Stock Market News PHOTO

Fear of higher rates is what’s really scaring the stock market

A bearish run-up in interest rates spooked the stock market Wednesday, and while a major shakeout may not yet be in the cards just now, analysts say it’s a sign of things to come as the world’s major central banks move to end easy policy.

The quick snap up in U.S. Treasury yields Wednesday came amid speculation that President Donald Trump would select the most hawkish candidate, Stanford University economist John Taylor, to chair the Fed. Yields, which move opposite price, went higher also because markets are awaiting the European Central Bank’s meeting Thursday. The ECB is expected to announce a 50 percent reduction in the 60 billion euros ($71 billion) of bonds it buys each month.

Then both the Bank of England and Federal Reserve meet next week. The BOE is expected to raise interest rates, but the Fed is expected to wait until December to raise the target range of the fed funds rate another quarter point.

“It’s not frightening at the moment, but the driving force here, rising interest rates because of inflation and tightening fears … and the leadership among commodity stocks, that may be more or less a good description of the rest of this bull market,” said James Paulsen, chief investment strategist at Leuthold Group.

Paulsen said higher rates could be healthy for stocks, at least initially. “This is a good example of the future. If it goes on too long and too fast then it’s going to be too severe. If it’s pretty measured, I think we can handle [rising rates] for a while.”

The yield on the 10-year Treasury note jumped to 2.47 percent Wednesday, after having breached the technically important 2.40 level just the day before. But by afternoon, yields settled back and the 10-year was at 2.44 percent.

Stocks traded sharply lower as yields touched their high point, with the Dow down 190 points Wednesday morning before erasing about half its losses.

“I think we’re going to have to get above 3 percent on the [10-year yield] and maybe inflation before we really start thinking of a bear market. In part because we have a much broader-based recovery,” said Paulsen. “We have more animal spirits and confidence in place to a certain degree.”

Paulsen said he does not see a big pullback just yet. “It will come, but I’m not sure if it’s going to be near year-end or next year. I also wonder how many buyers we’ll get coming in,” he said.

Analysts say gradually rising interest rates shouldn’t hurt the stock market, but a quick jump in rates or a central bank policy error could be problematic and that’s what worried stocks Wednesday morning.

“I wouldn’t be ringing any alarm bells at this point because we have not seen a change in the data that makes us think the Fed is falling behind the curve,” said Jim Caron, fixed income portfolio strategist at Morgan Stanley Investment Management.

“I don’t think it is a turning point. It’s early to say. I go back and just look at a chart of yields. … We’re kind of back where we started the year,” said Caron.

While bond strategists say the market may see higher yields this year, it is not at the point where they would shoot significantly higher and hurt stocks.

Mark Cabana, head of U.S. short rate strategy at Bank of America Merrill Lynch, said the sell-off in bonds has been in part due to seeming progress on tax reform, viewed as a positive for stocks. He said the selection of a new Fed chair who would support deregulation is also a factor, as are expectations that the ECB will announce a tapering back of its bond buying on Thursday.

“We think a turning point for the market would be if there was progress on tax reform and it seemed like it was really going to materialize. We think the rates market has been discounting that for some time and we think progress and a reversal in sentiment could cause upward pressure on rates,” Cabana said. “If we were to ultimately see a tax package get through, we think we could see rates push up substantially higher, from here 40 basis points or so. It really depends on what happens with DC.”

Cabana said that may be seen as a positive for stocks if it is viewed as something that would add to growth, so equities may shrug off the move higher in yields.

The selection of a new Fed chair is also important to the bond market, and could result in a shift in interest rate expectations. Fed Governor Jerome Powell is considered the front-runner, and he is seen as being very similar to Fed Chair Janet Yellen, though possibly more inclined to deregulate banks. Trump said he was still considering Yellen but her chances are viewed as slim.

“I don’t think the world is changing all that much. I think bond yields are catching up to economic fundamentals. Bond yields have been a lagging indicator basically because of the stock effects of QE,” Caron said.

He notes that Europe is still moving slowly and ECB President Mario Draghi is not likely to put a date on when the bank will end quantitative easing. He notes that the ECB’s policy rate is still negative.

“For yields to materially rise, we would have to believe there’s an inflation impulse that returns term premia back to the curve,” said Caron. “Otherwise this is just markets being markets. Growth is decent. Third-quarter GDP might be OK. It makes sense 10-year notes should be 2.40. That’s not exactly high. That’s where we started the year.”

Bloomberg PHOTO

Michael Bloomberg: Brexit is stupidest thing any country has done besides Trump

Michael Bloomberg, the billionaire media mogul and former mayor of New York, has said Brexit is the “single stupidest thing any country has ever done” apart from the election of Donald Trump as US president.

Bloomberg argued that “it is really hard to understand why a country that was doing so well wanted to ruin it” with the Brexit vote, in a series of outspoken remarks made at a technology conference in Boston a fortnight ago.

At that event, Bloomberg, 75, also warned that some workers at the financial media company that bears his name were asking to leave the UK and US because they think the two countries no longer like immigrants and are no longer welcoming.

The CEO was in London on Tuesday to open a new European headquarters for Bloomberg in the City, covering 1.3 hectares (3.2 acres). But his earlier remarks, unearthed the same day, suggested he had regrets about making the investment decision because of the Brexit vote.

“We are opening a brand new European headquarters in London – two big, expensive buildings. Would I have done it if I knew they were going to drop out? I’ve had some thoughts that maybe I wouldn’t have, but we are there, we are going to be very happy.

“My former wife was a Brit, my daughters have British passports, so we love England – it’s the father of our country, I suppose. But what they are doing is not good and there is no easy way to get out of it because if they don’t pay a penalty, everyone else would drop out. So they can’t get as good of a deal as they had before.”

He added: “I did say that I thought it was the single stupidest thing any country has ever done but then we Trumped it.”

Bloomberg employs 4,000 staff in the UK and 20,000 worldwide, and the New York-based firm has long made the country its headquarters in Europe. But he said some staff were becoming unhappy about London as a key location.

“One of the things that is hurting us both in the United States and in the UK is that we have employees, not a lot but some, who are starting to say: ‘I don’t want to work here – can we transfer to some place else? This country doesn’t like immigrants,’” Bloomberg said.

“All this talk in Washington – words have consequences. Whether we change the immigration laws or not, there is general feeling around the world that America is no longer an open, welcoming place and a lot of people don’t want to go there, and the same thing is happening in the UK because of Brexit.”

Bloomberg first made the comments about Brexit at the little-reported HUBweek conference in Boston less than two weeks ago – and then repeated his quip about Brexit and Trump at an event in France on Monday.

“It is really hard to understand why a country that was doing so well wanted to ruin it,” Bloomberg said of Brexit. “It was not a smart thing to do and getting out of it is going to be very difficult and is going to be very painful. It will hurt industries. People are already taking space in other cities over there [Europe], us included.”

On his visit to London, Bloomberg was more circumspect. Giving a speech next to Sadiq Khan, the mayor of London, Bloomberg insisted his company was “strongly committed to London”.

He added: “Whatever London and the UK’s relationship to the EU proves to be, London’s language, timezone, talent, infrastructure and culture all position it to grow as a global capital for years to come. We are very optimistic about London’s future and we are really excited to be a part of it.”

Bloomberg is worth an estimated $47.5bn (£36.2bn) according to Forbes and was given an honorary knighthood in 2015. He was a Republican mayor of New York between 2002 and 2013 before he reassumed his position as chief executive of Bloomberg.

Bloomberg considering standing as a third-party candidate in the 2016 US presidential election but eventually ruled it out, saying that if he stood it could diminish the Democratic vote and lead to the election of Trump. “That is not a risk I can take in good conscience,” Bloomberg said in March 2016 when he confirmed his decision not to stand.

His criticism of Brexit included hitting out at the leave campaign and its claims that Britain had problems with immigration and too much EU regulation. Bloomberg described comments from Boris Johnson that the EU rules meant there had to be at least four bananas in a bunch as “fictitious” and said on immigration that Britain “didn’t take anyone from northern Africa or the Middle East”.

He added: “They didn’t have an immigration problem and they didn’t need control of their borders. They have the English Channel – that gave them control of their borders.”

Bloomberg said London was the centre of Europe but warned that was “not going to be as true any more” due to Brexit.

Bermuda

Kennedys to launch in Bermuda as expansion continues

Kennedys has continued its global expansion through the addition of Bermuda-based Sedgwick Chudleigh to its global network.

The insurance-focused firm, which was previously associated with US law firm Sedgwick, will operate independently as Kennedys Chudleigh. The opening makes Kennedys the first “onshore” global firm to establish a presence in Bermuda.

Kennedys has hired six partners from struggling US firm Sedgwick in recent months, including the firm’s New York managing partner John Blancett.

Former-Sedgwick managing partner Mark Chudleigh will continue to lead the Bermuda office. Chudleigh has a focus on dispute resolution, with a strong emphasis on insurance matters. He will be joined by insurance partner Alex Potts and Nick Miles.

Kennedys senior partner Nick Thomas said: “This arrangement provides us with the opportunity to service clients in Bermuda, the United States and the UK, as well as our numerous other locations globally. It significantly augments our global insurance practice and puts us in a class of one amongst insurance law firms.”

Chudleigh added: “The global reach of Kennedys is unsurpassed for an insurance and litigation firm and the available expertise and resources over the Kennedys network places us in a unique position in Bermuda as we continue to service our valued clients.

“Our New York, Chicago and London lawyers have worked with Mark and his team and, together, we all represent some of the world’s largest insurers.

Kennedys launched in the US this year through a merger with US insurance firm Carroll McNulty & Kull.

It has also opened offices in Paris, Bangkok, Melbourne and Mexico City this year.

Capitalism ‘has been broken’, top UK business leaders warn

The state of capitalism is in desperate need of reform and modernisation, according to some of the UK’s top business leaders, who claim that the system has been hurt by management greed, corporate tax dodging and investor short-termism.

Speaking on a panel for the Financial Times, former minister Baroness Shriti Vadera, who is now chairwoman of Santander UK, said that “the underlying promise of western capitalist economies — that a rising tide lifts all boats — has been broken”. She said that a “better model” is needed.

Others echoed her remarks.

Robert Swannell, the former chairman of retailer Marks and Spencer, said that capitalism had “lost its way” and that companies and their investors had become much too focused on short termism, according to the FT.

And Carolyn Fairbairn, director-general of the Confederation of British Industry, said that capitalism had taken a number of “wrong turnings”.

“The financial crash, a fixation on shareholder value at the expense of purpose, and the toxic issues of […] payment of tax and executive pay stand in the way of redemption,” she said, according to the FT.

The chairmen of Barclays and Lloyds and the former chairman of HSBC also levelled criticism at the emergence of short-termism. Anne Richards, chief executive of asset management company M&G, said: “In the current era, best described as ‘the age of anxiety’, we will see capitalism rejected unless it finds a way of fundamentally addressing this anxiety.”

Last week the former Greek finance minister, Yanis Varoufakis, claimed capitalism is coming to an end because it is making itself obsolete.

Speaking to an audience at University College London, he said that artificial intelligence would spell the end of capitalism in its current form.

“Capitalism is going to undermine capitalism, because they are producing all these technologies that will make corporations and the private means of production obsolete,” he said, according to the FT.

Theresa Angela PHOTO

Theresa May admits for the first time that Brexit negotiations have been in ‘difficulty’

Theresa May has admitted for the first time that Brexit negotiations have hit “difficulty” as she beseeched European leaders to give her a deal she can sell to the British people.

The Prime Minister explicitly conceded last night that talks were in trouble ahead of her key intervention in Florence two weeks ago, prompting her to try and get negotiations back on track.

She told Angela Merkel, Emmanuel Macron and other EU leaders that there is now the “urgent” need for progress with the threat of the UK crashing out of the EU without a deal looming.

Speaking on Thursday evening at a working dinner with other heads of government in Brussels, Ms May said that at the end of the summer she “recognised the difficulty the process was in”.

“I took stock, listened to what the people in the UK were saying, and what my friends and partners in Europe were saying, and I made a step forward,” she said.

The Prime Minister, who is attending a meeting of the European Council, told leaders that the Florence speech was designed to break the deadlock she had identified and called for a new “joint effort and endeavour”.

“There is increasingly a sense that we must work together to get to an outcome we can stand behind and defend to our people,” she said, adding that when the 27 remaining member states convene tomorrow to discuss Brexit in private “the clear and urgent imperative must be that the dynamic you create enables us to move forward together”.

The PM and world leaders dined on gnocchi and pheasant supreme at the dinner, followed by fresh pineapple.

European Commission chief negotiator Michel Barnier has repeatedly said he is “worried” about “deadlock” in negotiations, but the line from the UK government has always been significantly more optimistic, stressing “concrete progress”.

The PM’s intervention comes as the European Council appears set to refuse to allow the UK to move to trade and future relationship talks – which it has said can only start once “sufficient progress” has been made on settling the divorce bill, Northern Ireland border, and EU citizens’ rights.

The 27 remaining EU leaders will meet tomorrow to discuss Brexit without Ms May, whose address to dinner was not followed by any discussion or debate.

They are expected to tell Britain to come back in December once more progress has been made for another assessment of whether it is ready for trade talks.

Senior UK government officials also admitted that the prime minister was “working against a difficult political backdrop” at home – an apparent reference to Tory MPs who were pushing her for a no deal.

Arriving at the summit on Thursday Angela Merkel said she believed there were “encouraging” signs that sufficient progress could be made in December. Ms May said the summit was a time to take stock of the progress that had been made in talks so far.

Dutch prime minister Mark Rutte however told reporters in Brussels that Ms May had to “come up with more clarity on what she means by ‘other commitments’ in her Florence speech”.

“I phoned her last week, and tried to encourage her to do that and so far she hasn‘t,” he said.

The Prime Minister’s spokesperson told journalists in Brussels: “The Florence speech intended to create momentum and we achieved that. In all our talks with EU leaders they have been responsive and we hope that will continue.”

Other issues such as forest fires and migration have dominated the first day of European Council discussions, with Britain’s departure not even getting a mention in the first press conference between Jean-Claude Juncker and Donald Tusk after hours of talks.

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Berwin Leighton Paisner (BLP) and Bryan Cave enter merger talks

Berwin Leighton Paisner (BLP) and Bryan Cave have entered into preliminary merger negotiations.

BLP managing partner Lisa Mayhew said: “Our two firms share a strong commitment to innovation in the interests of our clients. We also have an unusually strong cultural fit with a mutual focus on collaboration across our businesses in the interests of deep and lasting client relationships. It is encouraging for the potential firm that BLP and Bryan Cave both have this complementary heritage, but crucially also share the same ambitions for the future.”

Bryan Cave chair Therese Pritchard said: “If we combine we will operate without regard to geographic boundaries. Our firm would be one of only a handful of global firms operating in a one-firm structure with more than 500 lawyers in both the US and also internationally. We will seamlessly provide counsel to clients across the globe, deliver client service at a new level and use technology and innovation to redefine efficiency in the practice of law.”

A merger would create a firm of around 582 partners and $989.5m (£744m) in annual turnover, and would gift BLP with an additional 13 partners in London. The firm would have 32 offices in 12 countries and a platform of 1,200 lawyers.

In the latest UK 200 report, Berwin Leighton Paisner’s figures showed a 7 per cent rise from £254m to £272m in 2016/17, but the firm also saw its average profit per equity partner (PEP) fall by almost 8 per cent to £630,000. BLP did not provide net profit but The Lawyer estimated this at £50.4m, based on 80 full equity partners on an average of £630,000.

Meanwhile, Bryan Cave’s LLPs for the 2016 period show a 32 per cent increase in revenue from €4.8m to €6.4m, generated by an average of nine equity partners, up from seven in 2015.

BLP’s global RPL stood at $561,000 compared to Bryan Cave’s $699,000, The Lawyer’s Global 200 report shows. Revenue per partner stood at $1.6m (£1.2m) and $1.9m (£1.4m) respectively.

The firm’s merged revenue would put it below King & Spalding ($1.06bn) and above Squire Patton Boggs ($983.1m) at number 35 in the Global 200.

Both firm’s practice mix is interesting: real estate is BLP’s largest practice area with 68 partners, followed by corporate (37) and litigation (27). These are also the three most important practice areas at Bryan Cave, although the order is different: litigation with 122 partners, followed by corporate with 86 and real estate with 48.