Monday Musings: July 12, 2021

Jul 12, 2021


Public Trust Credit Team
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Majority of global countries agree to a “global minimum tax framework” setting the stage for a potential global tax overhaul

At the end of June, a virtual meeting of 130 countries including all the largest countries that make up the G-20 agreed to a framework for setting a global minimum tax rate, a keystone of the Biden Administration’s tax policy. The agreement says the countries will begin to attempt passing legislation setting their minimum tax rates to 15% while changing their policies so that more profits are taxed in the countries where customers are versus the physical headquarters location. The modifications would represent a large change in global tax policy and are targeted at closing loopholes that corporations have been using to pay fewer taxes by relocating to tax-friendly countries. While the 130 countries in the agreement represent ~90% of global GDP, there are a few holdouts – most notably, Ireland is still against the proposal. Small countries tend to see lower tax rates as a competitive advantage that makes up for their smaller addressable markets. The U.S. tech giants that happen to be the major focal point of the agreement have been supportive since they feel a global minimum tax would help avoid the mishmash of tax regimes, especially in Europe. It remains to be seen whether the changes will make it through the U.S. Congress and other countries which have been wary about raising taxes, but the agreement still represents a major shift in thinking for global tax policy.

Global corporations enter expansion from a position of strength as the upgrades keep coming

In June, a net ~$115 billion of debt outstanding was upgraded by the rating agencies on the heels of a record number of upgrades in May. Following a theme we have been reporting on, we believe U.S. corporations are entering the economic expansion from a position of relative strength. 2020 and the COVID-19 recession were largely better than feared, and many companies were able to outlast with just a scratch compared to prior recessions. As earnings accelerate and companies enter the expansion with strong balance sheets, we expect to see a pace of upgrades that is much faster and shorter than prior expansions.

Large domestic banks set for strong second-quarter earnings as the U.S. economic recovery continues

The money center banks (JPMorgan, Citigroup, Bank of America, and Wells Fargo) are scheduled to release second-quarter earnings results this week with market participants expecting a solid profit rebound compared to a year ago. All four banking groups are expected to report profit gains in the second quarter after recording large losses in anticipation of loan defaults in Q2 2020. Domestic banks have begun to release reserves against improved economic outlook assumptions which will translate to a boost in bottom-line results after incurring billions in loan loss provisions in fiscal 2020. However, the expected improvement in earnings is owed almost entirely to anticipated reserve releases as the industry still faces a number of headwinds that will likely constrain top-line growth over the near term. The sector remains flush with excess liquidity – given limited opportunities on the lending side amid still muted loan demand and low domestic interest rates, pressure on net interest income and net interest margins is expected to persist. Additionally, capital markets activity has slowed following a robust 2020. According to an article in the Wall Street Journal this morning, top executives at both JPMorgan and Citigroup signaled to investors that trading revenues could fall by as much as 30% compared to the second quarter of last year. In general, the market anticipates this quarter to mark a trough in net interest income with loan growth expected to pick up gradually in subsequent quarters as the economic recovery continues. 

All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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