Brian Bollen's Blog

Fed Affirms Hard‑Line Approach to Taming Inflation

In Jackson Hole, Federal Reserve officials unequivocally emphasised their commitment to bringing inflation under control – even as the U.S. economy slows.

By Tiffany Wilding, North American Economist, and Allison Boxer, Economist, at PIMCO

Market participants listened closely to Federal Reserve officials at the annual symposium in Jackson Hole, Wyoming, for any sign of how committed the central bank remains to fighting inflation amid concerns about the associated costs to growth and employment.

The issue of WHT reclamation: the view from Northern Trust

Helping out with a recent feature I wrote about withholding tax reclamation for Asset Servicing Times magazine, Howard Rapley, global product lead, securities services at Northern Trust, emailed his views on the topic right on deadline. Unfortunately they did not make it through to the published pages, but Northern Trust has agreed that I can use Howard's contribution here.

Brian Bollen: What are the main themes and big issues currently relating to WHT that affect asset managers, custodians and their clients and other market participants or market servicers? 

Howard Rapley: We see a convergence of two key pillars, harmonisation of the withholding tax landscape alongside increasing attention and governance from regulators.

Every market has its own set of rules, typically with specific documentation requirements and manual handling processes. This makes sense if you consider that entitlement has to be evidenced against local rules, however it places technical and administrative burdens on both clients and service providers working to pursue relief across multiple jurisdictions.

For instance, one of the challenges faced by clients is completing the various different tax forms while ensuring their technical veracity. Asset managers and custodians face the similar challenge of navigating a web of disparate tax procedures at scale, whilst also supporting their clients.

Additionally, with increased scrutiny from tax authorities, we anticipate the need for even more data and information sharing across market participants. This forms the basis for industry discussions around harmonised tax systems to drive a more efficient tax landscape.

BB: Have those changed in recent times? 

HR: We have seen an increased focus on effective beneficial ownership, which extends through many different concepts from; legal form and structure, tax transparency, evidential documentation, transaction activity, and trade motivations.

BB: Have there been recent regulatory or cultural developments in any major markets that we ought to be more aware of?

HR: As part of the continuance of market change, the last six months presented a number of market consultations in the tax space. These afford the industry an opportunity to consider initial proposals, provide feedback, and engage with policy makers directly to influence change. Notable recent developments include:

EU: Consultation on Action 10 of the Capital Markets Union (CMU) plan to alleviate tax associated burdens to cross-border investment.

Germany: Updates on the Reform of the German Withholding Tax regime, including modernisation of withholding tax procedures.

Finland: Early adopter of the Tax Relief and Compliance Enhancement model (TRACE), a regime that is now live but one that has undergone extensive industry discussion over many years.

Sweden: A new proposal that is under consultation and shares some attributes of the Finnish framework.

Denmark: An example of a live consultation that could see changes to the mode of tax reliefs available to investors, depending on their profile.

Poland: not a regime overhaul per se but an example of an extremely fluid sequence of legislative changes. 

Market and regulatory changes are not new phenomena. Custodians and service providers have always needed to navigate a complex and disparate rule book to provide global tax services to their clients at scale. These market developments reflect this and illustrate a range of perspectives – from those taking a central view on opportunities for market harmonisation to those with a more insular view.

However, the emergence of innovation and new technology heralds the opportunity for a paradigm shift, where key concepts of governance and market efficiency may more easily co-exist. After many years of industry debate, we could be at the precipice of real transformational change meaning that market advocacy efforts and input into industry consultations have never been as important in the tax space as it is right now.

BB: Can we expect to see further technology or infrastructure development? 

HR: It is clear that digitalisation will reshape financial services and regulatory changes continue apace to ensure the banking system and all of the inherent layered protections remain robust and resilient. This presents interesting opportunities to create a brave new world where, for instance, digital tax identities integrated within distributed ledger technology might connect beneficial ownership principles to the asset and income record.

One of the benefits of digitalisation will be the step-away from iterative, gradual, and layered change towards a first-principle approach. The global tax system is full of market standards that have developed over time through a layering of rule changes making them complex -- not necessarily by design, but by evolution.

Yet opportunities will exist for all parts of the value chain to innovate. And for those providing tax services to their clients, this may provide them with the edge they need to increase alpha, improve client experience, and differentiate their product.  

 

 

 

 

Sadness Boosts Sustainable Investment

 Emotions have a strong influence on purchasing decisions. Because of the growing popularity of assets with a strong focus on environmental, social and governance (ESG) goals, scholars decided to look at what role emotions can play in determining people’s preference for sustainable investments.

In a new paper published this month in the journal Economics Letters, professors Alexandre Garel (Audencia), Adrian Fernandez-Perez (Auckland University of Technology) and Ivan Indriawan (University of Adelaide) found that pessimism and worse mood are associated with greater investment in sustainable assets.

US Heads to the Moon, but European Inflation Remains on a Rocket Trip

Mark Dowding, CIO of BlueBay Asset Management, looks at UK recession risk, and European, US, and Japanese inflation.

Global yields continued to move higher over the past week, as markets discounted a progressively more hawkish path for monetary policy in the months ahead. In the US, money markets now project rates peaking around 4% at the end of Q1 2023. With inflation now on a downward trajectory, we think this is broadly in line with fair value. The latest print on PCE Core inflation (the Fed’s favoured measure) stood at 4.56% in July, down from a peak above 5.3% earlier in the year.  By the end of 2022, we think that this reading could decline towards 3.5%, as base effects push the year-on-year rate lower. A strong dollar, declining oil prices and a cooling in demand, following fiscal and monetary tightening earlier in the year, are all helping to restrain price pressures. However, the Fed is likely to remain very alert to secondary inflation effects, in particular, evidence that wage costs are accelerating in a relatively tight labour market.

Energy Crisis and Inflation Dampen Growth Prospects

Nordic corporate bank SEB has released its latest Nordic Outlook report this morning. The report contains SEB economists' views on Swedish and worldwide economic developments, including the policy dilemmas brought on by the energy crisis and accelerating inflation, the impact of China’s strict COVID-19 policy on long-term growth, key forecasts and analysis of other major trends affecting the world economy. 

It also includes an in-depth article on the economic effects of the war in Ukraine, and examines quantitative tightening in monetary policy, mild recession expectations, and Sweden’s upcoming election. 

Please see the top line points below. A link to the full report can be found here; the following represents the contents of the associated press release, ad verbatim.

PIMCO: Fed Reaction

By Tiffany Wilding, North American Economist at PIMCO

• As widely expected the Federal Reserve raised their target interest rate by 75 basis points taking the midpoint of their target rate range to 2.35% - just below their estimate for a neutral policy stance in the longer run.
• At the press conference Chair Powell also guided that “modestly restrictive” monetary policy is warranted by the current economic fundamentals, including elevated inflation, and mentioned that another outsized move in the Fed Funds rate may be necessary in September in order to ensure monetary policy is restrictive.

The US economy is teetering on the brink of recession

The US economy is teetering on the brink of recession, World Economics has stated this morning.

Business activity indicators all remain close to the 50 "no growth" line. Business confidence is actually sitting right on the 50 no-growth fence. Both sales and market growth indices fell in July, the former just below and the latter just above 50. The staffing index rose sharply year-on-year, but remained at a lowly reading of 48.1. The overall sales managers index remained marginally under the 50 no growth line. Prices continue to rise, but at a rapidly diminishing rate, perhaps the most encouraging sign this month.

PIMCO: Corporate Credit - Capitalising on Potential Disruption

A Q&A with Christian Stracke, global head of credit research & Adam Gubner, head of US corporate special situations at PIMCO

Record corporate leverage and challenging macroeconomic factors are combining to create a compelling investment environment for managers with flexible capital. Christian Stracke and Adam Gubner explain why.

Why is the credit market compelling right now?

Stracke: There are three key reasons. First, there is a limited supply of flexible capital. Second, there are global macro headwinds. And third, we are seeing a significant increase in corporate leverage. The market is increasingly fragile against a backdrop of rising rates, higher inflation, and slowing growth – this supports an increasing demand for that flexible capital.

Can you explain the need for flexible capital?

Gubner: Demand for private credit is growing from a variety of factors. Assets under management in the private debt space reached a 20-year high of $1.2trn in 2021 from $50bn in 2001. The sheer growth of the market means borrowers often have a greater certainty of execution, while the private market is often more flexible for the customised financing terms required to meet certain unique borrower needs.

One question I hope I would ask

There is one question I hope I would ask re events in Downing Street over the past 48 hours or so if I were an aspiring journalist trying to make a name.

Is there any suggestion that one happy event might have been induced in order to distract attention from other not so happy events?

If someone doesn't ask it, there is something even more rotten than I thought in the state of British journalism.

Boris Johnson must go

Boris Johnson must go. After the fiasco involving Christmas parties that his own shambles of a government decided the rest of us must not have, he must resign, not least because before long he will run out of others who can resign to protect him.

Talk about one law for them, and one for us? I seem to remember that the last incumbent of senior office who tried to run Britain in such a cavalier dictatorial fashion sparked off a civil war, and eventually lost his head.

Boris Johnson MUST resign. Or be defenestrated by his party.

Doctor Why?

I've said it before, but last night's episode of Doctor Who on BBC1 was the worst ever, and I have been watching the programme since the first episode was broadcast on November 23 1963.

Words fail me, they really do. Apart from anything else, the incomprehensible storyline, the endless shouting and the grotesque overuse of the sonic screwdriver (oh, sorry, it's been renamed 'the sonic') and the apparently slavish box-ticking approach to scripting and casting, no one on it could act their way INTO a paper bag, let alone out of one.

If Doctor Who were a domestic pet, it would be making one last visit to the family vet...do us a favour, BBC, put it down.

Airdrie and the International Monetary Fund

Well, I never thought I would see Airdrie (my home town in central Scotland) and the International Monetary Fund in the same sentence, but it's there for all to see on the IMF website:

https://blogs.imf.org/2021/10/31/not-yet-on-track-for-net-zero-climate-threats-demands-more-ambitious-global-action/

 

Hats Off To Wilfried Zaha

Hats off to Wilfried Zaha for refusing to participate in the ludicrous virtue-signalling 'taking a knee' before a sports event: https://www.bbc.co.uk/sport/av/football/56389709

 

Cressida Dick MUST resign: Part Two

Read the BBC report on the women's demonstration yesterday evening, and ask yourself if, should this be a wholly accurate version of events, the police action is remotely appropriate and proportionate: https://www.bbc.co.uk/news/uk-56389824

In order to prevent a risk of spreading Covid-19, they had to handcuff and arrest people, who were protesting about the abduction and murder of a woman by a practising member of that force.

Policing by consent? Don't make me laugh. This completes the UK's journey over the past 12 months into being a dystopian totalitarian police state. Qualitatively speaking, is there any difference between what the Met are doing and what the police in Burma are doing?

I think not.

Cressida Dick MUST resign, followed swiftly by the home secretary.

 

 

Cressida Dick MUST resign

Cressida Dick MUST resign.

I am no fan of public demonstrations, and am usually agnostic about aggressive containment thereof.

But even I thought that the London police might show SOME sensitivity in policing the demonstration by, mostly, it seems, women, prompted by the abduction and murder of a woman in respect of which a member of that force has been accused.

I watched in astonishment at some of the scenes on our tv screen last night depicting policemen physically attacking demonstrators and arresting some with what looked like a degree of force bordering on brutality.

Cressida Dick has been in her post as head of the Met for long enough for blame for this culture of macho aggression (displayed by female police as well as male) to be laid firmly at her door.

She simply MUST resign. If not, she MUST be sacked.

Bradley Walsh: Why?

Would someone please explain to me why Bradley Walsh is everywhere on telly? From sub-standard game shows to sub-standard travel shows to sub-standard Doctor Who.

Now, I learn, he is to be Pop Larkin in what I fully expect to be a sub-standard iteration of a rehashing of The Darling Buds of May.

Why?

Non-fungible token technology

Just when I thought I had seen every variety of snake-oil imaginable, along comes another.

I had never heard of non-fungible token technology until this week and have just looked it up, discovering that it is in effect cryptocurrency without the underlying solidity.

 

Löw to quit as Germany football national coach

After 15 years as the national coach of the German national soccer team, Joachim Löw will leave his post after the postponed 2020 Euro Championships take place.

https://www.faz.net/aktuell/sport/fussball-em/joachim-loew-tritt-nach-der-fussball-em-als-bundestrainer-zurueck-17235022.html

What a waste of time The Dig is

Watched The Dig last night. What a waste of time.

 

There was a vaguely interesting plot that might have made a 60-minute film but they dragged it out and parachuted in a triangular relationship sub-plot that was meaningless, but some might have thought edgy and provocative. It totally distracted attention from the plot itself to no good effect, that I could make out.

 

You hardly see any archaelogy and virtually none of the Sutton Hoo treasure, or even replicas thereof.

 

And the accent that Ralph Fiennes sports is probably very authentic but combine the authentic ooh arrs with his authentic muttering and his speech was virtually unintelligible.

 

If you haven't seen it, don't bother, go and boil your head instead...

I thought vaccine was going to be a 'get out of jail free' card

Almost since the start of the Covid-19 hysteria, we have been told that vaccine is THE ANSWER.

But I have been reading articles this weekend that suggest that even if 80% to 85% of people are vaccinated, we must still carry on with the ridiculous 'anti-social distancing' measure that forces people to converse while standing the best part of eight feet (in old money, you younger readers) away from one another.

This is not natural but a new wave of hype is starting about the new spike in deaths (1,000 to 1,500 a day in the UK according to some calculations) that will follow if we don't carry on with the practice till at least the end of 2021.

If vaccines are not going to enable something vaguely resembling normality to return, what is the bloody point of the expense and effort involved, I ask myself. Cue trolls.

But there is the rub. I have said from the start that governments around the world who have accidentally acquired total dominion over the everyday life of every citizen under their iron fist without firing a shot are not going to sacrifice said dominion.

We live in a new permanent. I, for one, feel I am going slightly bonkers, but that matters not a jot as we must accept endless privation of liberty so our various health services will not be overwhelmed.

And remember, as the late great Frank Herbert told us: An immobile population is easier to control.

 

Boris Johnson clearly hasn't been paying attention

If Boris Johnson, the current prime minister of the UK and Northern Ireland, thinks that a visit to Scotland by him will calm down tension being created by the Edinburgh parish council (copyright former prime minister Blair), then he clearly has not been paying attention.

All other issues aside, you and I are under house arrest, because to go outside our home will cause people to die and overwhelm the NHS, but Johnson can undertake travel that is clearly not necessary with legal and medical impunity?

Following the science? I don't think so.