WeWork, the loss-making US office rental company, is planning a stock market launch next month to fund its global expansion. All the signs on Wall Street on Wednesday were that Silicon Valley’s next big thing might have left it a tad late.
On a day when global stock markets took a tumble, WeWork will doubtless be hoping that swift and decisive action by the Federal Reserve can hold off a bear market in shares for just a bit longer. Otherwise the company’s float will be remembered for the wrong reason: as the one that marked the top of the cycle.
Donald Trump has his own reasons for wanting the stock market to remain buoyant – the fact that his 2020 presidential campaign is already under way – but was uncharacteristically slow to respond to the turmoil. Eventually, of course, the president could not resist having another dig at the Federal Reserve as part of his campaign to have interest rates slashed.
And they almost certainly will be. The Fed is highly sensitive to what is happening on Wall Street and a rate cut at its next meeting in September is a nailed-on certainty. Some analysts, Steen Jakobsen at Saxo Bank, for instance, think that the US central bank might not wait that long and instead announce an emergency cut before its scheduled meeting.
That still seems a bit of a long shot but the accumulation of bad economic news means that the battle between the Fed and the White House has been won decisively by Trump. All that remains is to see how much face the Fed’s chairman, Jerome Powell, can save.
Powell’s position was uncomfortable but defensible all the time the financial markets thought the longest sustained period of growth in US history would continue. Now, though, the bond markets have signalled that they think Trump has got it right and the Fed has got it wrong.
The catalyst for the latest share sell-off was the news that the yield (broadly-speaking, the interest rate) on a 10-year Treasury bond was lower than that on a two-year bond.
This is unusual because for the most part investors demand a higher yield on 10-year bonds because there is more uncertainty over what might happen in the next decade than in the next two; higher risk equals a higher return.
But occasionally, the yields on 10- and two-year bonds converge. Even more rarely, yields on 10-year bonds fall below those on two-year bonds. That’s when investors are more concerned about short-term growth prospects than about inflation risks in the longer term and, historically, it is often the moment the recession warning light turns red.
That’s not always the case. Sometimes the economy sails on regardless. But share prices have been defying gravity for months and it would be a brave investor who would shrug off the inverted yield curve as a false signal this time.
Why accountants are batting back Sports Direct
It says something about a company when none of Britain’s big four accountancy firms is willing to take on the job of doing its books. When the boss of Sports Direct, Mike Ashley, asked PwC, KPMG, EY and Deloitte whether they wanted his business, they all said no.
As things stand, the business secretary, Andrea Leadsom, may have to appoint one of the “big four” to do the Sports Direct accounts. This sort of humiliation is unprecedented for a big UK company.
But this affair also speaks volumes about the current state of the accountancy business, which has been tarnished by failures to spot problems developing in a number of high-profile collapses: Carillion, BHS and Patisserie Valerie to name but three.
The big four (and Sports Direct’s current auditors, Grant Thornton) have enough problems already without Ashley’s unconventional business adding to them. What’s more, a recession is likely to expose further accountancy failings because, as Warren Buffett said, it’s only when the tide goes out that it is possible to see who’s swimming naked.