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The Weekend Edition # 59
Volatile Markets, The Mighty US Dollar, Notes for Earnings Season, Busy week ahead
Welcome to another issue of the Weekend Edition.
Thank you to all who’ve read and subscribed to the newsletter this week!
Here’s what we cover:
Market Recap - Volatile Markets
Macro - The Might US Dollar
Earnings Results - Earnings season starts next week
Premium Post of the Week - What the OPEC+ cuts mean - A brief FAQ
The Week Ahead - Economic & Earnings Calendar
Closing Thoughts - Busy week ahead
Let’s dive in ⬇️
Market Recap - Oct 03 - Oct 07, 2022
The week ended badly once the jobs report came out. It would seem that the market has finally begun to believe the Fed’s narrative, and a strong report that saw the unemployment drop to 3.5% from 3.7% is certainly cause for the Fed’s tightening to continue aggressively.
We saw the markets rally during the week quite aggressively and while Friday was a tough day, overall the market came out green for the week.
The big news for the week was Oil. OPEC+ plus held an in-person meeting announcing production quota cuts of up to 2 million barrels per day starting Nov 2022 and ending Dec 2023. This sent the price of oil soaring and we’re up 16% on the week for WTI.
Corn is also looking bullish as we’re seeing a lot of open interest on the call side and long side for futures. With wheat harvests being poor, and the lower supply coming out of Europe, corn seems to be the commodity in demand right now.
As we head into earnings season and a week filled with economic data. Markets are sure to remain volatile.
Macro of the Week - The mighty US Dollar
The dollar index made a sharp pullback this week. Given that the dollar index is a weighted basket of the dollar against other currency, namely the European currencies, we saw a double hit - the USD weakening with the market and the GBP rebounding after the British government’s u-turn. Every time the market starts to price in a lower rate hike or the notion of a Fed pivot, we tend to see the index decline.
The strength of the US Dollar is inevitable as the Fed continues to tighten. With rates in the US going up, we have inflow of funds into the dollar-denominated bonds, which pushes up the strength of the dollar. With more funds pouring into these instruments, the rates continue to rise. It is a feedback loop.
Some countries have been able to front-run the Fed’s tightening and have managed to keep their currency more stable. An example is Brazil, where the Brazilian Real vs the USD is actually up for the year at around 4%.
A strong dollar has consequences:
It causes indirect monetary tightening for countries.
It makes exports more competitive, which is a positive for the country.
But, it also makes imports more expensive. This has led to a great many countries suffering particularly where oil is concerned as they have to pay for it in USD.
It hampers the overall demand for commodities, again because most commodities are priced globally in USD.
It exacerbates inflation, as a consequence.
It causes a country’s external debt repayments to become more expensive, as I’d written in some detail two weeks ago.
It hits the profitability of companies who have international operations, as we have seen throughout earnings season last quarter. And which company isn’t global nowadays?
Earnings of the Week
Not too many earnings this week. But, next week we gear up for yet another earnings season. We’re starting off on Thursday and Friday with Taiwan Semi, Blackrock and the banks. It is certainly going to be a rocky earnings season as we see a confluence of factors hit companies. We have a few things to look out for:
Inventory Glut - Write down of inventory
Supply chain issues not completely resolved
Slowing Global Demand and US demand
Cost of Capital because of rising interest rates
Cost of labor as inflation still persists
Lower Capex Spend; cut in Stock Buy Backs
Labor demand softening
That’s a long list of issues to look out for but, this is where we are. Earnings estimates are still too high. However, given the warning shots fired by Nike, AMD and FedEx, I do believe that more companies may even pre-announce or lower their guidance during earnings. Again, this could lead to companies outperforming estimates, and we see a temporary pop. It’s going to be a confusing season. We will probably need to watch very closely and stay away from betting on earnings.
The Week Ahead
We have a really busy week ahead of us next week.
Monday is Columbus Day in the US so the bond markets are closed but, the stock markets are open. We may see muted trading on Monday. Then we have PPI, CPI and Retail Sales numbers. And finally, we have earnings season kicking off on Thursday / Friday.
All of this is sure to cause quite a lot of volatility in the markets, and it’s imperative to try and remain flexible. I personally, would stay away from trading the markets before big events because we never know what the numbers will be and how the market reacts.
Here’s wishing you a happy weekend and safe investing.
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Ayesha Tariq, CFA
There’s always a story behind the numbers
None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have no affiliation with any of the companies that are mentioned.