Reserve will hike rates sooner than expected.
Why payrolls matter, but not until August
On that note, Friday’s payrolls report is the major focus for investors this week as the debate around rising price pressures continues to heat up. If we get a strong reading for June’s payrolls, the market expects 700k, then inflation hawks will likely be concerned about the economy overheating and calling for the Fed to hike interest rates. Wage growth is also important in Friday’s report.
Currently the market expects average hourly wage growth to rise by 3.7% last month, which could be seen as another sign that inflation pressures will not be transitory like the Fed expects and instead could be sticky. Overall, we would expect a knee-jerk reaction to Friday’s payrolls, with the potential for global risk sentiment to take a knock if the jobs data is strong, but any sell off could be short lived.
What we have seen in recent weeks is that the market tends not to have a long-term reaction to higher inflation data or economic data that shows that the US economy is strong. For example, bond yields have not reacted to recent strong prints for US monthly inflation, which is a sign that the Fed’s Powell has done a good job of calming waves of concern in the bond market in recent months.
Jackson Hole in focus for the Fed watchers
While stronger than expected economic data has not had the expected impact on global financial markets in H1, we think that H2 could be a different story. While we think that financial markets will have a free pass for the summer, i.e., markets will not react too strongly to strong economic data as trading volumes thin out in July, we think that there may be choppier markets in H2, particularly if the Federal Reserve uses the Jackson Hole central bankers’ symposium at the end of August to discuss when and how it will step away from the easy monetary policies put in place during the peak of the Covid pandemic. This is when we expect the flattening of the US yield curve to happen with a gusto, and when stock and FX markets could react.
Until then, we expect stock markets to continue to move higher, and the dollar to slowly meander upwards. We expect US stocks to be propelled higher by strong corporate earnings growth for Q2 along with super-charged economic growth around the world. Overall, while the global press may be obsessed by Covid and the new delta variant, we do not think that this is a big issue for investors. Instead, investors are focused on strong vaccination rates and the opening up of economies around the world that will drive stocks higher in the coming weeks.
Opec and why the oil price could go to triple figures
You may have noticed that we have tried to avoid talking about oil for as long as possible, largely because it has been appreciating and when investment banks start to talk about the oil price in triple figures it worries us. However, Opec meetings have become the singular most important driver of oil prices in recent months as, let’s face it, Opec has command of the oil price. This is why Thursday’s meeting matters, Saudi Arabia and Russia, arguably Opec +’s two most important members, have agreed to gradually increase oil production after last year’s drastic cuts in response to the pandemic. This news was already priced in by the market and suggests that the post pandemic global economy can soak up the extra supply announced by Opec on Thursday without weighing on the oil price. The biggest risk to the oil price right now is a US/ Iranian nuclear accord that paves the way for 1mn barrels per day or more of Iranian oil to flood the global economy. We believe that there is not a possibility of this happening in the near future and that it will not hinder further upside for the oil price, especially if we get strong payrolls on Friday. Perhaps those investment bank reports on $100 oil will turn out to be true.
Overall, the direction for markets for July could be determined by the June payrolls report as the debate about price pressures heats up, so look closely at both the number of jobs created last month and average wage growth.