Stocks wrapped up a quiet August and got off to positive September start as Friday's goldilocks jobs report pushed risk assets higher into the long holiday weekend. The U.S. economy added 151,000 non-farm payrolls in August, below consensus estimates of 180,000, while the unemployment rate was unchanged at 4.9%. Average hourly earnings grew by only 0.1% while the average workweek fell 0.1 to 34.3 hours. Combined with Thursday's lackluster Institute for Supply Management (ISM) reading, which fell 3.2 points to 49.4, the biggest drop in more than two years and first contraction in six months, the the data was seen as not enough to spur the Fed into action at its September meeting. A potential rate rise is likely on hold until at least December.
September is setting up to a be much livelier month for financial markets. Not only is it traditionally one of the worst months for stocks - dating back to 1928 it is the only month in which the S&P 500 has a median negative return - but the calendar is jam-packed. The U.S. presidential race is tightening as we head into the first debate. There are numerous major policy announcements scheduled from global central banks. The G20 summit is currently taking place with hopes of developing plans for greater fiscal policy and financial sector coordination. OPEC officials will meet in Algeria later in the month. With short-volatility bets reaching record levels in August, investors are being cautioned to avoid complacency.
Apple Ordered to Repay Nearly $15 Billion in European Back-Taxes
In the greatest international corporate tax battle in history, Apple this week was ordered to repay $14.5 billion plus interest in back-taxes to Ireland from 2003-2014 after the European Commission deemed Ireland's favorable tax arrangement in violation of the EU's state-aid rules. Ireland doesn't even want the cash, with Finance Minister Michael Noonan saying, "[Apple] may owe it elsewhere, but not to Irish authorities."
For the past three years the EU has been cracking down on sweetheart fiscal deals granted to multinational corporations from EU nations. The commission says Apple paid an effective corporate tax rate of 1% on European-denominated profits in 2003, with that figure falling to 0.005% by 2014. Ireland's tax policy in regard to Apple has long been considered among the most brazenly favorable for U.S. multinationals, and EU officials saw it as undermining the single market project. Apple essentially funnels all European sales through Apple Sales International, an Irish-incorporated subsidiary not subject to the country's standard 12.5% corporate taxes.
Apple, needless to say, is not thrilled with the decision, saying in a statement: "The European Commission has launched an effort to rewrite Apple's history in Europe, ignore Ireland's tax laws and upend the international tax system in the process," adding the company is "confident the decision will be overturned." To make its point, the company published a picture from 1980 of Steve Jobs at the company's first factory in Cork, Ireland.
Investors were nonplussed by the news as Apple shares ended the week higher. Investors either share Apple's optimism about an appeal (which could take 3-4 years), or were reminded of the company's $214 billion overseas cash stash.
Apple executives weren't the only ones upset by the news, with the U.S. Treasury essentially telling the EU "that's not your cash to repatriate!" As part of comprehensive tax reform, the U.S. hopes to one day strike an agreement with American multinationals to bring cash home, and the EU ruling endangers that prospect.
Senator Ron Wyden (D-Oregon), a leading member of the Senate Finance Committee said, "Countries ought to be working in partnership to prevent tax evasion and crack down on the unfair practices that have eroded tax bases in the U.S. and around the world, but today's ruling could make that kind of partnership more difficult."
Tim Cook agreed: "At its root, the Commission's case is not about how much Apple pays in taxes. It is about which government collects the money. Taxes for multinational companies are complex, yet a fundamental principle is recognized around the world: A company's profits should be taxed in the country where the value is created. Apple, Ireland and the United States all agree on this principle. In Apple's case, nearly all of our research and development takes place in California, so the vast majority of our profits are taxed in the United States."
The only problem with those protestations is that Apple doesn't pay much tax in the United States, either. Until 2015 the company funneled profits through subsidiaries outside the jurisdiction of both U.S. and Irish tax laws, creating a situation where Ireland considered those subsidiaries resident in the U.S. while U.S. considered them foreign entities based on their Irish registration.
Essentially the U.S. Treasury's argument is that profits of U.S. companies earned abroad are taxable in the U.S., thus if any repatriation takes place it should be in the U.S. domain. But since Apple doesn't need its foreign cash for any pressing reason, it has been in no hurry to bring the $214 billion home, instead tapping receptive credit markets for the cash to boost its capital return program. The whole ordeal is a reminder of the desperate need for U.S. corporate tax reform, where rates are less prohibitive and profits are taxed when and where they're earned.
Reform-Minded China Prepares for G20 Summit
At the G20 Summit in the eastern Chinese city of Hangzhou, the U.S. is expected to urge the group to heed citizen anger and take steps to boost economic growth. China is hoping a successful summit will cement its status as a leading voice on the global economy but fears Western arguments over territorial disputes and trade protectionism threaten to overshadow the event. Intentionally or not, problems started mere minutes after the American delegation stepped off Air Force One.
A Chinese security official berated U.S. national security adviser Susan Rice as she tried to walk to the motorcade, perhaps mistaking her for a journalist crossing the press barrier. "This is our country. This is our airport," the official exclaimed in English.
Meanwhile, China continues to move forward with under-the-radar economic reforms. According to Jeffries, The People's Bank of China (PBoC) has been engaging in "back-door quantitative easing" by expanding lending facilities and injecting liquidity into its banking sector.
China's Big Four state-owned commercial banks are being included in the government's debt-to-equity pilot scheme. The government is already putting finishing touches on a plan allowing industrial firms to convert debt into equity.
While trying to reduce leverage in its financial system, the Chinese government is being careful not to pull back too sharply from public spending. Activity in China's manufacturing sector unexpectedly expanded at its fastest pace in nearly two years amid a construction boom.
The New York Times also dove into a great Chinese mystery: just who owns Anbang, the firm on a global shopping spree? (Cliff notes: all signs point to those with close ties to the communist regime).
Alphabet Makes Ride-Sharing Entry
The ride-sharing war took a new turn this week: apparently Alphabet (Google) is set to take on Uber with its own carpooling program through popular traffic app Waze (which Alphabet owns). Alphabet, a heavy investor in self-driving car technology, also invested $258 million in Uber back in 2013. Alas there now exists a potential conflict of interest necessitating executive David Drummond's resignation from the Uber board this week.
Growing incest within ride-sharing is apparently not going unnoticed by regulators. In an ironic twist, Chinese officials have opened an antitrust investigation into Uber's deal to merge its China operations with Didi Chuxing. The commission wants to "protect fair competition in the relevant market and safeguard the interests of consumers and the public." The resulting decision could mean fewer subsidies for drivers and higher costs for users.
Apparently General Motors expressed interest in buying Lyft outright for $6 billion but was rebuffed, while Uber CEO Travis Kalanick confirmed to the Economist he discussed an acquisition with Lyft in 2014 only for negotiations to break down over price. The Verge examined Uber's plan to take over public transit, one small town at a time.
Follow Anthony Scaramucci on Twitter: @Scaramucci