Weekly Commercial Awareness Thread

[Jaysen]

Hi All,

I thought you might find it useful if I posted one story a week from our commercial awareness section in the TCLA Premium forum. Closer to law firm interview time, you can then scroll back through this thread and catch up with some of the important stories for each month.

Feel free to post your own stories/share links in this thread also.

Thanks,

Jaysen

 

[Jaysen]

Thursday 11 October 2018

The US stock market sell off

What is happening?

Over the last two days, US share prices have dropped significantly. Yesterday, the S&P 500 -- an index tracking 500 of the largest companies trading on the New York Stock Exchange or NASDAQ -- fell to its worst one-day drop in eight months. And today, the after-effects continued to hit the US and global markets.

What are the causes?

The US central bank, the Federal Reserve, is raising interest rates faster than expected. Interest rates have already risen three times this year, the last time being last week. Rising interest rates causes companies to face higher borrowing costs and lower profits, which puts a downward pressure on a company's share price.

Rising interest rates also increases the return from investing in US government debt (US Treasuries), which leads to investors selling their investments in shares to buy US Treasuries. This month, strong US earnings data has led to a sharp rise in Treasury yields as investors expect the Fed to continue to raise interest rates quicker than planned.

The market is still fragile over the US-China trade war. At times of uncertainty, investors buy government bonds because they are safe (backed by the government). The dispute has also ignited fears over the rate at which the Chinese economy is slowing, which has consequences for the global economy.

US stocks, especially Amazon and Apple, which have recently surpassed $1 trillion in market capitalisation, was due for a correction at some point. Tomorrow, companies will begin to report their earnings for the third quarter of 2018 and their profits will need to justify their valuations. There is also uncertainty over how much companies have been hurt by the US-China trade war.

What is the background?

The US bull market -- in this case referring to shares rising on the stock market (or technically, when share prices continue rising 20% from a previous drop of 20%) -- began in 2009. This bull market recently became the longest in US history.

The US stock market has performed better than stock markets around the world, fuelled by strong US earnings growth, low interest rates, tax cuts, and other factors.

This, compared to the unattractive 10-year Treasury yield (the return from buying a 10-year US government bond) of under 3%, has led to investors to pour into US stocks.

How has the sell-off impacted the global market?

Stock markets around the world were impacted:

• Europe's Stoxx 600 fell to its lowest level since February 2017
• Japan's stock market faced its largest one-day fall since March 2018
• Hong Kong's stock market fell over 3.8%
• Taiwan's tech-heavy stock exchange fell to its worse day since 2008 (big on electronics/semiconductors)

Tech companies were also hit hard from the sell off:

• China's Tencent Holdings fell 6.8% making it no longer on of the world's 10 most valuable public companies
• Japan's SoftBank Group fell 5.8%
• South Korea's Samsung Electronics fell 4.8%
• The FAANG companies (Facebook, Amazon, Apple, Netflix and Google) loss $172 billion in value (combined) with Amazon losing the most by value and Netflix the most by percentage

Other consequences include:

• Car-leasing group Leaseplan called off plans to IPO
• Vannin Capital, which provides litigation financing, called off plans to IPO
• Almost $13 billion was wiped off the cryptocurrency market
• Oil prices fell over 5%

 

[Yminh]

Thursday 11 October 2018

The US stock market sell off

What is happening?

Over the last two days, US share prices have dropped significantly. Yesterday, the S&P 500 -- an index tracking 500 of the largest companies trading on the New York Stock Exchange or NASDAQ -- fell to its worst one-day drop in eight months. And today, the after-effects continued to hit the US and global markets.

What are the causes?

The US central bank, the Federal Reserve, is raising interest rates faster than expected. Interest rates have already risen three times this year, the last time being last week. Rising interest rates causes companies to face higher borrowing costs and lower profits, which puts a downward pressure on a company's share price.

Rising interest rates also increases the return from investing in US government debt (US Treasuries), which leads to investors selling their investments in shares to buy US Treasuries. This month, strong US earnings data has led to a sharp rise in Treasury yields as investors expect the Fed to continue to raise interest rates quicker than planned.

The market is still fragile over the US-China trade war. At times of uncertainty, investors buy government bonds because they are safe (backed by the government). The dispute has also ignited fears over the rate at which the Chinese economy is slowing, which has consequences for the global economy.

US stocks, especially Amazon and Apple, which have recently surpassed $1 trillion in market capitalisation, was due for a correction at some point. Tomorrow, companies will begin to report their earnings for the third quarter of 2018 and their profits will need to justify their valuations. There is also uncertainty over how much companies have been hurt by the US-China trade war.

What is the background?

The US bull market -- in this case referring to shares rising on the stock market (or technically, when share prices continue rising 20% from a previous drop of 20%) -- began in 2009. This bull market recently became the longest in US history.

The US stock market has performed better than stock markets around the world, fuelled by strong US earnings growth, low interest rates, tax cuts, and other factors.

This, compared to the unattractive 10-year Treasury yield (the return from buying a 10-year US government bond) of under 3%, has led to investors to pour into US stocks.

How has the sell-off impacted the global market?

Stock markets around the world were impacted:

• Europe's Stoxx 600 fell to its lowest level since February 2017
• Japan's stock market faced its largest one-day fall since March 2018
• Hong Kong's stock market fell over 3.8%
• Taiwan's tech-heavy stock exchange fell to its worse day since 2008 (big on electronics/semiconductors)

Tech companies were also hit hard from the sell off:

• China's Tencent Holdings fell 6.8% making it no longer on of the world's 10 most valuable public companies
• Japan's SoftBank Group fell 5.8%
• South Korea's Samsung Electronics fell 4.8%
• The FAANG companies (Facebook, Amazon, Apple, Netflix and Google) loss $172 billion in value (combined) with Amazon losing the most by value and Netflix the most by percentage

Other consequences include:

• Car-leasing group Leaseplan called off plans to IPO
• Vannin Capital, which provides litigation financing, called off plans to IPO
• Almost $13 billion was wiped off the cryptocurrency market
• Oil prices fell over 5%

Hi Jaysen,

I struggle a little to understand why tech companies' stock are amongst the hardest hit. Clearly, concerns about the US-China trade war potentials to disrupt supply chain of these companies have been circulating for a while now, so in a way the interest rate hike is like a final push that sets in motion the sell-off that worried investors had already been contemplating?

I understand that investors also want to lock in profit ahead of expectation that there will be correction in stock prices of the best performing companies, like Amazon and Apple as you pointed out. But isn't the correction is the result of hindsight after the sell-off drove down the value of these tech stocks, as opposed to being the reason that initially trigger investors to sell?

Thanks for sharing yours thoughts. Pls correct me if I misunderstood any of the materials you shared above.

 

[Jaysen]

Hi Jaysen,

I struggle a little to understand why tech companies' stock are amongst the hardest hit. Clearly, concerns about the US-China trade war potentials to disrupt supply chain of these companies have been circulating for a while now, so in a way the interest rate hike is like a final push that sets in motion the sell-off that worried investors had already been contemplating?

I understand that investors also want to lock in profit ahead of expectation that there will be correction in stock prices of the best performing companies, like Amazon and Apple as you pointed out. But isn't the correction is the result of hindsight after the sell-off drove down the value of these tech stocks, as opposed to being the reason that initially trigger investors to sell?

Thanks for sharing yours thoughts. Pls correct me if I misunderstood any of the materials you shared above.

Great questions.

1. That's a good way to put it. There's a few things you can point to. The longer the trade war goes on, the more investors become jittery and risk averse: will China devalue its currency? Will Trump continue with more tariffs? Will there be more investigations into Chinese investments? So investors move out of tech stocks into safer assets. Investors might rotate into finance stocks, for example, which will benefit from the higher interest rates. Or they could buy assets less exposed to China.

If we're talking about -- why tech stocks now? With higher interest rates and the rise of yields on 10-year treasuries, investing in stocks comes at a higher opportunity cost compared to the low risk government bonds. The money being pulled out of stocks hits tech companies more because they have been the ones to gain the most over the last few years from a low interest rate environment. Now that interest rates are rising, this might not continue. There's also the higher borrowing costs and the impact on valuations.

2. Yes, I agree. It's not the trigger, but once tech stocks started going down, nervous investors accelerated the sell-off.

 

[Yminh]

Great questions.

1. That's a good way to put it. There's a few things you can point to. The longer the trade war goes on, the more investors become jittery and risk averse: will China devalue its currency? Will Trump continue with more tariffs? Will there be more investigations into Chinese investments? So investors move out of tech stocks into safer assets. Investors might rotate into finance stocks, for example, which will benefit from the higher interest rates. Or they could buy assets less exposed to China.

If we're talking about -- why tech stocks now? With higher interest rates and the rise of yields on 10-year treasuries, investing in stocks comes at a higher opportunity cost compared to the low risk government bonds. The money being pulled out of stocks hits tech companies more because they have been the ones to gain the most over the last few years from a low interest rate environment. Now that interest rates are rising, this might not continue. There's also the higher borrowing costs and the impact on valuations.

2. Yes, I agree. It's not the trigger, but once tech stocks started going down, nervous investors accelerated the sell-off.

took me a bit of googling here and there to fully understand your answer but the pieces are coming together! thank you

 

[Jaysen]

took me a bit of googling here and there to fully understand your answer but the pieces are coming together! thank you

Haha -- let me know if anything is unclear!

 

[Yminh]

Haha -- let me know if anything is unclear!

haha I was wondering why financial stocks would benefit from high interest rate, realised the answer is rather simple: they gain more from lending. Still trying to wrap my head around the connectivity of all these events, and financial jargons could be a pain sometimes

 

[Jaysen]

Friday 19 October 2018

Lawyers are not prepared for Brexit

Thomson Reuters recently surveyed over 250 legal services professionals including a variety of top UK and US law firms. Here are some of the results:

• 47% said they were "not well prepared" to tackle threats posed by Brexit during the two years. Only 9% felt they were well prepared.
• 63% agreed with the statement that Brexit was more of a threat than an opportunity in the short term.
• 21% said they expect over 10% of their firm's total UK employment to be moved to non-UK offices.

Their report also found:

• Since the announcement of the referendum, the legal services industry has performed robustly -- with output rising by 5% in real terms up to the end of 2017 -- likely because of the increased level of legal uncertainty.
• Practice areas likely to be affected by Brexit include: IP, financial services, competition and agriculture. This compared to practices that are not too influenced by EU law such as arbitration, conveyancing and construction.
• The authors predict the turnover from legal services will slow -- growing by 2.2% -- but still outperform the growth of the economy.

 

[Jaysen]

Friday 26 October 2018

The good and bad side of the US economy

How is the US economy doing well?

Today the Commerce department revealed that the US economy has grown at a 3.5 percent annual rate. Consumer spending was strong -- increasing by 4% -- and made up about 70% of economic output. This means the US economy is on track for the fastest annual growth in 13 years.

This month companies have also been reporting their earnings for their third quarter. So far, the results have been good and third quarter profits from the S&P 500 - the large publicly listed US companies - are on track to increase by 22%. International Paper announced profits rose by 10.3%. Intel's profits rose by 4.5%. Twitter stock increased by 15.5%. Microsoft's jumped up 5.8%.

The overall picture seems good: unemployment is almost at 50-year lows while stocks have risen almost 300% since 2009.

Why is the US economy doing well?

As mentioned, the strongest sector was consumer spending. Many people are in employment and they're confident enough to spend.

Donald Trump's tax cuts have also contributed to the growth in stocks. As businesses and consumers have more disposable income, they are encouraged to spend, especially at a time of low interest rates.

How is the US economy not doing well?

All of the gains made by the S&P 500 (the index which tracks the largest listed US stocks) this year have now been wiped out. Disappointing earnings from big tech stocks such as Amazon and Alphabet today triggered a further stock market sell of.

The US will be increasing tariffs on $250bn of Chinese imports. US tariffs hurt US companies that import Chinese goods while China's retaliatory tariffs hurt US companies trying to sell to Chinese consumers.

While corporate earnings this quarter are good, it's lower than second-quarter earnings (4.2%).

Why is the US economy not doing well?

For investors, there's a lot to be worried about:

• The Federal Reserve will be meeting in December for the next interest rate hike. A rise in interest rates may impact corporate earnings and dampen spending.

• China growth is slowing down meaning US companies may see a fall in sales to Chinese consumers. To top this off, the US is engaged in a trade war with China and there seems to be little evidence this is benefiting the US economy.

• Trump's tax cuts are a one-off. Investors are looking to the future when the stimulus wears off. So the US stock market may be as good as it gets right now.

• While Donald Trump has taken credit for the growth -- and criticised the US central bank, the Federal Reserve, for raising interest rates -- some of the trends were already present in the economy. For example, unemployment had been falling since 2010. Many investors are also pulling out now as there's a midterm election coming up.

 

[Jaysen]

Thursday 11 October 2018

The US stock market sell off

What is happening?

Over the last two days, US share prices have dropped significantly. Yesterday, the S&P 500 -- an index tracking 500 of the largest companies trading on the New York Stock Exchange or NASDAQ -- fell to its worst one-day drop in eight months. And today, the after-effects continued to hit the US and global markets.

What are the causes?

The US central bank, the Federal Reserve, is raising interest rates faster than expected. Interest rates have already risen three times this year, the last time being last week. Rising interest rates causes companies to face higher borrowing costs and lower profits, which puts a downward pressure on a company's share price.

Rising interest rates also increases the return from investing in US government debt (US Treasuries), which leads to investors selling their investments in shares to buy US Treasuries. This month, strong US earnings data has led to a sharp rise in Treasury yields as investors expect the Fed to continue to raise interest rates quicker than planned.

The market is still fragile over the US-China trade war. At times of uncertainty, investors buy government bonds because they are safe (backed by the government). The dispute has also ignited fears over the rate at which the Chinese economy is slowing, which has consequences for the global economy.

US stocks, especially Amazon and Apple, which have recently surpassed $1 trillion in market capitalisation, was due for a correction at some point. Tomorrow, companies will begin to report their earnings for the third quarter of 2018 and their profits will need to justify their valuations. There is also uncertainty over how much companies have been hurt by the US-China trade war.

What is the background?

The US bull market -- in this case referring to shares rising on the stock market (or technically, when share prices continue rising 20% from a previous drop of 20%) -- began in 2009. This bull market recently became the longest in US history.

The US stock market has performed better than stock markets around the world, fuelled by strong US earnings growth, low interest rates, tax cuts, and other factors.

This, compared to the unattractive 10-year Treasury yield (the return from buying a 10-year US government bond) of under 3%, has led to investors to pour into US stocks.

How has the sell-off impacted the global market?

Stock markets around the world were impacted:

• Europe's Stoxx 600 fell to its lowest level since February 2017
• Japan's stock market faced its largest one-day fall since March 2018
• Hong Kong's stock market fell over 3.8%
• Taiwan's tech-heavy stock exchange fell to its worse day since 2008 (big on electronics/semiconductors)

Tech companies were also hit hard from the sell off:

• China's Tencent Holdings fell 6.8% making it no longer on of the world's 10 most valuable public companies
• Japan's SoftBank Group fell 5.8%
• South Korea's Samsung Electronics fell 4.8%
• The FAANG companies (Facebook, Amazon, Apple, Netflix and Google) loss $172 billion in value (combined) with Amazon losing the most by value and Netflix the most by percentage

Other consequences include:

• Car-leasing group Leaseplan called off plans to IPO
• Vannin Capital, which provides litigation financing, called off plans to IPO
• Almost $13 billion was wiped off the cryptocurrency market
• Oil prices fell over 5%

I suggest students read about the current tech sell-off: https://news.sky.com/story/wall-street-sees-renewed-sell-off-amid-tech-worries-11558829

It has come up in the news enough this year that it could be asked at interview.

 

[Camilla Gionso]

I suggest students read about the current tech sell-off: https://news.sky.com/story/wall-street-sees-renewed-sell-off-amid-tech-worries-11558829

It has come up in the news enough this year that it could be asked at interview.

Jaysen - this may sound like a stupid question, but can we say that oil and tech sell-offs are getting more connected?

 

[Jaysen]

Jaysen - this may sound like a stupid question, but can we say that oil and tech sell-offs are getting more connected?

Interesting - what do you mean by connected?

 

[Camilla Gionso]

Interesting - what do you mean by connected?

I meant to ask, do you think that tech sell-offs influence the oil price negatively?

 

[Jaysen]

I meant to ask, do you think that tech sell-offs influence the oil price negatively?

Yes I would. I don't think it has a huge impact, but I believe the tech sell off has led some investors to shift into less risky assets, which if true, would lead to a fall in the demand for oil. That said, I'd say the main causes are oversupply and fears of slowing global growth.

And FYI - you could also make the argument the other way i.e. the fall of oil prices is impacting the tech sell off.

 

[Celine]

Yes I would. I don't think it has a huge impact, but I believe the tech sell off has led some investors to shift into less risky assets, which if true, would lead to a fall in the demand for oil. That said, I'd say the main causes are oversupply and fears of slowing global growth.

And FYI - you could also make the argument the other way i.e. the fall of oil prices is impacting the tech sell off.

If I could just chip in to this conversation, what has the fear of slowing global growth got to do with oil in this situation

 

[Jaysen]

If I could just chip in to this conversation, what has the fear of slowing global growth got to do with oil in this situation

It's all down to supply and demand. Slow global growth means a fall in demand for oil. When the supply of oil outstrips demand, prices will fall.

That's a little simplistic and there are other factors involved but that's the basic idea.

 

[Jaysen]

A good summary of the issue with oil prices right now (podcast/audio): https://www.bbc.co.uk/sounds/play/p06sq4d2