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• Bank of America Merrill Lynch says traders are continuing to misprice how quickly rates are going to rise.
• The firm recommends going long the US dollar and hedging against stock declines in the face of higher interest rates.

Investors are underestimating how quickly the economy is growing. At least that's what Bank of America Merrill Lynch says with regards to interest rate expectations.

The firm notes that while the US rates market has repriced in recent months, it's still unprepared for what it thinks will be the pace of rate increases over the next year or so. It also trails median forecasts from the Fed's so-called dot plot, which summarizes rate forecasts from the members of the Federal Open Market Committee.

"Stronger growth is causing markets to reprice US rate expectations to the upside," BAML investment strategist James Barty wrote in a client note. "Yet expectations remain well below the dot plot. We think further adjustment is needed, pushing yields and the USD higher into year end."

The end of Barty's quote touches upon one of BAML's recommendations for playing this wrinkle in the market. The firm says to expect strength in the US dollar, which should also get a boost from corporate tax reform and the likely repatriation of billions of dollars from overseas. The greenback has rallied slightly from a multi-year low reached earlier this year, but it's still nowhere near recent highs.

From a stocks perspective, BAML has an idea how to purchase protection. It suggests that traders buy so-called "fragility hedges" using options contracts. The firm specifically recommends shorting one S&P 500 put contract on the benchmark falling to 2,300 by June for every two put contracts bet long on the index to hit 2,500 by the end of December. The equity benchmark closed at 2,587.84 on Friday.

BAML explained the attractiveness of the entry point comes from the steepness of the S&P 500's term structure, where near-dated contracts are expensive relative to those further in the future. Further, put skew — or the degree to which future protection is more expensive than at-the-money options — is high because of the market's tendency to buy more stock exposure on short-term dips.

You can see that dynamic at play in the chart below.

So now you know what to do to prepare yourself for higher rates in the future: go long the US dollar and buy some downside stock protection.

SEE ALSO: 'The haggling will only intensify' — Wall Street's wary of the Republican tax plan

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• "Millennials want to game. It's a game society," Rob Kapito said.
• "The winners are going to be the people who have that game, the technology, and the brand."

LONDON — The cofounder of BlackRock, the world's biggest asset manager, thinks financial services companies need to be more like games developers to win over millennial investors.

"Millennials want to game. It's a game society," Rob Kapito said at the Barclays New Frontier conference in London on Thursday.

"Most people use Uber because they'll say you've got the card, it's already paid for, it shows up — that's not why people really like it. They love watching the car come get them. It's a game. All of the technology is gamification," he said.

"What we need to do is find the financial game that makes people feel comfort and safety. The winners, in my opinion, are going to be the people who have that game, have the technology, and have the brand."

Earlier this year BlackRock invested €30 million into Scalable Capital, a European app-only investment platform. BlackRock, which manages $5.7 trillion globally, also acquired FutureAdvisor, an automated investment platform, in 2015.

Kapito, who is also BlackRock's president, said the asset manager was also adapting its working culture to suit millennial staff. He joked that a recent office redesign looked to him "like a diner" with booths and places to stand. He added that businesses need to offer more flexible working hours and routines to accommodate millennials.

Kapito, who was being interviewed by Barclays CEO Jes Staley, also discussed the role of artificial intelligence in financial services, saying machines won't replace humans.

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LONDON — London house prices will drop 2% next year despite rising nationally.

Estate agents Savills forecasts that prices in Greater London will fall 1.5% over 2017 then fall by a further 2% in 2018, before stabilising in 2019 and returning to growth the year after.

Here are Savills' five-year regional forecasts in full:

Here's how that looks as a chart:

The slowdown — which is already starting to bite, with negative price growth measured in the third quarter this year — is being driven by bloated prices in the capital, slow progress in Brexit negotiations, and worries about further interest rate hikes from the Bank of England, which drive up mortgage costs.

Higher prices and stretched finances mean the market is more sensitive to issues like Brexit which can affect a change in sentiment.

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