Wednesday <strong>28</strong> <strong>Mar</strong>ch <strong>2018</strong> FINANCIAL TIMES COMPANIES & MARKETS @ FINANCIAL TIMES LIMITED Bond yields: The real thing Fed’s hawkish posture suggest move into positive territory soon Coca-Cola for many years included “real” in its slogan to suggest that its beverage was inimitable — even natural. Bond investors demand a more precise definition. To credit markets, real means an actual premium to expected inflation. The era of loose monetary policy curtailed this. Now US government bond yields have begun to cover inflationary expectations once again. Real yields are likely to go considerably higher. If measured on the basis of inflation-indexed two-year Treasuries, US government bonds still give little or no protection from future price increases. Most long-term investors want returns that exceed rising prices. Two-year notes offer none. However since September, five-year Treasuries have begun to offer a positive real yield — currently the highest since 2010. The US Federal Reserve’s hawkish stance on interest rates suggests that shorter-term real rates will also move into positive territory soon. That is bad news for equity markets. Bonds will increasingly be able to MARTIN ARNOLD Lloyds Banking Group has been ordered by a judge to award shares worth up to £1.35m to Eric Daniels, who ran the lender when it was rescued by UK taxpayers, after he won a legal claim that his bonus had been withheld unlawfully. A High Court judge also ordered Lloyds to pay a bonus worth up to £933,230 to Truett Tate, the lender’s former head of wholesale banking. The two men claimed that they should have been paid the share awards in 2012 after hitting targets linked to the acquisition of HBOS. Mr Daniels, who left the bank in 2011 with a £5m pension pot, was responsible for orchestrating the takeover of rival HBOS in a deal that left Lloyds nursing heavy losses and needing a government bailout. The ruling is a blow for Lloyds, which has resisted for six years paying the bonuses to the two executives, which were likely to be seen as a reward for failure because of the disastrous outcome of the HBOS deal. The summary judgement will be closely analysed by the financial sector as a sign of how the courts view attempts by bankers to enforce their contractual rights in the light of tighter regulations that allow banks to withhold or clawback remuneration due to failings. Barristers for Mr Daniels at 20 Essex Street chambers celebrated “an emphatic vindication” of his position. They said in a statement that the ruling “will have general relevance beyond the facts of this particular case to the construction of contractual share schemes awarded to employee participants, unilateral compete with risk capital for funds from investors. It is no surprise that money has come out of US equity funds this year, including another $24.9bn in the week ended <strong>Mar</strong>ch 21, according to EPFR data. Even so, smallish positive real interest rates will not cause too much upset in wider markets. For one thing, the past decade has hardly been a normal period of comparison given the volume of global central bank purchases of government and corporate securities. That intervention has supported government bond prices, influencing all types of bonds and loans. And real yields of well over 2 per cent were seen in five-year Treasuries in the periods before the past two equity bear markets. Compared with this, a 0.5 per cent real yield is unremarkable. As such, US real bond yields could rise substantially higher yet. In Europe real yields are still a long way from positive territory. Expect more headlines about positive inflation-adjusted bond yields in the months ahead. However it is likely to be 2019 before the real pain starts to show in equities. Lloyds ordered to pay bonus to ex-CEO Eric Daniels powers of variation and settlement agreements”. Lloyds said: “We accept the court’s decision and now consider this matter closed.” The judge ordered the bank to pay Mr Daniels 2,063,640 shares and Mr Tate 1,424,778 shares, plus any dividends they would have earned since 2012, within 14 days. The court judgement cited a conversation in February 2012 in which Mr Daniels was told by Sir Win Bischoff, the then chairman of Lloyds, that “if he did not agree to waive the award, the board would not agree to pay him”. The award related to a 2009 sharebased long-term incentive plan that was conditional on the progress of integrating HBOS, including achieving at least £1.5bn of cost savings — a target the bank hit in 2011. Mr Daniels, who now works at Stormharbour, a boutique investment bank in the City, supported his claim with minutes from a meeting of Lloyds’ remuneration committee in January 2012 showing that it was agreed that the 2009 awards should vest in full. The remuneration committee went on to approve and adopt an amended version of the plan in February 2012 that included a rule giving it general powers to adjust an award downwards if the performance of any party justified an amendment. Lloyds decided to award the HBOS integration bonus to only some executives and not others. It also blocked pay-outs to Helen Weir, former head of retail, and Archie Kane, the ex-head of its insurance arm. But those two executives have not made claims against the bank and it may now be too late for them to do so. Wall Street adds to global rally as trade fears ease Miners and carmakers shine in Europe as investors buy export stocks MICHAEL HUNTER US stocks are continuing to rally, building on their biggest oneday gains since 2015, as soothing noises from the White House ease investors’ fears that a trade war will hurt a robust global economy. Donald Trump’s move last week to impose tariffs on $60bn of Chinese imports rattled fund managers who have enjoyed a benign economic backdrop over the past year. However, sustained hope that China and the US are working to avoid a series of retaliatory measures is helping the S&P 500 rise 0.4 in opening trade on Tuesday, adding to Monday’s 2.7 per cent advance. The rally is global, with European equities powering ahead after a strong session in Asia. The Europe-wide Stoxx 600 is up 1.4 per cent, with the UK’s FTSE 100 rising 2 per cent and Germany’s benchmark Dax gaining1.8 per cent. The shadow cast by trade tension comes at a delicate juncture for global equities already grappling with the tighter monetary policy, new potential regulation on high-flying tech companies such as Facebook and early signs that the eurozone economy may be losing some momentum. The “rally was helped by a much more diplomatic tone out of the White House,” Jim Reid, a strategist at Deutsche Bank, noted of Wall Street’s bounce. In Europe the Stoxx industrial metals index, which includes the continent’s steelmakers, rose 1.9 per cent, a rise matched by an index tracking carmakers. In Frankfurt, Volkswagen climbed 2.5 per cent and BMW jumped 2.2 per cent. Given their sensitivity to the outlook for the Chinese economy, resource stocks stood out. Miners were prominent on the leaderboard for the blue-chip FTSE 100 with Anglo American rising 3 per cent and Glencore gaining by 4 per cent. Although European stocks found upward momentum on Tuesday, they missed out on Monday’s rebound and are significantly lagging Wall Street this year. The Euro Stoxx 600 is down 5.6 per cent in <strong>2018</strong> compared with a 0.6 per cent drop for the S&P 500. Despite this underperformance, analysts at HSBC cautioned against Hopes for trade talks power global stock rally Renminbi touches 7-month peak, pound shies away from month highs MICHAEL HUNTER AND EDWARD WHITE What you need to know • Hopes grow that US and China move to avert trade war • European stocks build on momentum from Asian rally • Wall Street firms slightly after biggest one-day gain since 2015 • Renminbi firms while dollar holds steady, sterling shies away from month highs • Haven assets slip pressure as risk appetite improves “My expectation is that the US wins a small victory on tariff reciprocity, both countries back off from trade war threats, equities bounce back and China and the US sit down for a long acrimonious set of negotiations on the harder issues related to investment flows and intellectual property,” says Steven Englander, Rafiki Capital Management. C002D5556 Masayoshi Son, chairman and chief executive of SoftBank, left, and Nikesh Arora © Bloomberg “The equity market damage is disproportionate to the amount of economic damage that will be inflicted over the short term, never mind the medium and longer term . . . much commentary is missing the point that rarely have so many lost so much over so little.” Hot topic Hopes that the US and China will avoid a full trade dispute are powering a global rally for stock markets, while the dollar holds steady, the renminbi rises and haven assets are shunned. European stocks are rallying after a strong showing in Asia and Wall Street’s biggest one-day gain since 2015. The S&P 500 climbed 0.2 per cent immediately following the opening bell after adding 2.7 per cent on Tuesday but in a sign of some pause in the rally, was later slipping between positive and negative territory. BUSINESS DAY A15 buying the dip in European stocks. “The European market is facing a whole series of headwinds and uncertainties related to growth, monetary policy, political risk and now also protectionist rhetoric from the US,” they argued. “The danger is that these intensify rather than subside as we struggle into Q2. We conclude that the going is going to remain tough.” However, so far this week the rebound on Wall Street is setting the tone globally. Monday’s rally on the Dow Jones Industrial Average and the techheavy Nasdaq Composite represented their best one-day gains in over two and a half years. Stephen Englander, a strategist at Rafiki Capital Management, is expecting progress in the trade talks and argues that the selling on fears of a deeper dispute had already run too far. “My expectation is that the US wins a small victory on tariff reciprocity, both countries back off from trade war threats, equities bounce back and China and the US sit down for a long acrimonious set of negotiations on the harder issues related to investment flows and intellectual property.” Chinese officials also stepped up efforts to smooth tension, including suggesting loosening foreign investment restrictions and offering to buy more semiconductors from the US. That followed signs from US Treasury secretary Steven Mnuchin that he was hopeful an agreement between Washington and Beijing could be reached on trade. The Stoxx industrial metals index, which includes European steelmakers, is up 2.1 per cent, with the index tracking carmakers gaining 2 per cent. The Europe-wide Stoxx 600 is 1.4 per cent higher, Frankfurt’s Xetra Dax 30 is up 1.8 per cent and London’s FTSE 100 is 2 per cent firmer. Equities The Topix in Tokyo was up 2.7 per cent a day after touching a six-month low. All major segments were higher but financials made the biggest gains, followed by the technology and basic materials segments.
Wednesday <strong>28</strong> <strong>Mar</strong>ch <strong>2018</strong> A16 BUSINESS DAY