Weakening Stock Market Worsened By Strong Dollar

A weakening stock market won’t be bailed out by a strong dollar this time. Yes, Europe, Japan and the UK have low yields for now and much gloomier economic prospects, but money managers there are unlikely to be pouring money into the US stock market for much longer. There is no short-term low point yet.

“What is the pain point for the Fed here? We’re at 3,659 on the S&P 500 and think it could go up to 2,800, although I don’t want to be too grumpy,” said Vladimir Signorelli, head of Bretton Woods Research, a research firm focused on macro investing. “Another drop of 20% is quite possible,” he says.

As currencies in the other core economies weaken, it becomes more expensive for these foreign money managers to buy dollars.

But where else do you get 4% on a one-year T bill? Parking money in treasuries is still considered a safe investment by them. But that won’t really help the stock market unless there’s a Jerome Powell pivot at the Fed. Stocks hate rising interest rates. The consensus in the Beltway now is that a recession is the best way to fight inflation, and that’s what America gets.

The strong dollar — or more accurately, a rapidly fluctuating dollar — is a growing economic threat, the WSJ’s editorial writers said Thursday.

“Right now, it could help the Fed curb inflation by lowering the dollar prices Americans pay for imports, especially energy.” But American companies will soon find the dollar value of their foreign profits shrinking. Meanwhile, weak currencies are exacerbating inflation in America’s major trading partners,” the WSJ editors wrote. “If you think the eurozone’s energy crisis is bad now, see what happens the longer it takes them to import energy at 99 cents a euro.”

The US is doing better than Europe. But the Atlanta Fed’s GDP tracker has lowered its GDP forecast for the third quarter to just 0.3%, down from a previous forecast of 2% in mid-summer. The economy is getting weaker. The strong dollar has done nothing for the US economy.

“The raging dollar is negative for global risk assets, including those in the US,” said Brian McCarthy, head of Macrolens. “It’s putting tremendous pressure on dollar borrowers around the world, especially those in emerging markets. The Fed is on a path that will eventually lead to a credit crunch. It’s taking a while because we came out of the pandemic with very high nominal growth. But the interest rate path they set at Wednesday’s meeting is a surefire recipe for global financial stress,” he says. His Friday note to clients says it all: “The Coming Crash”.

Fed rate hikes are making the dollar “a wrecking ball,” says Brendan Ahern, CIO of KraneShares. Higher US interest rates mean that countries like Japan and those in Europe are lured into buying US bonds, which are certainly paying more than the nearly 1.5% you’re getting in Europe. This pulls money out of global stocks and into Treasuries or cash.

Over the past three months, investments in emerging markets have lost more than $10 billion in redemptions. Funds focused on Europe are much worse. They lost nearly $40 billion. Meanwhile, US equity funds saw $15 billion in inflows, some driven by inflows from Europe.

But how long can that take? Almost everyone on Wall Street is now banking on a recession. Last week Vanguard quoted recession chances as over 60%.

“Equity sentiment is weak and already appears to be pricing in an earnings slowdown,” said Mark Haefele, CIO of UBS Global Wealth Management. “We remain invested but are selective. Focus on Defense, Income, Value… and Security.”

Crude oil markets are also pricing in a slower economy, falling 5.5% just before the close on Friday. US automakers Ford, GM and Tesla
are all down more than 4.5% on expectations that soon-to-be-laid Americans won’t buy the Ford Lightning EV anytime soon. Even emerging markets are doing better than them. iShare MSCI Emerging Markets (
) ETF is down just over 2.6%.

Meanwhile, dollar futures are up 1.6%, suggesting there is no end in sight to the dollar’s rally.

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