Rich People From These Nations Hide the Most Offshore Wealth

 

 

 

 

The top 0.01 percent isn’t paying a big chunk of its tax bill

Pinpointing the inequality between rich and poor is notoriously difficult because the data is so squishy, and new research shows just how hard that job can be.

The study is the first of its kind to quantify tax avoidance by nation. It kicks off this week’s economic research roundup, and is followed by a look at the decline in innovative ideas, another on the trajectory for pricing power, and a final piece on inflation and wages in the U.S. and Europe. Check this column each week for new economic studies from around the world.

 

Who’s skipping out on taxes

One-tenth of the world’s total wealth is held in offshore tax havens, but that share jumps to as much of 15 percent for Europe and as much as 60 percent for Gulf and some Latin American countries, new research shows. When it comes to total offshore wealth as a share of GDP, the United Arab Emirates, Venezuela, Saudi Arabia, Russia and Argentina lead the pack, while Germany, the U.K. and France all have above-average holdings. The U.S. is slightly below average.

There are a few factors that are closely associated with a high share of offshore wealth-to-GDP – proximity to Switzerland, the presence of national resources,  and political and economic instability. That could be why the U.S. is slightly below the average, said economist Gabriel Zucman, one of the authors.

Offshore wealth boosts inequality when it’s factored into tax data, because it belongs mostly to the richest households.  In the U.K., Spain, and France, about 30 percent to 40 percent of the wealth of the richest 0.01 percent of households is held abroad. Russia’s richest hold as much as 60 percent of their wealth overseas. “The way that we measure inequality in economics, and the social sciences, is that we rely a lot on tax data,” Zucman said. “There’s the obvious problem that there is tax avoidance: if you only look at tax data there is risk that you’re going to underestimate the true concentration of wealth.”

 

 

 

 

 

 

 

 

 

 

 

 

Also worth noting: Hong Kong is rising as a destination for overseas cash, probably thanks to the rise of the super-rich in China and increased international pressure on more storied tax havens, like Switzerland.

Who Owns the Wealth in Tax Havens? Macro Evidence and Implications for Global Inequality
Published September 2017

 

A good idea is hard to find

Moore’s law – the idea that the number of transitors packed onto a computer chip doubles every two years – is getting harder to bring to fruition: it takes 18 times as many researchers to generate that change today as in 1970. That’s happening as research productivity is declining at a rate that averages 6.8 percent per year, new research by Stanford University economist Nicholas Bloom and co-authors finds. Likewise, research productivity for agricultural seed yields is slumping, and a similar slide is evident in mortality improvements associated with cancer and heart disease.

So what’s going on here? We could be trying too hard. The decrease in semiconductor-related productivity “might be precisely due to the fact that research effort is rising so sharply,’’ the authors suggest. “Because it gets harder to find new ideas as research progresses, a sustained and massive expansion of research” might “lead to a substantial downward trend in research productivity.” Regardless of the cause, it matters for economic growth.

Are Ideas Getting Harder to Find?
Published September 2017

 

Pricing power: don’t count it out

Pricing power – the ability to raise prices without choking off demand – has actually increased over the past two decades despite the advent of Amazon, according to Goldman Sachs researchers. U.S. firms charged 67 percent more than their marginal costs in 2014, versus 18 percent in 1980. The authors suggest that that could be happening because superstar firms are capturing a bigger slice of market share and are establishing productivity advantages, and because technology has boosted other forms of pricing power, like product differentiation.

At the same time, consumer price elasticity – the chance that they curb buying things as they become more expensive – has fallen for the past 20 years, though it’s picked up a bit in the last five.

US Daily: Pricing Power and Inflation
Published Sept. 8, 2017

 

Don’t get too excited about inflation 

Much of the recent slowdown in U.S. inflation and recent pickup in the euro area owe to jumpy sub-components – like cell phone plans and generic medicines in America – rather than a genuine change in trend inflation, researchers at The Institute of International Finance write in a note. “The`signal-to-noise’ ratio in core inflation has deteriorated on both sides of the Atlantic,” the researchers write. When it comes to wages in the U.S., though, the story changes: there’s no reason to believe that one-off events are driving a recent slowdown, so that “the wage slowdown looks broad-based and is therefore a genuine puzzle.”

Signal-to-Noise in the Wage Slowdown
Published Sept. 11

 

Remember there is nothing wrong with being tax efficient, the problems occur when you are tax avoiding, we help many expats each year to maximise their legal right to be tax efficient while offshore and if you would like a free and private consultation please let me know.

All the best and have a great day

Stuart

CEO

Farringdon Group

+60 3 2026 0286

 

Article – Courtesy of Bloomberg

Week 36 In Review

 

 

 

 

 

 

 

 

 

  • Florida eyes powerful winds, rain, storm surge
  • Fed job openings in focus
  • Trump strikes deal on debt limit, Harvey relief
  • North Korea tests hydrogen bomb

Global equities were little changed this week as markets digested escalating tensions on the Korean Peninsula and the potential impacts of hurricanes Harvey and Irma on the US economy. The odds of a third US Federal Reserve rate hike this year declined this week, prompting a drop in the yield on the US 10-year Treasury note to 2.06% from 2.14% a week ago. The price of a barrel of West Texas Intermediate crude oil rose to $48.95 from last Friday’s $46.75 while volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), advanced to 12.35 from 10.3.

 

MACRO NEWS

Another major storm set to hit US coast


Hurricane Irma, a Category 5 storm that wreaked havoc in the Caribbean, is set to make landfall this weekend in south Florida. The storm comes on the heels of Hurricane Harvey, which dropped a record 50 inches of rain along portions of the Texas Gulf Coast. The price tag for Harvey is still being calculated, but the cost of two storms together could be several hundred billion dollars.

Property and casualty insurers entered this hurricane season with strong balance sheets after several quiet seasons but will likely be hit with sizable claims in coming quarters. US economic data is likely to be impacted by the storms for some months to come, making underlying trends more difficult to discern. Hurricanes are not the only natural disasters affecting North America this week: Southern Mexico was shaken by an 8.2- magnitude earthquake, the strongest to hit the country in a century.

 

And then there were three


The US Federal Reserve’s seven-member Board of Governors is now down to just three members, with Vice Chair Stanley Fischer this week tendering his resignation, effective in mid-October. Fischer, 73, whose long career includes stints at the International Monetary Fund, the World Bank and the Bank of Israel before he joined the Fed, is leaving roughly a year before his term is set to expire.

Meanwhile, nominee Randal Quarles awaits final confirmation. And the Wall Street Journal reported this week that US President Donald Trump is unlikely to appoint Gary Cohn, his chief economic advisor, to replace Janet Yellen when her term expires in February. Cohn’s sharp criticism of Trump’s reaction to the recent violence in Charlottesville, Virginia, in an interview with the Financial Times, has diminished his chances of being nominated to the top job at the Fed, the Journal reported.

 

Trump, Democrats kick the can


With the government close to hitting the debt ceiling and the end of the fiscal year approaching without a budget in place, President Trump struck a deal with congressional Democrats to extend the debt ceiling and fund the government for three months while providing Harvey relief funds for Texas and Louisiana. This is the first time Trump has reached across the political aisle to strike a deal. Republican leaders pushed for a longer-term package to avoid having to repeatedly vote to raise the debt ceiling — an unpopular move with the party’s base of supporters — before next year’s mid-term elections.

 

North Korea tests more powerful bomb


Markets were unsettled early in the week as Kim Jong-un’s nuclear program continued to advance rapidly. North Korea successfully tested a hydrogen bomb, further raising the stakes in its standoff with the United States. A further missile test is believed to be planned for Saturday, according to South Korea’s prime minister.

Escalating tensions have prompted South Korea to reverse its opposition to additional THAAD missile interceptor launchers. Four launchers are being deployed to join two launchers that have been operational since May.

 

ECB raises growth view


The European Central Bank did not adjust monetary policy at its September meeting, but it did up its 2017 economic growth outlook to 2.2% from an earlier 1.9% forecast. The inflation outlook remains subdued, however, with the ECB downgrading its full-year forecast to 1.2% from 1.3%. At Thursday’s press conference, ECB president Mario Draghi hinted that any adjustment to the bank’s asset purchase program would wait until its October meeting.

Draghi also cautioned that recent euro strength has tightened financial conditions. While the ECB held the line on policy adjustments, the Bank of Canada tightened policy a quarter of a percentage point for the second straight meeting, to 1%.

 

Madrid seeks to halt Catalonia’s referendum


Spanish prime minister Mariano Rajoy vowed this week to “stop at nothing” to derail a planned independence referendum in the region of Catalonia. On Thursday, Spain’s Constitutional Court suspended the referendum law passed late Wednesday in Catalonia’s parliament, though Catalan officials vow to press on with the vote regardless. Polls show only a slight majority of Catalans support independence from Spain.

 

 

 

 

 

 

All the best and have a great week

Stuart

CEO

Farringdon Group

+60 3 2026 0286

The FTSE 100 And Their Pension Disclosures

 

This Quarterly Report covers all FTSE100 companies. It includes analysis of all annual reports for years ending on or before the 30 June 2016 and published by 31 October 2016.

This report albeit 6 months old is something to look at as this problem is only getting worse, hence I wanted to share it with you all.

 

EXECUTIVE SUMMARY

  • The total deficit in FTSE 100 pension schemes at 30 June 2016 is estimated to be £117 billion. This is a deterioration of £42 billion from the position 12 months ago.
  • Only 54 FTSE 100 companies are still providing more than a handful of current employees with DB benefits (i.e. ignoring companies who are incurring ongoing DB service costs of less than 1% of total payroll). Of these, only 23 companies (i.e. less than a quarter of the FTSE 100) are still providing DB benefits to a significant number of employees (defined as incurring ongoing DB service cost of more than 5% of total payroll).
  • There continues to be significant funding of pension deficits. Last year saw total deficit funding of £6.3 billion, up from £6.1 billion the previous year. BT led the way with a deficit contribution of £0.8 billion (net of ongoing costs), but 49 other FTSE 100 companies also reported significant deficit funding contributions in their most recent annual report and accounts.
  • The decline in ongoing DB pensions continues. We estimate that after allowing for the impact of changes in assumptions and market conditions, the underlying reduction in ongoing DB pension provision is approximately 10% in the last 12 months.
  • There are a number of companies reporting very significant individual changes to investment strategies. Three FTSE 100 companies changed their bond allocations by more than 10%.
  • The average pension scheme asset allocation to bonds has increased from 59% to 61%. Ten years ago, the average bond allocation was only 34%.
  • There are a significant number of FTSE 100 companies where the pension scheme represents a material risk to the business. Eight FTSE 100 companies have total disclosed pension liabilities greater than their equity market value. For International Airlines Group, the total disclosed pension liability is more than triple its equity market value. For BAE Systems, Royal Bank of Scotland and Sainsbury, the total disclosed pension liabilities are almost double their equity market value.
  • Only 28 companies disclosed a pension surplus in their most recent annual report and accounts; 60 companies disclosed pension deficits.
  • In the last 12 months, the total disclosed pension liabilities of the FTSE 100 companies have fallen from £614 billion to £586 billion. Ten years ago, the total disclosed pension liabilities were £407 billion. A total of 16 companies have disclosed pension liabilities of more than £10 billion, the largest of which is Royal Dutch Shell with disclosed pension liabilities of £57 billion. A total of 21 companies have disclosed pension liabilities of less than £100 million, of which 12 companies have no defined benefit pension liabilities.
  • If pension liabilities were measured on a “risk-free” basis rather than using a AA bond discount rate, the total disclosed pension liabilities of the FTSE 100 would increase from £586 billion to £705 billion, and the total deficit at 30 June 2016 would be around £185 billion.

 

FUNDING POSITION

The overall funding position of pension schemes of FTSE 100 companies has worsened over the year covered by their latest annual report and accounts.

Including all pension arrangements, both UK and overseas, whether funded or unfunded, the FTSE 100 companies with the best-funded pension schemes overall were as follows:

 

 

 

 

 

 

 

 

 

The FTSE 100 companies with the worst funded pension schemes overall were as follows:

 

 

 

 

 

 

 

 

 

In 2007, IFRIC14* provided new guidance on the recognition of surpluses and the impact of minimum funding requirements. Within the FTSE 100, 18 companies have reported that the restrictions imposed by IFRIC14 have had an impact on their pension disclosures.

The total reported impact for FTSE 100 companies is now £5.6 billion. The largest reported adjustments for IFRIC14 in the FTSE 100 were as follows:

 

 

 

 

 

 

 

 

 

 

Adjusting these figures up to the quarter-end, we estimate that the total pension deficit in the FTSE 100 as at 30 June 2016 was £117 billion. This is a deterioration of £42 billion from the position 12 months ago.

* For more information on IFRIC14, see JLT publication – IAS19: A Quarterly Guide for Finance Directors

 

INVESTMENT MISMATCHING

Legislation over a number of years has clarified that pension liabilities are a form of corporate debt. Despite the fact that there is an increasing weight of opinion from academics and analysts that mismatched investment strategies in pension schemes reduce shareholder value, many companies are still running very large mismatched equity positions in their pension schemes. This has the impact of creating balance sheet volatility, which some academic evidence might suggest flows through to share price volatility.

Inevitably, analysis of mismatching is limited to the information disclosed in the annual report and accounts. Given the bond-like nature of pension liabilities, the allocation of pension assets to bonds gives an indication of the level of investment mismatching that exists. This report refers to investment mismatching in terms of the IAS19 accounting position, where liabilities are being valued using AA corporate bonds; therefore assets other than these bonds will lead to a mismatch.

 

The FTSE 100 companies with the highest allocation to bonds were:

 

 

 

 

 

 

 

 

 

The FTSE 100 companies with the lowest allocation to bonds were:

 

 

 

 

 

 

 

 

 

The FTSE 100 companies with the greatest change in bond allocation were:

 

 

 

 

 

 

 

 

 

 

Several companies and trustees are continuing to switch pension assets out of equities into bonds. Standard Life is the latest company to report a big switch, with bond allocations increasing by 28%. A total of 61 FTSE 100 companies have more than 50% of pension scheme assets in bonds. Moreover, company disclosures reveal little of the extensive activity there has been by many companies to use LDI (liability-driven investment) strategies, which frequently make use of derivatives and other financial instruments to improve liability matching.

Overall, though, the average pension scheme asset allocation to bonds is now 61%, which has increased from 59% a year before. This compares to 34% ten years ago.

 

SIZE OF PENSION SCHEME

In recent years, pension schemes have grown significantly. Attempts by many companies to stem the growth of their pension liabilities by closing defined benefit pension schemes to new entrants have had little impact. Changes in economic conditions and increasing life expectancy have contributed to the spiralling growth in pension liabilities.

The FTSE 100 companies with the largest pension scheme liabilities (all those over £10 billion) are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The FTSE 100 companies with the smallest pension liabilities (all those under £100 million) are as follows:

 

 

 

 

 

 

 

 

 

In addition, Admiral, ARM Holdings, Burberry, Easyjet, Hargreaves Lansdown, Hikma Pharmaceuticals, Intu Properties, Paddy Power Betfair, Randgold Resources, Shire, St. James’s Place and Worldpay Group all reported no defined benefit pension liabilities.

In the last 12 months, the total disclosed pension liabilities of the FTSE 100 companies have fallen from £614 billion to £586 billion. A total of 16 companies have disclosed pension liabilities of more than £10 billion, whilst 21 companies have disclosed pension liabilities of less than £100 million.

The possibility of measuring pension liabilities on a “risk-free” basis (i.e. using gilt-based discount rates rather than AA bond discount rates) has been debated at length, including in a detailed discussion paper from the Accounting Standards Board. In the UK, a company can no longer default on its promises to pension scheme members unless it goes into liquidation. If pension liabilities were to be measured on a “risk-free” basis, with no allowance for default or further reduction in benefits, we estimate that it would add approximately 20% to the total pension liabilities, increasing the total disclosed pension liabilities from £586 billion to £705 billion. The total deficit at 30 June 2016 on a “risk-free” basis would be around £185 billion.

 

SIGNIFICANCE OF THE PENSION SCHEME IN THE BOARDROOM

The impact of the pension liabilities on corporate decision-making and its importance in the boardroom depends on the relative size of the pension scheme. In the analysis below, the pension scheme deficit and liabilities are expressed as a percentage of the equity market value of the company. The FTSE 100 companies with the most significant pension scheme liabilities are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* as at 30 June 2016

** These companies’ pension schemes have purchased contracts, which insure part of their liabilities; the figures in italics represent the impact of the liabilities without these insured sections.

 

A further sign of the significance of pensions in the boardroom is the extent of continuing DB provision to employees. This can be measured by looking at the ongoing spend on DB pensions (the service cost) before any allowance for deficit spending. The FTSE 100 companies with the highest ongoing spending is shown in the table below, together with the previous year’s spend for comparison.

 

 

 

 

 

 

 

 

 

 

28 FTSE 100 companies showed zero (or negative) cost of current DB service costs, compared with 27 in the previous year.

Eight FTSE 100 companies have total disclosed pension liabilities greater than their equity market value. For International Airlines Group, the total disclosed pension liability is more than triple its equity market value. For BAE Systems, Royal Bank of Scotland and Sainsbury, the total disclosed pension liabilities are almost double their equity market value. BAE Systems and GKN have a disclosed pension deficit of about one-third of their equity market value. A further six companies have disclosed pension deficits bigger than 10% of their equity market value.

Increasingly companies are reacting to the combination of difficult economic conditions, rising pension costs and increasingly aggressive pension regulations by closing pension schemes to future and even current employees. This decline in total DB pension provision is now apparent in the accounts of FTSE 100 companies, with several companies closing their scheme to future accrual or freezing pensionable salaries. The total current DB service cost is £8.1 billion compared to £7.5 billion in the previous year. However, we estimate that after allowing for the impact of changes in assumptions and market conditions, the underlying reduction in ongoing DB pension provision is approximately 10% in the last 12 months alone. We believe that the next year’s accounts will show that the majority of FTSE 100 companies have ceased DB pension provision to all employees.

 

IMPACT OF THE PENSION SCHEME ON THE COMPANY’S SHARE PRICE

As already mentioned, there is some evidence that balance sheet volatility caused by pension schemes flows through to share price volatility. Changes in the balance sheet position resulting from pensions can be separated into expected changes and unexpected changes. Expected balance sheet changes arise largely from the contributions paid by the company and the costs shown in the company’s income statement. Unexpected balance sheet changes arise largely from actuarial gains and losses (due to stock market volatility) and changes to actuarial assumptions.

In the analysis below, the unexpected change in balance sheet position (net of change in adjustment for IFRC 14) is expressed as a percentage of the equity market value of the company. We are not suggesting that the balance sheet impact will translate into a £ for £ impact on a company’s share price (not least because of the impact of deferred tax), but this analysis gives a good indication of those companies most positively (and negatively) affected by their pension schemes in their last financial year.

 

The FTSE 100 companies most positively affected by their pension schemes were:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*as at 30 June 2016

Over the year covered by their latest report and accounts, 58 companies felt the benefit of an unexpected gain to their balance sheet as a result of their pension schemes, whilst 29 companies suffered an unexpected loss to their balance sheet as a result of their pension schemes.

 

CONTRIBUTIONS PAID INTO PENSION SCHEMES

This analysis compares the pension scheme contributions actually paid by companies with the cost of pension benefits accrued during the year. Surplus pension contributions paid in excess of the cost of benefits will reduce pension scheme deficits. However, where the contributions paid are less than the cost of benefits, this will increase pension scheme deficits (or reduce pension scheme surpluses).

The large increases in the contributions seen in the last couple of years have ended, with the amount contributed in the most recent accounting year being £ 0.2 billion lower than the amount contributed the previous year.

Only contributions actually paid in the relevant accounting year are included in the analysis below.

The FTSE 100 companies who have made the largest surplus contributions to their pension schemes were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* The Cost of Benefits recognised in the income statement of the Barclays was reduced by a past service cost credit of £434million.

In total, the amount contributed to FTSE 100 company pension schemes was £13.2billion, down from £13.4 billion in the previous accounting year. This is more than the £6.9 billion cost of benefits accrued during the year. It therefore represents £6.3 billion of funding towards reducing pension scheme deficits. This is an increase on the previous year’s deficit funding of £6.1 billion.

 

CONFLICT OF INTEREST BETWEEN EMPLOYERS AND TRUSTEES

There is an inherent conflict of interest involved in the running of a pension scheme. The following tables aim to capture employers’ reluctance towards contributing to their pension schemes against their relative enthusiasm for declaring dividends for their shareholders.

The total disclosed pension deficit of the FTSE 100 companies was £25 billion and the total dividends paid by companies with a defined benefit pension scheme in the FTSE 100 was £68.5 billion. This compares to a deficit of £48 billion and dividends of £67 billion one year ago. In total, the amount contributed to FTSE 100 company pension schemes was £13.2 billion, down from £13.4 billion in the previous accounting year.

46 FTSE 100 companies could have settled their pension deficits in full with a payment of up to one year’s dividends. Seven companies would need a payment of up to two years’ dividends to settle their pension deficit in full and seven companies would need a payment of more than two years dividends in order to settle their pension deficit in full.

The following companies had the highest excess of dividends paid over the latest disclosed pension scheme deficit. This might suggest that these companies could not only wipe off their pension scheme deficit right away but also potentially contribute significantly towards de-risking opportunities.

 

 

 

 

 

 

 

 

 

 

The following companies had the highest levels of pension scheme contributions relative to their dividends declared in a year. This may suggest that these companies are prioritising the financial health of their pension schemes over making returns to shareholders.

 

 

 

 

 

 

 

 

 

 

 

If you do have a UK pension now is the right time to be speaking to us, as specialists we can assess the current markets and advise on the best practice moving forward, with the interest rates so low currently the values are very good, BUT when the interest rates increase (Potentially twice this year) your pension value will go lower.

We don’t charge for a pension valuation and will offer a full detailed report so please let me know by return email

All the best and have a great day

Stuart

CEO

Farringdon Group

+60 3 2026 0286

 

NOTES

All of the analysis contained in this report is based on the IAS19 numbers disclosed in a company’s most recently published annual report and accounts.

No adjustment is made for the fact that companies have applied different interpretations of IAS19 and have used different actuarial assumptions (for example, different mortality assumptions can make a significant difference to a company’s pension liabilities).

No adjustment is made in the individual analysis for the fact that companies have different year-ends. Inevitably, different market conditions applying at different year-ends will affect the comparisons.

The assets and liabilities shown are the total global pension assets and liabilities, not just the UK figures.

The figures shown in this report are before adjustment for IFRIC14 (and before adjustment for any other unrecognised pension surpluses), except for Unanticipated Balance Sheet Impact, which is shown net of the change in irrecoverable surplus.

 

 

 

 

 

Week 35 In Review

 

 

 

 

 

 

 

 

 

  • US nonfarm payrolls disappoint
  • Harvey displaces thousands, energy sector hit hard
  • North Korea fires missile over Japan
  • US Q2 growth revised higher
  • Euro strengthens as inflation rises

Gains later in the week helped stocks move higher amid generally light trading in advance of the Labor Day holiday. The advance brought the large-cap indexes and the technology-heavy Nasdaq Composite near their all-time highs, but the smaller-cap indexes remained a few percentage points below the peaks they established earlier in the summer.

Technology stocks performed well, helped by strong performance at midweek from dominant Internet firms Facebook, Amazon, Netflix, and Google. Health care shares were also strong, boosted by the announcement of biotechnology giant Gilead Science’s planned acquisition of rival Kite Pharma.

US 10-year Treasury note yields fell six basis points to 2.14% on the week while West Texas Intermediate crude oil dipped 80 cents a barrel to $46.75. After spiking higher on Tuesday, volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), ended the week lower, at 10.3 from 11.9 a week ago.

 

MACRO NEWS

 

US hiring managers went fishing in August

History shows that August is traditionally one of the slowest months of the year for new hires, and this August was no exception. US nonfarm payrolls rose a less-than-expected 156,000, missing estimates for a 180,000 rise. The unemployment rate ticked up to 4.4% from July’s 4.3%. Payrolls for the prior two months were revised lower by a combined 41,000. On a brighter note, the August Institute for Supply Management manufacturing index reached a six-year high of 58.8, up from 56.3 in July.

Manufacturing data across the developed world were on the firm side, suggesting the synchronized global economic upturn remains intact.

 

Gasoline prices rise as Houston begins recovery

An estimated 23% of US refinery capacity is offline because of flooding in the wake of the exceptionally slow-moving Hurricane Harvey. Nationally, gasoline prices have risen an average of 17 cents a gallon since Harvey made landfall and now average $2.45, according to AAA. The storm, which left at least 39 dead and displaced tens of thousands, is expected to be one of the most expensive natural disasters in US history.

Parts of the Houston area received in excess of 50 inches of rain, a US record for a single event. Markets have largely taken the news in stride. Prices of municipal securities issued around the Houston region have not been heavily impacted, nor have bonds of companies in the insurance and energy industries.

 

Euro Strengthens as Inflation Rises

Euro strength continued to be the topic du jour as this strength began to frustrate those looking for an earnings revival in Europe. Cuts to profit estimates have outnumbered upgrades for nine straight weeks, trailing global momentum by the most since 2014, according to Citigroup research. Inflation in the Eurozone ticked up at a higher rate than expected (climbing to 1.5% from 1.3% in July), helped by energy prices, according to a European Union statistics agency report.

The region’s inflation is below the European Central Bank’s target of “below, but close to 2%,” and core inflation (less volatile food and energy prices) was flat at 1.2%. Notably, German and Spanish consumer prices rose more than expected in August.

 

North Korea ups the ante

North Korea conducted several missile tests this week in response to annual US-South Korea military exercises. The second launch drew particular scrutiny as the missile crossed over Hokkaido, Japan’s northern island. US and South Korean aircraft replied by conducting tests of bunker busting bombs on a range near the North Korean border.

Equity markets briefly sold off on risk aversion at midweek before recovering losses. US 10-year Treasury note yields dipped briefly to 2.08% while safe-haven currencies like the Japanese yen and the Swiss franc also rallied.

 

US growth revised up

The US economy grew at a 3% annual pace in the second quarter, an upward revision from the 2.6% pace reported in July. Spending was robust by both consumers and businesses in Q2, with capital expenditures expanding at an 8.8% rate — the fastest in nearly two years. Corporate profits rose 8.1% year over year.

 

Trump stumps for tax reform

US President Donald Trump traveled to Missouri this week to make the case for overhauling the US tax code. The president called this a once-in-a-generation opportunity to reshape the increasingly complex US tax system. But, the president offered few specific policy proposals beyond calling for a code that is fairer for lower- and middle-class Americans and for the corporate tax rate to be lowered to 15%, a level he said would create jobs and raise wages.

Tax reform faces an uphill battle, with an already packed legislative calendar set to become even more crowded as lawmakers begin to address disaster relief for the Texas Gulf Coast.

 

High-tax Denmark looks to cut rates

Denmark is proposing the equivalent of $3.7 billion in income tax cuts as an incentive for citizens to work and to save for retirement, according to the country’s finance minister, Kristian Jensen. In 2016, tax revenues in Denmark were the highest in the developed world at nearly 47% of gross domestic product, according to the Organization for Economic Cooperation and Development (OECD). Tax revenue as a percentage of GDP in the 35-member OECD averaged 34.3%, while Americans paid an average of 26.4%.

 

Brexit talks grow Acrimonious 

The third and latest round of Brexit negotiations ended on an acrimonious note, with the two sides unable even to agree on whether any progress had been made during the week. British Brexit secretary David Davis said concrete progress had been made while the European Union’s Michel Barnier said no progress had been made. There has been no agreement on key issues such as the Northern Ireland border, citizen’s rights and the size of the Brexit divorce payment.

The EU has stated that sufficient progress must be made on those issues before discussion of the United Kingdom’s future trade relationship with the EU can be taken up.

 

 

 

 

 

 

 

 

All the best and have a great week ahead

Stuart

CEO

Farringdon Group

+60 3 2026 0286