Why the rising dollar and falling euro are shaking global markets: Morning Brief

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Friday, 15 July 2022

By today’s newsletter Jared BlikreA reporter focusing on the Yahoo Finance markets. follow him on twitter @SPYJared.

US dollar (DX-Y.NYB) burning, reaching close parity with euro (EUR=X) for the first time in twenty years.

yen (JPY=X) fell 20% against the dollar last year – almost unheard of in the modern era.

Bitcoin (BTC-USD) It has lost 70% of its value against the dollar since the November record – not unheard of but painful.

Some of these may be great for Americans who shop or travel abroad, but these moves are wreaking havoc on global markets and leaving many investors scratching their heads.

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

Sell: what gives?

There are two important factors in the workplace.

First, US interest rates rise as Federal Reserve moves to tamper with Inflation hits 40-year high. And if global investors want to get paid at relatively higher interest rates here, they’ll sell their local currency, buy dollars, invest in US bonds and pocket the difference. This so-called “carry trade” has hedging costs, but it’s pretty simple in theory and is a hedge fund favorite.

Second, foreign investors in weak economies buy the dollar for its relative safety. Inflation is rising in the country and the political situation in the US is at least messy, but so far there is no concern among investors that the US government will not be able to meet its financial obligations.

Taken together, these port flows, along with large interest rate differentials, have caused investors to push the dollar up at an uncomfortable rate.

Much like the rise in interest rates, large movements in the dollar rate are wreaking havoc for global investors.

A trader displays US dollar notes at a currency exchange office in Karachi, Pakistan, December 3, 2018. REUTERS/Akhtar Soomro

Transactions in the normally quiet US Treasury and dollar currency markets are highly leveraged.

Investors in these markets are usually trying to get a few basis points — or one percent off — from a given move. To make these bets, they use large leverage to magnify small wins.

This year, the bets on these markets have slackened – often sporadically – spilling over into the plain vanilla stock market.

And dollars exploring the backlash in corporate America is wreaking havoc on the C-suite.

According to FactSet, 40% of S&P 500 companies’ total revenue comes from abroad, and the technology and materials sectors generate more than 50% of their sales outside the US.

One of the positives to come out of the rising dollar has been the recent reversal of the commodity bubble, which has begun to put pressure on oil, gas and grain prices. Low input prices are great for companies and ultimately consumers, but volatility is the killer.

If you were an airline earlier this year, WTI crude oil (CL=F) was trading in the $120/barrel range – you probably spent a lot of money considering the price was in the mid-nineties.

Therefore, as we enter the earnings season, we will seek further clarity on the repercussions of the latest currency movements and what executives are seeing in the coming quarters. Analysts will then start working and revise their own expectations – expectations that are still extremely high by historical standards.

And as we’ve all learned this year, the bad news is pricing in fast.

What to Watch Today?

economic calendar

08:30 ET: Imperial ManufactureJuly (expected -2.0, previous month -1.2),
08:30 ET: Retail Advanceon a monthly basis, June (0.9% expected, 0.3% in the previous month)
08:30 ET: Retail sales excluding automobileson a monthly basis, June (0.7% expected, 0.5% month-on-month)
08:30 ET: Retail sales excluding automobiles and gasolinemonth-to-month, June (0.1% expected, 0.1% in previous month)
08:30 ET: Retail Sales Control GroupJune (0.3% expected, 0.0% in previous month)
08:30 ET: Import Price Indexon a monthly basis, June (expected 0.7% vs. 0.6% in previous month)
08:30 ET: Import Price Index Excluding Oilmonth to month, June (expected 0.2%, -0.1% in previous month)
08:30 ET: Import Price Indexyear-over-year, June (expected 11.4% versus 11.7% in prior month)
08:30 ET: Export Price Indexon a monthly basis, June (1.2% expected vs 2.8% month-on-month)
08:30 ET: Export Price Indexyear-over-year, June (19.9% expected versus 18.97% in prior month)
09:00 ET: Bloomberg July United States Economic Survey
09:15 ET: industrial productionon a monthly basis, June (0.1% expected, 0.2% month-on-month, revised down to 0.1%)
09:15 ET: Capacity UtilizationJune (expected 80.8%, 79.0% for the previous month, revised upwards to 80.8%)
09:15 ET: Manufacturing (SIC) ProductionJune (anticipated -0.1%, -0.1% in previous month)
10:00 ET: Job InventoriesMay (1.4% expected, 1.2% in previous month)
10:00 ET: University of Michigan EmotionsJuly preliminary (50 expected, 50 in previous month)
10:00 ET: University of Michigan Current ConditionsJuly preliminary (expected 53.7, 53.8 in previous month)
10:00 ET: University of Michigan ProspectsJuly preliminary preparations (47 expected, 47.5 in previous month)
10:00 ET: University of Michigan 1-Year InflationJuly preliminary preparations (5.3% expected, 5.3% for previous month)
10:00 ET: University of Michigan 5-10 Year InflationJune finale (expected 3.0%, 3.1% in previous month)

Earning

pre market

Wells Fargo (WFC) is expected to report adjusted earnings of 80 cents per share on revenue of $17.54 billion.
Black Rock (BLK) is expected to report adjusted earnings per share of $7.90 on revenue of $4.65 billion.
Citigroup (C) is expected to report adjusted earnings per share of $1.70 on revenue of $18.48 billion.
BNY Mellon (UK) is expected to report adjusted earnings per share of $1.12 on revenue of $4.18 billion.
UnitedHealth (UNH) is expected to report adjusted earnings per share of $5.19 on revenue of $79.62 billion.
progressive (PGR) expected to report adjusted earnings of 85 cents per share on revenue of $12.39 billion
USA Bancorp (USB) is expected to report adjusted earnings per share of $1.07 on revenue of $5.92 billion.
State Street (STT) is expected to report adjusted earnings per share of $1.73 on revenue of $3 billion.
PNC Financial (PNC) expected to report adjusted earnings per share of $3.14 on revenue of $5.14 billion