Weekly View - Delta hedging
Last week, 130 countries signed on to apply a global minimum tax rate of 15% to multinational companies. Their shared objective is to enable governments to collect taxes based on where these global companies do business while at the same time setting lower limits to countries’ tax competition. This will translate into additional tax revenues of USD100 bn per year globally. OPEC+ failed to agree a deal to raise oil production beyond July and to extend the deal beyond April 2022. Oil prices have risen to their highest level in nearly three years as a result.
June US nonfarm payrolls released on Friday showed an increase in employment of 850,000 jobs, far higher than expected. However, the US economy is still 9 million jobs short of full employment and the labour market participation rate was little changed. Investors interpreted the mixed data as reassurance that the Federal Reserve will not rush to tighten monetary policy, leading gold to rise and the dollar to weaken on Friday. We observe that recourse to the Fed’s reverse repo facility is nearing the USD1 trn mark, which could put pressure on the central bank to taper its asset purchases sooner than markets currently anticipate.
The correlation has clearly broken down between growth- and value-style stocks, which is at an all-time low, while the high positive correlation between equities and bonds may have peaked. We interpret these indicators as grounds to stay cautious. At the same time, we are aware of the amount of stimulus money that is still in the pipeline and the pile of savings that the US consumer is sitting on as wages start to rise. Meanwhile, the latest US bank stress tests revealed USD200 bn of potential excess capital, with banks increasing payouts as a result, for a total yield of 9% this year. Dividends are back and we are focused on dividend growers. Days after its US IPO, the Chinese ride-hailing app Didi found itself a target of a broader regulatory crackdown by Chinese authorities, who accused the company of violating personal data laws and ordered its removal from domestic app stores. We continue to prefer developed-market equities over their emerging-market peers.