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Favorable News for the Stock Market: Dollar is Finally Falling

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The 2022 stock market’s recovery is aided by the dollar’s decline from its recent high point.

The U.S. Dollar Index is approximately 2.4% lower than its multidecade high of 104.85, which was hit in the middle of May. This decline is primarily attributable to the fact that investors are a little less frightened about slowing economic growth, reasoning that central banks are not going to get much more aggressive in increasing interest rates to battle inflation. As economic anxiety subsides, global investors are less likely to rush to purchase safe-haven assets such as U.S. Treasury paper, which has led to a decline in dollar demand.

Similarly, rates on U.S. government debt have decreased from their recent peaks. The yield on two-year Treasury notes, for example, has decreased to 2.69 percent from 2.76 percent at the beginning of May, giving foreign investors less incentive to purchase dollars in order to acquire this debt. Declining yields diminish the attractiveness of owning dollars.

All of this is good news for stock investors. The dollar has gained 6.6% so far this year, while the S&P 500 has lost 13%. Since May 12, when the dollar peaked and began to decline, however, the benchmark has increased by over 6 percent.

It’s not only that a weaker dollar improves stock market sentiment in general. When the dollar declines, foreign-currency sales convert to more dollars, resulting in a profit for foreign currency sales companies. When the dollar weakens, a greater proportion of forecast adjustments involve upward earnings revisions, according to data compiled by Morgan Stanley strategists.

Numerous worldwide corporations’ stock values have already benefited. Microsoft (MSFT) stock, for example, has gained a little more than 6 percent since May 12. According to FactSet, over half of the business’s income comes from overseas. The company recently decreased its financial projections for the current quarter, citing fluctuations in foreign exchange. The midpoint of its range of revenue expectations declined by about 1 percent, and the midpoint of its range of per-share earnings forecasts fell by slightly more than 1 percent, so investors have every reason to appreciate the dollar’s decline.

Since May 12, shares of Caterpillar (CAT), which generates almost two-thirds of its sales outside the United States, have increased by 10 percent. Nike (NKE) derives a comparable proportion of sales from international markets, and its stock price has increased by 13 percent.

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All of this is positive for stocks to a certain extent, but the strength of the dollar continues to harm corporate profitability. Tom Essaye, the founder of Sevens Report Research, argued that the currency’s decline “will provide some relief for corporate earnings… but we still need to get the Dollar Index at or below 100 before we can say the currency is no longer a real headwind on earnings.”

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The German Yield Curve Inverted To Its Highest Level Since 1992 As Recession Fears Increased

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On Friday, the yield curve for German bonds traded at its steepest inversion level since 1992, which may be an ominous indication for the economy of the country with the largest GDP in Europe.

It came as rates on German 10-year bonds, which are viewed as a benchmark for the currency bloc, climbed on Friday but stayed on course for their third weekly decline in a row despite the fact that they rose. Prices go in the opposite direction of yields.

Late on Thursday, Germany’s yield curve continued to invert, with the difference between the country’s 2-year and 10-year government bond yields falling to -27 basis points (bps) and remaining there on Friday before rebounding to -23 bps. This indicated that the inversion was becoming more severe. According to data provided by Refinitiv, the decline to -27 bps represented the largest disparity since October of 1992.

An inversion is extremely unusual, and many economists believe that it can be used to predict future recessions.

When yields on bonds with longer maturities have a lower rate of return than those on bonds with shorter maturities, this indicates that investors believe the central bank will raise interest rates in the near future before lowering them in the long term in response to slowing growth.

According to Christoph Rieger, head of rates and credit research at Commerzbank, it is a hint that investors anticipate the European Central Bank (ECB) to delay its rate hikes or even decrease them next year. Rieger said this was a sign that investors expect the ECB to do one of these things.

On the other hand, he continued by saying, “I think they’ll continue hiking rates more than the market and many people are forecasting.”

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According to Rieger, the German curve has less predictive value than the American curve does since the German curve takes into account the many economies that are present in the euro zone.

The yield on Germany’s 10-year government bond increased by 8 basis points (bps) to 1.924% on Friday, but it was still on course to decline by more than 9 bps for the week.

The yield on the 2-year note, which is the most sensitive to forecasts regarding future ECB interest rate changes, increased by 5 basis points to 2.156%. It was projected to go up during the course of the coming week, which is a hint that investors anticipate additional rate hikes from the ECB in the near future.

Yields on longer-term bonds across the globe have experienced a precipitous decline this month as investors have become more optimistic that the Federal Reserve may be able to slow the pace at which it is increasing interest rates. This would reduce the amount of pressure being exerted on other central banks.

However, in their 2023 prognosis that was released on Thursday, the analysts at Societe Generale stated that they anticipate the yield on the German 10-year bond to surge back higher and reach 2.5% in the first quarter.

According to what they claimed, even though inflation has reached its highest point in the United States, it has not yet begun to decline in Europe. SocGen projected that the European Central Bank (ECB) would increase interest rates to 3% by May 2023, up from the current rate of 1.5%, and maintain that rate until the end of 2024.

On Friday, the yield on Italy’s 10-year government bond increased by 9 basis points to 3.761%, although it was still on course for its fifth consecutive weekly decline.

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Shares of Nike and Adidas May Perform Well During The World Cup

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While 32 nations compete for the World Cup in Qatar, both Adidas and Nike are keeping their fingers crossed that their stocks will do well.

With FIFA estimating that at least 5 billion people will watch the game, the most prominent soccer competition in the world presents a significant chance for manufacturers of sports gear to sell their jerseys, boots, and other products with teams and individual players.

During the month-long 2018 World Cup, shares of Adidas fell by 6% because the widely favored Germany, which played on an Adidas squad, was eliminated in the group stage. Conversely, France, which played on a Nike team, won the FIFA tournament. During the same time period, Nike’s gain of 4% was higher than the S&P 500’s gain of 1%.

During the quarterly conference call that Adidas held on November 9, the company stated that it anticipates World Cup-related revenues of approximately 400 euros ($415 million), which would equate to approximately 2% of additional yearly revenue.

A request for Nike to comment on the significance of the World Cup to the company’s sales was not immediately met with a response from the company.

The excitement surrounding the World Cup and team jerseys can provide a halo effect that drives sales of other kinds of merchandise, according to Tom Nikic, an analyst at Wedbush. This is true even though soccer-related merchandise only accounts for a small portion of both Adidas and Nike’s overall businesses.

“Do people in Germany buy a new set of shoes whenever they purchase a World Cup jersey? Or, if a team that is sponsored by Adidas ends up winning the whole thing, does the excitement that comes along with winning the World Cup cause people to buy more shirts than they normally would have? That’s where you’ll find some differences in approach, “Nikic remarked.

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As a result of the fact that Nike is supplying World Cup jerseys to 13 teams, including Brazil, France, and the United States, the company has surpassed Adidas as the market leader in this particular category. A total of seven teams, including soccer powerhouses Germany, Spain, and Argentina, will be wearing jerseys manufactured by Adidas.

Puma is providing jerseys for six of the teams, while New Balance and other firms are providing jerseys for the remaining teams.

After day four of the World Cup, teams wearing Nike have gained a total of 15 points, while teams wearing Adidas have accumulated a total of 11 points.

Shares of Nike have increased by more than 1 percent so far throughout the tournament, while those of Adidas and Puma have both decreased by more than 3 percent.

Nike teams Brazil and France are presently favored as the most likely to win the 2022 Cup, according to current betting odds.

Change in percentage during cup at the time of this writing.

Nike Inc 0.6% 1.2%

Adidas AG 1.1% -3.8%

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Puma SE -0.2% -3.5%

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Alibaba And Other Chinese Stocks Soar While Ignoring This Big Risk

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This month, Chinese technology stocks such as Alibaba BABA +3.30%  at the time of this writing, and others looked to have stopped their precipitous decline that had been going on for the past two years. Investors who are betting on a recovery may be missing the risk that is posed by China’s “zero Covid” policy and the extent to which these stocks are likely to continue to suffer.

Alibaba (ticker: BABA), along with the rest of the Chinese stocks technology sector, found itself on the wrong side of regulators in both Beijing and Washington in 2021, which resulted in a loss of about half of the company’s worth. The picture did not clear up much in 2022, with China’s rigorous rules to limit Covid-19 bringing in the lowest revenue growth the business has ever seen on record for the company.

The value of the market has been eroded steadily as a result of this. However, at the beginning of November, it appeared that things were about to take a turn for the better, as there were rumors that China was about to relax its laws around Covid-19, which were at least partially supported by material actions to relieve the pressure of limitations. The stock of Alibaba, which is representative of the entire technology industry and its sensitivity to expansion in the world’s second-largest economy, has seen a remarkable increase of 24 percent over the course of the past month. In comparison, the S&P 500 index has increased by 6% since the beginning of the year. After suffering through a difficult period over the past two years, it’s likely that investors are becoming overly enthusiastic too quickly.

We applaud recent efforts made by China to relax some of the stringent limitations that it has imposed. However, are investors  looking to purchase stocks expecting a release from lockdowns more sooner than what is reasonable?

Mark Haefele, the chief investment officer of UBS Global Wealth Management, stated in a recent note that “a meaningful reopening, which we define as a permanent end to snap lockdowns and other domestic mobility curbs, is most likely to take place in [the third quarter of 2023].” “A meaningful reopening” is defined as “an end to snap lockdowns and other domestic mobility curbs.” Although the end of the year 2023 is still quite a ways off, markets do function by factoring in events that take place over a longer time horizon. Between now and then, there are at least two important questions that remain: how terrible the Covid-19 situation continues to be in China, and what the recent consolidation of power by President Xi Jinping implies for a progressive policy on the coronavirus.

On Thursday, investors were given a jarring reminder of the first uncertainty as a result of China’s National Health Commission reporting more than 31,000 new cases of Covid-19. This is the biggest daily number reported since the start of the epidemic. Despite this, Alibaba stock was able to stage a comeback, sending the Hong Kong-listed shares 1.3% higher.

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