Why the soaring dollar and the falling euro are rattling global markets: Morning Brief

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Friday, July 15, 2022

Today’s newsletter is at Jared Blikre, a reporter focusing on the markets at Yahoo Finance. Follow him on Twitter @SPYJared.

The US dollar (DX-Y.NYB) is burning and almost reaching parity with the euro (EUR = X) for the first time in two decades.

The yen (JPY = X) has fallen 20% against the dollar over the past year – almost unheard of in the modern era.

Bitcoin (BTC-USD) has crashed 70% against the dollar since its record high in November – not unheard of, but painful.

Some of this may be good for Americans shopping or traveling abroad, but these measures are wreaking havoc on global markets, leaving many investors scratching their heads.

After all, the Fed “printed” $ 9 trillion by buying government bonds, which could sound like a massive devaluation of the dollar. And now the dollar is rising as traditional inflation hedges like gold are crushed.

So: what gives?

There are two key factors in the work.

First, interest rates in the United States are rising as the Federal Reserve moves to dampen 40-year highs in inflation. And if global investors want to get the relatively higher interest rates paid out here, they sell their local currency, buy dollars, invest in US bonds and pocket the difference. There are hedging costs in this so-called “carry trade”, but it is quite simple in theory and a hedge fund favorite.

Second, foreign investors in weak economies buy the dollar for its relative security. Inflation at home is sky-high, and the political situation in the United States is at least messy, but so far there is no concern among investors that the US government will not meet its financial obligations.

Together, these refugee flows, combined with large interest rate differentials, have led investors to bid the dollar an uncomfortable rate.

And just like the rise in interest rates, the huge movements in the dollar currency crossing are creating chaos for global investors.

A trader shows US dollar bills at a currency exchange stand in Karachi, Pakistan on December 3, 2018. REUTERS / Akhtar Soomro

A trader shows US dollar bills at a currency exchange stand in Karachi, Pakistan on December 3, 2018. REUTERS / Akhtar Soomro

Trading in the normally quiet US financial and dollar markets is strongly uplifted.

Investors in these markets often seek to pick up a few basis points – or hundreds of percent – from a given move. To make these bets, they use massive leverage to magnify the small winnings.

This year, bets across these markets have been settled – often chaotically – and spread to the regular vanilla stock market.

And when you look at the reaction in corporate America, the dollar is wreaking havoc in the C-suite.

According to FactSet, 40% of the total turnover of S&P 500 companies is from abroad, where the technology and materials sectors get over 50% of their sales outside the USA

One positive thing to get out of the soaring dollar has been a turnaround in the recent bubble in commodities, which has begun to weigh on oil, gas and grain prices. Lower input prices are great for businesses and ultimately consumers, but it is volatility that is the real killer.

If earlier this year you were an airline trying to cover your fuel costs when WTI Crude Oil (CL = F) traded in the $ 120 / barrel range – you probably just wasted a lot of money as the price is now in the middle of the nineties.

So as we enter the earnings season, we will look for more clarity on the downturn from the recent currency movements – and what managers are seeing in the coming quarters. Analysts will then go ahead and revise their own expectations – expectations that are still extremely high by historical standards.

And as we have all learned this year, bad news is priced fast.

What to see today

Financial calendar

  • 8:30 AM ET: Empire ManufacturingJuly (-2.0 expected, -1.2 in the previous month),

  • 8:30 AM ET: Retail sales advancesmonth-over-month, June (0.9% expected, 0.3% in previous month)

  • 8:30 AM ET: Retail sales excluding carsmonth-over-month, June (0.7% expected, 0.5% in previous month)

  • 8:30 AM ET: Retail sales excl. cars and gasmonth-over-month, June (0.1% expected, 0.1% in previous month)

  • 8:30 AM ET: Retail control groupJune (0.3% expected, 0.0% in the previous month)

  • 8:30 AM ET: Import price indexmonth-over-month, June (0.7% expected, 0.6% in previous month)

  • 8:30 AM ET: Import price index excl. Petroleummonth-over-month, June (0.2% expected, -0.1% in previous month)

  • 8:30 AM ET: Import price indexyear-on-year, June (11.4% expected, 11.7% in previous month)

  • 8:30 AM ET: Export price indexmonth-over-month, June (1.2% expected, 2.8% in previous month)

  • 8:30 AM ET: Export price indexyear-on-year, June (expected 19.9%, 18.97% in the previous month)

  • 9:00 AM ET: Bloomberg July US Economic Survey

  • 9:15 ET: Industrial productionmonth-over-month, June (0.1% expected, 0.2% in previous month, downgraded to 0.1%)

  • 9:15 ET: Capacity utilizationJune (80.8% expected, 79.0% in the previous month, adjusted up to 80.8%)

  • 9:15 ET: Production (SIC) ProductionJune (-0.1% expected, -0.1% in previous month)

  • 10:00 AM ET: Company inventoriesMay (1.4% expected, 1.2% in previous month)

  • 10:00 AM ET: University of Michigan Sentimentpreliminary July (50 expected, 50 in the previous month)

  • 10:00 AM ET: University of Michigan current conditionspreliminary July (53.7 expected, 53.8 in the previous month)

  • 10:00 AM ET: University of Michigan expectationspreliminary July (expected 47, 47.5 in the previous month)

  • 10:00 AM ET: University of Michigan 1-year inflationpreliminary July (5.3 expected, 5.3% in previous month)

  • 10:00 AM ET: University of Michigan 5-10-year inflationJune final (3.0% expected, 3.1% in previous month)

Earnings

Formarked

  • Wells Fargo (WFC) is expected to report adjusted earnings of 80 cents per share. share with a turnover of 17.54 billion.

  • Black stone (BLK) is expected to report adjusted earnings of $ 7.90 per share with revenue of $ 4.65 billion.

  • Citigruppe (C) is expected to report adjusted earnings of $ 1.70 per share. share with a turnover of $ 18.48 billion.

  • BNY Mellon (BK) is expected to report adjusted earnings of $ 1.12 per share. share with a turnover of $ 4.18 billion.

  • UnitedHealth (UNH) is expected to report adjusted earnings of $ 5.19 per share. share with a turnover of $ 79.62 billion.

  • Progressive (PGR) is expected to report adjusted earnings of 85 cents per share. share with a turnover of 12.39 billion.

  • US Bancorp (USB) is expected to report adjusted earnings of $ 1.07 per share. share with a turnover of $ 5.92 billion.

  • State Street (STT) is expected to report adjusted earnings of $ 1.73 per share with revenue of $ 3 billion

  • PNC financial (PNC) is expected to report adjusted earnings of $ 3.14 per share. share with a turnover of $ 5.14 billion.

Postmarket

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