In this week’s Commercial Awareness update, we discuss progress on the Brexit divorce bill, Facebook’s new London office, the Bitcoin billionaires after record gains and tax cuts in America.
Brexit Divorce Bill
Ahead of talks between European Commission president Jean-Claude Juncker and Theresa May this week, commentators believe a settlement will soon be reached on the so-called Brexit “divorce bill” and citizens’ rights, enabling negotiations on trade to begin. It’s reported that May went to the EU with an improved offer, which could be as much as €50 billion (£44 billion) to cover Britain’s existing commitments within the EU. There also appears to have been progress on the rights of UK citizens in the EU and EU citizens in the UK, which was another block to starting negotiating a trade deal. However, questions over the Irish border continue, with Dublin wanting assurances from the British government that a hard border (with no custom checks) won’t be reintroduced with Northern Ireland. This could cause problems for the government because without knowing what the deal for trade or movement of people with the EU looks like, it’s difficult to agree to a soft border with Ireland.
The size of the divorce bill has angered many politicians and a number of Conservative backbenchers have suggested they will revolt against the bill, putting further pressure on Theresa May’s government. However, the markets have reacted positively to news of progress in the talks, which has eased worries Britain will leave the EU in March 2019 without any form of trade deal. On Friday, the pound peaked at $1.354 against the dollar - the highest it’s been since September. The most significant part of the Brexit process for a majority of businesses is the ongoing trade deal with the EU, which could start to be negotiated from this week.
Confidence in the UK economy is crucial for the government at this time and last week there was some good news as Facebook announced it would be opening a new London office, creating 800 jobs in 2018. The office will be the firm’s biggest engineering hub outside of the US and will increase their staff in the UK to 2,300 by this time next year. After announcing the new office, near Oxford Street, Facebook said London is “one of the best places in the world to build a tech company”.
Questions to ask yourself… What is the most important thing for the UK ahead of the trade talks? What impact does big businesses expanding in London have on the overall economy?
Bitcoin Surges in Value
Last week was an incredible week for cryptocurrencies, as the value of Bitcoin hit $11,700 on the Luxembourg-based Bitstamp exchange. Starting the year valued at under $1,000, it has climbed more than 1,000% during the year to date. The currency is unregulated and sees significant fluctuations on a weekly, if not daily, basis.
What is causing this surge in value?
Ultimately, the rise can be attributed to investor confidence in Bitcoin and other cryptocurrencies - in an unregulated market many suggest this confidence is misplaced, but there has been positive news underpinning it. On Friday, the US-based financial institution CME Group announced it has permission from the US Commodities and Futures Trading Commission (CFTC) to open a bitcoin futures exchange, which means Bitcoin futures will be listed from 18th December.
Bitcoin is similar to trading gold - the practical use for making purchases with Bitcoin is limited, with most people buying for investment reasons. While interest rates are low and returns on other types of investment remain limited, cryptocurrencies offer investors the opportunity to make strong returns. As more investors become interested in trading the currency, the supply (which is limited by the way Bitcoin works) doesn’t meet this demand.
The Winklevoss twins - the brothers who sued Mark Zuckerberg claiming he stole their idea for Facebook - are said to be worth over $1 billion from a cryptocurrency investment of $11 million made four years ago. It’s believed they own around 1% of the global supply of Bitcoin.
Treasury launches crackdown
There are challenges for cryptocurrencies and the value of Bitcoin fell significantly after Sunday’s peak on the news the Treasury are planning to place regulations on their exchange. There are growing concerns in government that the currency could be used for money laundering and tax evasion. The Treasury has joined efforts by other EU governments to clampdown on trading to bring them in line with anti-money laundering and counter-terrorism financial legislation. The EU-wide plan would mean trading platforms would be required to do background checks on customers before transactions.
Questions to ask yourself… Will the value of Bitcoin collapse in 2018? Would you recommend Bitcoin to an investor?
Tax Cuts in America
In Donald Trump’s first major legislative victory, the Senate passed a draft legislation to reform the tax code, known as the GOP tax reform. After last minute rewrites, the vote passed by 51-49, with only one Republican voting against the reform. Among the series of proposals, there is a plan to slash the corporate tax rate from 35% to 20% and create four individual tax brackets with rates of 12%, 25%, 35% and 39.6% - currently there are seven. The bill was broadly opposed by Democrats, with many concerned that it could add up to $1.4 trillion to America's debt over the next 10 years.
Experts believe that big business and the wealthiest individuals will benefit the most, as well as the middle classes due to tax cuts. The Republicans hope it will lead to economic expansion and investment, benefiting everyone in America and outweighing the potential black hole in national finances. However, sceptics worry about part of the legislation that will phase out some benefits (e.g. removing personal and family tax breaks), which could actually see individual taxes rise in the future. There are also concerns that the tax bill would lead to immediate cuts to Medicare and other services.
The markets are expected to react positively to the prospect of tax cuts. In America they have been steadily rising since Trump became President, in the belief there would be tax cuts and infrastructure spend to support businesses - before this vote, many investors were concerned about Trump’s ability to actually deliver these changes. The significant decrease in corporate tax will lead to US firms being able to generate greater profits, and they will also benefit from tax changes on foreign profits. The final amendments to the legislation were only made available hours before the vote, with some amendments poorly written, which could make it vulnerable to exploitation by lawyers and accountants specialising in tax avoidance.
Question to ask yourself… What impact will corporation tax cuts in America have on the global economy?