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Ramifications Of Brexit: Economic And Political Consequences

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Ramifications Of Brexit- Economic And Political Consequences

The big post-WW2 dream of the United States of Europe lies in ruins after the indecisive but binding 52% Brexit win.

This has not just affected the Britain and Europe’s fragile recovery from the 2008 market dump; it has wrecked it.

Just how temporary will this be if a save is possible at all?

It is certain to say that some emotion was involved in the pound performance directly after the results for the Brexit came in on Friday, June 24, 2016.

Foreign investors reacted predictably by having a “reject my country, refuse my money” attitude.

This can clearly be seen in the graph below which displays the steep fall of the pound against the Euro.

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  • Some of the thoughts crossing the public’s mind currently are:
  • How is this affecting the political stage in Europe?
  • How will the Euro and pound recover?
  • Will this impact the slight optimism starting to be felt after 2008?

The British Public Want A Fall Guy

To address the issue of how this situation is impacting on the global political perceptions of Europe first.

The European Union was seen on the world stage as being a symbiotic entity that flourished in the main.

The key feature of one hand washing the other in an economic and political sense was ingrained in the public’s perception of the Europe machine.

It is glaringly obvious in reading the signs communicated by the vox pop that carried the Brexit leave a vote, which the British public were front runners in declaring themselves tired of immigrants and the country’s laws being decided outside the UK.

Many who were interviewed stated that this was their minuscule window of opportunity to voice their unhappiness.

These key issues were fixed on by the Leave party brigade and the fears and prejudices of those of a nationalistic bent were nurtured.

The burning question is whether Britain can survive its chosen isolation on the political landscape, or will its sovereignty cost it any chance of short to mid-term financial, economic recovery.

Who Is Bound For Recovery First?

Moving onto the second point – Now that the Euro and the pound have embarked on different paths, will the two separate currencies experience a sudden surge in the world markets?

As can be seen in the graph below, there are already signs that the panic and precipitous fall of the pound sterling in the markets against the dollar are already improving.

 

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It is a safe bet to say that the fall of the Euro and GBP will resound on other markets.

Globally, confidence and trust in the markets have never really fully returned after the 2008 misstep.

The cautious pessimism that is being charted will possibly prevail and spread.

This move away from the mid ground snail crawl recovery from 2008 will continue the downturn.

It should not be forgotten, however, that Britain has always been the center of trade and commerce.

This is not likely to change as long as the banking hours of GMT stay so convenient for both eastern and western markets.

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Encouragement Needed

Taking the lead from the world banks by sitting back and dispassionately seeing how events unfold it is confident that the Federal Bank will keep rates low for now.

Looking at the graph below it is easy to see that the Federal Bank has encouraged recovery by keeping the rates down since 2008.

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Explaining the view of how Europe and Britain see each other is objective.

Each has considered one another essential and vital to financial and political viability for many decades.

If their policies will be divided and possibly in conflict remains to be seen.

It seems judicious at this point to remain optimistic.

Rivalries will not suddenly spring up after such a beneficial partnership.

It is the best interest of both parties to continue a financial arena that promotes the economies and politics of Europe and Britain.

The Body Politic

All depends on how the world will see a post-Brexit Britain and Europe.

Which country was the backbone of the other?

Which body structure is going to collapse or at least struggle to stand first?

Will the world see the two economies as spineless and helpless or will all efforts be made to build an exoskeleton to help them stand?

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Economy

The Fed is Propping Up Bond Prices, Are Stocks Next?

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The Fed is Propping Up Bond Prices, Are Stocks Next?

Last Monday the Federal Reserve announced that it would spend nearly $700 billion to buy up Treasurys and mortgage-backed securities as part of its “aggressive action” to soften the impact the coronavirus is having on our economy.

As part of the stimulus package, the Fed also said it would start buying exchange-traded funds (ETFs) that track the corporate bond market. For now, it appears the purchases will be limited to investment grade or highly-rated corporate bonds and won’t include more risky high-yield (or junk) bonds.

It’s the first time that the Fed has directly bought securities in an attempt to add liquidity and jump start a frozen market.

“This will provide much-needed liquidity to the bond market and to ETFs,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA.

Steve Blitz, chief U.S. economist for TS Lombard, says the Fed’s move is helping investors enter and exit a position if needed. “All of this is to make sure that people who want to sell have a buyer. The Fed is taking both sides of the market so people who need to raise cash can do so.”

It’s clear why the Fed prefers to buy corporate bonds through an ETF as opposed to buying bonds in individual companies. With one purchase order, it can impact the bond prices of hundreds of companies at once, as opposed to the time consuming task of identifying, pricing and then buying bonds of individual companies.

By moving into the ETF space and buying up bonds, the Fed may also be trying to calm a part of the market that has seen record outflows over the last few weeks. Just two weeks ago, the iShares iBoxx $ High Yield Corporate Bond ETF saw a $1.2 billion outflow, or roughly 8% of it’s total value.

The question becomes, if the market continues to slide as the coronavirus outbreak batters the economy, would the Fed extend its reach and start buying stocks via index ETFs?

It’s an unprecedented move, but then again so was buying bond ETF a little over a week ago.

It would allow the Fed simultaneously impact the stock price of hundreds of companies at once. With the SPDR S&P 500 ETF, the Fed could move the stock price of all S&P 500 companies with a single purchase.

The same would apply for all broad index ETFs like the Dow Jones Industrial Average (DIA) and Nasdaq (QQQ).

Vincent Reinhart, chief economist and macro strategist at BNY Mellon Asset Management, says it could be in the Fed’s playbook.

“Other central banks have done it. It’s the ETF route that the Bank of Japan has taken. I would not rule out them doing equities.”

Lindsey Bell, chief investment strategist at Ally Invest added “We’ve seen the Fed show that they’re willing and able to do whatever it takes to make sure the markets are opening in an efficient manner. They’re taking whatever steps they can. That would be new territory for the Fed, not that they’re scared of new territory.”

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Wall Street Warns: More Pain Still to Come

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Wall Street Warns: More Pain Still to Come

Despite his hopes to have the country operating normally by Easter, President Trump announced in a press conference last night that he is extending the social distancing mandate until April 30, and now hopes the country will be on the road to recovery by June 1.

That’s going to put additional pressure on an already struggling economy as restaurants, retailers and other businesses stay shuttered for even longer.

And despite last week’s dramatic rally in stocks, many on Wall Street are saying that things are going to get much worse before they get better, and are expecting further declines in the market.

Goldman Sachs’ U.S. chief equity strategist David Kostin wrote in a recent note to clients that “bear markets are often punctuated by sharp bounces before resuming their downward trajectory.”

Kostin says there were six distinct rallies of 9% or more between September 2008 and December 2008 during the financial crisis.

“Most bounces involved optimism around monetary or fiscal policy support. However, the market low did not occur until March 2009, when the pace of economic contraction began to slow,” Kostin added.

John Velis, a currency and macro strategist for the Americas at BNY Mellon, agrees that there could still be plenty of downside left in the markets.

“COVID-19 infections in the United States are still growing in number and we are not close to the peak of ‘the curve.’ Indeed, one could argue the worst is yet to come on the public health front, and this could entail ever more pain on businesses and employees — and the market.”

Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, also believes the market is still searching for a bottom.

“This analysis continues to keep us concerned that the U.S. equity market hasn’t found a bottom yet. It also reminds us that after the most severe equity market drawdowns, durable bottoms have taken time to form – something we think will be the case this time around as well. We are growing increasingly skeptical about the V-shaped recovery thesis in stocks. In particular, we are concerned that there has been too little discussion about the longer-term collateral damage from the public health crisis.”

Mohamed El-Erian, the chief economic adviser at Allianz, said in a Bloomberg op-ed article last night that even with last week’s rally he expects stocks to resume their slide.

“I fear that this is more likely to prove a temporary exception to what, unfortunately, is still an outlook for high stock market volatility around a still-downward trend.”

And economist Nouriel Roubini, known as “Dr. Doom” said in a recent tweet to “beware of bear market “head fake” rallies. The market can’t truly Bottom till the Virus tops & the rate of increase of new cases is sharply down.”

This isn’t to say investors should sit on their hands and do nothing until the market drops further. If you have a long-term outlook and can average into positions over time, adding a bit here makes sense while waiting to see which direction the market goes. If it drops further, you’ll have the chance to add more at even lower prices. And if the market rallies, today’s prices will seem cheap.

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IRS, Treasury Department and Department of Labor Give Guidance on Small Business Leave and Tax Credit

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IRS, Treasury Department and Department of Labor give guidance on small business leave and tax credit

The U.S. Treasury Department, Internal Revenue Service (IRS) and the U.S. Department of Labor (Labor) have announced that small and midsize employers can begin taking advantage of two new refundable payroll tax credits, designed to immediately and fully reimburse them, dollar-for-dollar, for the cost of providing Coronavirus-related leave to their employees.

This relief to employees and small and midsize businesses is provided under the Families First Coronavirus Response Act (Act), signed by President Trump on March 18, 2020.

The Act will help the United States combat and defeat COVID-19 by giving all American businesses with fewer than 500 employees funds to provide employees with paid leave, either for the employee’s own health needs or to care for family members.

The legislation will enable employers to keep their workers on their payrolls, while at the same time ensuring that workers are not forced to choose between their paychecks and the public health measures needed to combat the virus.

Key Takeaways

* Paid Sick Leave for Workers

* For COVID-19 related reasons, employees receive up to 80 hours of paid sick leave and expanded paid child care leave when employees’ children’s schools are closed or child care providers are unavailable.

* Complete Coverage

* Employers receive 100% reimbursement for paid leave pursuant to the Act.

* Health insurance costs are also included in the credit.

* Employers face no payroll tax liability.

* Self-employed individuals receive an equivalent credit.

* Fast Funds

* Reimbursement will be quick and easy to obtain.

* An immediate dollar-for-dollar tax offset against payroll taxes will be provided

* Where a refund is owed, the IRS will send the refund as quickly as possible.

* Small Business Protection

* Employers with fewer than 50 employees are eligible for an exemption from the requirements to provide leave to care for a child whose school is closed, or child care is unavailable in cases where the viability of the business is threatened.

* Easing Compliance

* Requirements subject to 30-day non-enforcement period for good faith compliance efforts.

To take immediate advantage of the paid leave credits, businesses can retain and access funds that they would otherwise pay to the IRS in payroll taxes. If those amounts are not sufficient to cover the cost of paid leave, employers can seek an expedited advance from the IRS by submitting a streamlined claim form that will be released next week.

Background

The Act provided paid sick leave and expanded family and medical leave for COVID-19 related reasons and created the refundable paid sick leave credit and the paid child care leave credit for eligible employers. Eligible employers are businesses and tax-exempt organizations with fewer than 500 employees that are required to provide emergency paid sick leave and emergency paid family and medical leave under the Act. Eligible employers will be able to claim these credits based on qualifying leave they provide between the effective date and December 31, 2020. Equivalent credits are available to self-employed individuals based on similar circumstances.

Paid Leave

The Act provides that employees of eligible employers can receive two weeks (up to 80 hours) of paid sick leave at 100% of the employee’s pay where the employee is unable to work because the employee is quarantined, and/or experiencing COVID-19 symptoms, and seeking a medical diagnosis. An employee who is unable to work because of a need to care for an individual subject to quarantine, to care for a child whose school is closed or child care provider is unavailable for reasons related to COVID-19, and/or the employee is experiencing substantially similar conditions as specified by the U.S. Department of Health and Human Services can receive two weeks (up to 80 hours) of paid sick leave at 2/3 the employee’s pay. An employee who is unable to work due to a need to care for a child whose school is closed, or child care provider is unavailable for reasons related to COVID-19, may in some instances receive up to an additional ten weeks of expanded paid family and medical leave at 2/3 the employee’s pay.

Paid Sick Leave Credit

For an employee who is unable to work because of Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis, eligible employers may receive a refundable sick leave credit for sick leave at the employee’s regular rate of pay, up to $511 per day and $5,110 in the aggregate, for a total of 10 days. For an employee who is caring for someone with Coronavirus, or is caring for a child because the child’s school or child care facility is closed, or the child care provider is unavailable due to the Coronavirus, eligible employers may claim a credit for two-thirds of the employee’s regular rate of pay, up to $200 per day and $2,000 in the aggregate, for up to 10 days. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.

Child Care Leave Credit

In addition to the sick leave credit, for an employee who is unable to work because of a need to care for a child whose school or child care facility is closed or whose child care provider is unavailable due to the Coronavirus, eligible employers may receive a refundable child care leave credit. This credit is equal to two-thirds of the employee’s regular pay, capped at $200 per day or $10,000 in the aggregate. Up to 10 weeks of qualifying leave can be counted towards the child care leave credit. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.

Prompt Payment for the Cost of Providing Leave

When employers pay their employees, they are required to withhold from their employees’ paychecks federal income taxes and the employees’ share of Social Security and Medicare taxes. The employers then are required to deposit these federal taxes, along with their share of Social Security and Medicare taxes, with the IRS and file quarterly payroll tax returns (Form 941 series) with the IRS.

Under guidance that will be released next week, eligible employers who pay qualifying sick or child care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit them with the IRS.

The payroll taxes that are available for retention include withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes with respect to all employees.

If there are not sufficient payroll taxes to cover the cost of qualified sick and child care leave paid, employers will be able file a request for an accelerated payment from the IRS. The IRS expects to process these requests in two weeks or less. The details of this new, expedited procedure will be announced next week.

Examples

If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.

If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000.

Equivalent child care leave and sick leave credit amounts are available to self-employed individuals under similar circumstances. These credits will be claimed on their income tax return and will reduce estimated tax payments.

Small Business Exemption

Small businesses with fewer than 50 employees will be eligible for an exemption from the leave requirements relating to school closings or child care unavailability where the requirements would jeopardize the ability of the business to continue. The exemption will be available on the basis of simple and clear criteria that make it available in circumstances involving jeopardy to the viability of an employer’s business as a going concern. Labor will provide emergency guidance and rulemaking to clearly articulate this standard.

Non-Enforcement Period

Labor will be issuing a temporary non-enforcement policy that provides a period of time for employers to come into compliance with the Act. Under this policy, Labor will not bring an enforcement action against any employer for violations of the Act so long as the employer has acted reasonably and in good faith to comply with the Act. Labor will instead focus on compliance assistance during the 30-day period.

For More Information

For more information about these credits and other relief, visit Coronavirus Tax Relief on IRS.gov. Information regarding the process to receive an advance payment of the credit will be posted next week.

© Copyright 2020, The Courier, All Rights Reserved.

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