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Chancellor of the Exchequer Rishi Sunak is expected to introduce cuts to UK public services of up £17 billion unless he takes action to increase funding in the coming weeks. The Institute for Fiscal Studies has said that, from April 2022, the UK government is on track to spend between £14 billion and £17 billion less each year across several different public services than had been proposed before the pandemic.  

The IFS has warned that there are growing demands on public finances that need to be addressed head-on amid Sunak’s preparations to allocate funding for government departments as covid cases across the country continue to rise. Just last week, Sunak was forced to push back the formal launch of the Treasury’s spending review due to having to self-isolate. The spending review process will now be delayed until later this summer when MPs return to the House of Commons come September. 

In a report that set out the economic backdrop for the chancellor’s spending review, the IFS said that Sunak was on track to be handed £30 billion by the Office for Budget Responsibility (OBR) for public finances this year as the UK experiences a much quicker recovery than initially expected. A budget deficit of £234 billion had been predicted by the Treasury watchdog this year, but the IFS, alongside US bank Citi economists, have said a shortfall closer to £203 billion is potentially more likely following the success of the vaccine roll-out. 

However, the think tank has still warned that the improvement was unlikely to continue. Like many countries across the globe, the UK is expected to suffer lasting economic damage from the pandemic. 

HSBC announced today that it plans to cut 35,000 jobs over the next three years following an overall YoY 33% profit drop and subsequent restructuring plans. It also said the impact of coronavirus could affect performance in the year ahead, especially as the bulk of its yearly profits come from Asia.

Noel Quinn, HSBC’s current interim CEO has confirmed the job cuts as part of their upcoming overhaul and says the overall headcount of HSBC staff is likely to drop from “235,000 to closer to 200,000 over the next three years.”

Until recently, analysts had predicted a 10,000 staff slash ahead, but none imagined it would amount to a 15% cut of HSBC’s total global staff. Which regions the job cuts will affect the most is still unclear and unconfirmed.

Profits before tax dropped 33% in 2019 to $13.3 billion (£10.2 billion). The announced 35,000 job cuts should make way for a cost reduction of $4.5 billion by 2022, bringing profits before tax back to figures HSBC saw in 2018.

In regards to the coronavirus outbreak, Quinn has stressed that services and staff have been affected in mainland China and Hong Kong, and could continue over the next few months: “Depending on how the situation develops, there is the potential for any associated economic slowdown to impact our expected credit losses in Hong Kong and mainland China.”

“Longer term, it is also possible that we may see revenue reductions from lower lending and transaction volumes, and further credit losses stemming from disruption to customer supply chains. We continue to monitor the situation closely.”

For the investors

While HSBC's reported revenue rose 5% in the final quarter of 2019 the bank made a loss of $3.9 billion. The bank's share buyback scheme has been suspended but the dividend was maintained.

Finance Monthly heard from Ian Forrest, Investment Research Analyst at The Share Centre, who explains what this news means for investors:“Given all the bad news from HSBC today it was no surprise to see the shares going down 5.6% in early trading. While the bank is clearly taking action the changes will take time to feed through into the figures and the degree of uncertainty about current activity levels in a number of areas is likely to dampen sentiment towards the shares for some time.”

While he retains a strong voter base in the conservative heartlands of North America, the Presidency of Donald Trump continues to be defined by an excess of smoke and a seemingly endless hallway of mirrors. Nothing embodies this better than the former real estate mogul's comprehensive tax reform plans, which has been presented as legislation for low and middle-income earners in the US.

While Trump's estimates suggest that the typical American family will receive a tax cut of $1,182, however, it will also offer huge breaks to wealthier citizens and the largest corporations in the US.

In fact, Trump's decision to slash the base corporate tax rate from 35% to just 21% represents the focal point of his proposed reforms, while it has already created considerable opportunities for entrepreneurs and investors alike. Here's how.

How Does Trump's Tax Reform Work and Who are the Initial Winners?

As well as slashing the corporate tax rate in the US by 14%, President Trump has provided sweeping tax reductions for special interests while also lowering the top federal tax rate from 39.6% to 37%.

Interestingly, the commercial tax cuts are permanent and will be sustained for the entire duration of the Trump administration and beyond, until the President's successor proposes his own reforms in the future.

While this will benefit all businesses to some degree or another in the US, those currently paying an inflated level of corporation tax will be the biggest winners. So too will corporations that hold considerable amounts in overseas cash and investments, with both of these tax breaks offering natural advantages to some of the largest and highest earning companies in the world.

Take Apple, for example, who at the time of writing hold an estimated 94% of its $269 billion cash reserves in overseas balances. As a direct result of Trump's tax reform, the CFRA estimates that the technology brand will be ultimately repatriate as much as $200 billion of this capital back into the US, while using the proceeds to buy back stock and boost its bottom line even further.

The same principle can also be applied to companies such as Amazon and Facebook, while JP Morgan analyst Sterling Auty has stated that US-based software stocks will also emerge as the largest beneficiaries of the tax reform. This includes prominent brands such as Intuit and Aspen Technology, who tend to have the majority of their revenue domiciled in the US and boast exceptionally high profit margins.

How will this Influence Investors?

Traders may be looking to take advantage of those companies that have benefited from the reforms, of course, and fortunately Trump's legislation has provided clear and obvious benefits for corporations that meet certain criteria relating to their business model and infrastructure.

More specifically, there should be a clear focus on companies that boast significant cash holding overseas, as well as those that have naturally high profit margins.

This includes a large majority of businesses in the vast and diverse technology sector, with brands such as Apple able to leverage their infrastructure, international reach and inflated margins to benefit significantly from Trump's multi-layered tax reform.

Discussing the latest US tax cuts decision, FTSE updates and bitcoin news, Lee Wild, Head of Equity Strategy at interactive investor, talks to Finance Monthly about the end of year affairs.

With a week to go till Christmas there’s a whiff of Santa rally in the air. Markets should respond well to a ‘yes’ vote on US corporate tax cuts and possible political agreement to avoid a government shutdown on Friday. UK stocks are better value than their US counterparts and, despite the spectre of Brexit horse trading through 2018, there are no obvious banana skins between here and New Year.

In fact, Trump’s tax reform and the failure of progress on Brexit negotiations to revive sterling, will continue to give overseas earners listed here a foreign exchange kick. This, and typically thin trade as investors wind down for Christmas, should allow the FTSE 100 to consolidate gains above 7,500, something it has failed to do thus far. If it does, don’t bet against a new record high by year-end. It’s only one good session away.

An ongoing shutdown of the North Sea Forties pipeline continues to underpin oil prices, with Brent crude looking prepped for a crack at a fresh two-and-a-half-year high.

Whether or not bitcoin traded above $20,000 over the weekend depends on where you get your prices from. According to coinmarketcap.com it peaked Sunday at $20,089.

That bitcoin passed $20,000 for the first time over the weekend is not a surprise. A week ago, with the price at less than $17,000, we said ‘the music may have much longer to play on this one than people think’.

With every new milestone there’s fresh discussion around bitcoin’s legitimacy and potential, both as a trading instrument and revolutionary digital currency. It was the same when it first broke above $10,000 at the end of November. Valuing cryptocurrencies is like sticking your finger in the wind, but traffic is still very much one-way.

Introducing futures contracts in the US was meant to give short-sellers access to the market and improve liquidity, but availability is still fairly restricted. The introduction of bitcoin futures on the Chicago Mercantile Exchange over the weekend may help, but it will take time.

Until it becomes easier to sell short, buying dries up, or there are tech issues or a major hack, bitcoin will keep passing milestones with alarming regularity. Right now, there’s a long queue of investors, both amateur and professional, still waiting for a ride. This bubble is not bursting yet.

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