Hopes that the Federal Reserve may be less aggressive in hiking borrowing costs than previously feared have rippled swiftly across markets in the past week. Stocks have rallied as bond yields have dropped. And it has brought the dollar’s rampage to a juddering halt.
The dollar index
which hit a 20-year high above 108.5 in July, is now near 105.5.
“Risks to dollar dominance may be rising,” says Evercore, and investors should position for the benefit a softer buck may bring to certain parts of the stock market.
There are two factors that will weigh on the greenback, one short term and the other long term, reckons the investment bank.
More immediately, softening inflation expectations could allow the Fed to slow the pace of monetary tightening, or even pause. Thus the interest-rate differentials with other major economies that have been supporting the U.S. currency will moderate.
This should also feed into equities more broadly. “A pause — or the end of the hiking cycle, only known in hindsight (which investors may have overzealously discounted this past week) — has tended to see stocks rally, albeit with elevated volatility,” says Evercore.
Looking further ahead, Evercore warns that U.S. government debt service costs are expected to rise to record levels, affected by quantitative tightening, “and the secular move to higher interest rates and the ever-ballooning debt, prospectively pressuring the ‘World’s Reserve Currency.’”
So, how best to benefit in stocks? Choose those with the highest international revenue exposures and for whom a weaker buck provides a competitive advantage. And it is also good if the rest of the world growth improves relative to the U.S.
Source: Evercore ISI
Evercore has dubbed this group the ‘Dollar Down Dominators’ and they can be found within the technology, energy, industrials communication services, consumer staples and discretionary sectors. Even better if many in the market have been betting against them.
“Names from these dollar-sensitive sectors with greater than 70% foreign revenue exposure and high short interest, underperforming their peer group in 2022…could outperform,” says Evercore.
For example, Nvidia
with its 84% foreign revenue exposure and the stock’s recent struggles, is a top pick.
Source: Evercore ISI
Conversely, stocks from these sectors with less than 30% foreign revenue exposure, low short interest, which have outperformed their peer group year-to-date — and which Evercore calls ‘Falling Dollar Falling Angels’ — could underperform. These include Lockheed Martin
and Kraft Heinz
S&P 500 futures
slipped 0.5% to 4,100 early Tuesday, easing back from near two-month highs. WTI crude futures
dropped 1% to $93.07 a barrel ahead of the latest meeting of the Organization of the Petroleum Exporting Countries on Wednesday. Gold
fell 0.1% to $1,787 an ounce and bitcoin
lost 0.8% to $22,841.
Markets are jittery, with Asian bourses notably weak, as traders worry about deteriorating relations between the U.S. and China over House Speaker Nancy Pelosi’s visit to Taiwan. Hong Kong’s Hang Seng Index
dropped 2.4% on Tuesday.
shares are surging 19%, after activist investor Elliot Management said it had become the group’s biggest investor.
The yield difference between U.S. 10-year Treasurys and 3-month notes has shrunk to just 9 basis points. An inversion of this spread would be seen as another market confirmation of recession in the world’s biggest economy.
It is another busy day for corporate earnings. Uber
are among those releasing their numbers before the market opens. After the close comes another big batch, including Advanced Micro Devices
U.S. economic data on Tuesday include JOLTS job openings for June, due at 10 a.m. Eastern.
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