Morning Brief: Why the crashing euro and the rising dollar are disrupting global markets

Date:

Share post:


This article was first published in the Morning Brief. Every Monday through Friday, the Morning Brief is delivered directly to your inbox by 6:30 a.m. ET. Register

Friday, July 15, 2022

Today’s newsletter is from Jared BlikreYahoo Finance’s reporter on markets, is. Follow him on Twitter @SPYJared.

The U.S.dollar (DX-Y.NYB) is on fire, reaching Near-parity to the euro (EUR=X) for the first time in two decades.

The yen (JPY=X) is down 20% versus the dollar over the last year — nearly unheard of in the modern era.

BitcoinBTC-USD) has crashed 70% against the dollar since its November record high — not unheard of, but painful.

This might be great news for Americans who travel abroad and shop, but it is causing havoc on global markets. Investors are scratching their heads.

The Fed “printed” $9 Trillion by purchasing Treasury bonds. This might seem like a huge devaluation of greenback. The dollar is now soaring, as traditional inflation hedges such as gold are being crushed.

What’s the answer?

Two key factors are at play.

First, the Federal Reserve is attempting to tamper with interest rates in the United States. Inflation has fallen to 40-year lows. Global investors can also sell their local currency to buy dollars and invest in U.S. debts to take advantage of the higher interest rates. This so-called carry trade has hedging risks, but it’s a hedge fund favorite and relatively simple in theory.

Second, foreign investors from weak countries are purchasing the greenback to ensure relative safety. The inflation in the U.S. is on the rise and the political situation is murky at best. However, there is no concern among investors that the U.S. government may fail to fulfill its financial obligations.

These haven flows, combined with large interest rate differentials, have resulted in investors bidding up dollar at an unfavorable rate.

The huge movements in the currency crosses of the dollar are just as disruptive for global investors as the increase in interest rates.

A trader shows U.S. Dollar notes at a currency booth in Karachi (Pakistan), December 3, 2018. REUTERS/Akhtar Soomro

The normally quiet U.S. Treasury and the dollar foreign exchange markets are heavily leveraged.

Investors in these markets are often seeking to eke out a few basis points — or hundredths of a percent — from a given move. These investors use huge leverage to magnify small gains.

This year, bets across these markets have been unwinding — oftentimes chaotically — spilling over into the plain vanilla stock market.

It is clear that the dollar is causing havoc in corporate America.

According to FactSet, 40% of the total revenue of S&P 500 companies is from abroad, with the tech and materials sectors deriving over 50% of their sales outside the U.S.

One positive result of the soaring dollar is a reversal of the recent commodity bubble that has begun to impact oil, gas and grain prices. Low input prices are great news for consumers and businesses, but volatility is what’s really the killer.

If you were an airline in the past year and wanted to reduce fuel costs, WTI crude oils (CL=F) was trading in the $120/barrel range — you probably just wasted a lot of money given the price is now in the mid-nineties.

So as we head into earnings season, we’ll look for more clarity on the fallout from the latest currency moves — and what executives see in the coming quarters. Analysts will then get to work and revise their own expectations — expectations that are still extremely lofty by historical standards.

We’ve all seen this year that bad news is priced in quickly.

What to Watch Today

Economic calendar

  • 8:30 a.m. ET: Empire ManufacturingJuly (-2.0 anticipated, -1.2 in the previous month),

  • 8:30 a.m. ET: Retail Sales Advance, month-over-month, June (0.9% expected, 0.3% during prior month)

  • 8:30 a.m. ET: Retail Sales excluding autos, month-over-month, June (0.7% expected, 0.5% during prior month)

  • 8:30 a.m. ET: Retail sales – autos and gas exempt, month-over-month, June (0.1% expected, 0.1% during prior month)

  • 8:30 a.m. ET: Retail Sales Control Group, June (0.3% expected, 0.0% during prior month)

  • 8:30 a.m. ET: Import Price Index, month-over-month, June (0.7% expected, 0.6% during prior month)

  • 8:30 a.m. ET: Import Price Index excluding Petroleum, month-over-month, June (0.2% expected, -0.1% during prior month)

  • 8:30 a.m. ET: Import Price IndexYear-over-year June (11.4% anticipated, 11.7% in the previous month)

  • 8:30 a.m. ET: Export Price Index, month-over-month, June (1.2% expected, 2.8% during prior month)

  • 8:30 a.m. ET: Export Price IndexYear-over-year June, 19.9% expected, 18.97% in the previous month

  • 9:00 a.m. ET: Bloomberg July United States Economic Survey

  • 9:15 a.m. ET: Industrial ProductionMonth-over-month June (0.1% anticipated, 0.2% in the previous month, and downwardly revised to 1.1%).

  • 9:15 a.m. ET: Capacity Utilization– June (80.8% anticipated, 79.0% in the previous month, revised upwardly to 80.8%

  • 9:15 a.m. ET: Manufacturing (SIC Production, June (-0.1% expected, -0.1% during prior month)

  • 10:00 a.m. ET: Business inventories, May (1.4% expected, 1.2% during prior month)

  • 10:00 a.m. ET: University of Michigan SentimentJuly preliminary (50 to be expected, 50 in the preceding month)

  • 10:00 a.m. ET: University of Michigan Current ConditionsJuly preliminary (53.7 anticipated, 53.8 during the previous month)

  • 10:00 a.m. ET: University of Michigan ExpectationsJuly preliminary (47 expected, 47.5 during the prior month).

  • 10:00 a.m. ET: University of Michigan 1-Year inflationJuly preliminary (5.3 Expected, 5.3% during the prior month)

  • 10:00 a.m. ET: University of Michigan 5-Year Inflation, June final (3.0% expected, 3.1% during prior month)

Earnings

Pre-market

  • Wells Fargo (WFCOn revenue of $17.54 trillion, ) expects to report adjusted earnings at 80c per share

  • BlackRock (BLKOn revenue of $4.65 trillion, ) expects to report adjusted earnings at $7.90 per share

  • Citigroup (CFor $18.48 Billion in revenue, ) will report adjusted earnings of $1.70 per Share

  • BNY Mellon (BKOn revenue of $4.18 trillion, ) will report adjusted earnings at $1.12 per share

  • UnitedHealth (UNHOn revenue of $79.62 trillion, ) will report adjusted earnings at $5.19 per share

  • Progressive (PGRFor revenue of $12.39 Billion, ) will report adjusted earnings of 85cs per share

  • US Bancorp (USBOn revenue of $5.92 trillion, ) expects to report adjusted earnings at $1.07 per share

  • State Street (STTFor a revenue of $3 billion, ) will report adjusted earnings of $1.73 per Share

  • PNC Financial (PNCFor a revenue of $5.14billion, ) will report adjusted earnings of $3.14 per Share

Post-market

Yahoo Finance Highlights

Click here to get the most recent stock market news, in-depth analysis and events that affect stocks

Yahoo Finance provides the most up-to-date financial and business news

For more information, download the Yahoo Finance App AppleOr Android

Follow Yahoo Finance Twitter, Facebook, Instagram, Flipboard, LinkedInAndYouTube



LEAVE A REPLY

Please enter your comment!
Please enter your name here

spot_img

Related articles

The Benefits of a Creative Subscription with Envato Elements

If you’re looking to find and use royalty-free images and other creative resources, it can be tough to...

Get an Additional ₹100 Cashback When You Pay with Domino’s Digital Wallet Partners

How does ₹100 cashback sound? Find out more about the additional cashback you can get when you pay...

Get Unlimited Access to DataCamp’s Library of Online Courses

DataCamp subscriptions enable access to over 300 courses, as well as projects, assessments, and additional content. Whether you're...

Why You Should Buy from DaMENSCH: The Best in Quality, Service, and Value

Buying products online can be dangerous; you never know if you’re getting an authentic product, or one that’s...