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Tag: DXY

  • Oil prices jump after drone attack kills U.S. troops, escalating Mideast crisis

    Oil prices jump after drone attack kills U.S. troops, escalating Mideast crisis

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    Oil futures popped higher Sunday evening, after a drone attack that killed three U.S. service members in northern Jordan, blamed by the White House on Iran-backed militants, marked a major escalation of tensions in the Middle East.

    West Texas Intermediate crude for March delivery
    CL00,
    +1.22%

    CL.1,
    +1.22%

    CLH24,
    +1.22%
    was up $1.09, or 1.4%, at $79.10 a barrel on the New York Mercantile Exchange. March Brent crude
    BRN00,
    +1.15%

    BRNH24,
    +1.14%    ,
    the global benchmark, gained $1.11, or 1.3%, to trade at $84.66 a barrel on ICE Futures Europe.

    Much will ultimately depend on the U.S. response and whether Iran takes action aimed at shutting down the Strait of Hormuz, Tariq Zahir, managing member at Tyche Capital Advisors, told MarketWatch on Sunday afternoon.

    “We are on the cusp of this escalating, which could seriously impact the flow of crude oil,” he said.

    Three U.S. service members were killed and more than two dozen injured in a drone strike on a U.S. base in northeast Jordan, according to U.S. Central Command. They were the first U.S. fatalities in months of attacks on U.S. bases by Iran-backed militias since the start of the Israel-Hamas war in October.

    President Joe Biden attributed the Sunday attack to an Iran-backed militia group and said the U.S. “will hold all those responsible to account at a time and in a manner (of) our choosing.” News reports said U.S. officials were still working to conclusively identify the precise group responsible for the attack, but have assessed that one of several Iranian-backed groups is to blame.

    Some congressional Republicans called for direct retaliation on Iran.

    “We must respond to these repeated attacks by Iran & its proxies by striking directly against Iranian targets & its leadership. The Biden administration’s responses thus far have only invited more attacks. It is time to act swiftly and decisively for the whole world to see,” wrote Sen. Roger Wicker of Mississippi, the senior Republican on the Senate Armed Services Committee, in a post on X.

    Oil futures rallied last week to their highest since November, but with gains attributed in part to production outages in the U.S. and more upbeat expectations around economic growth.

    “Crude already has the wind to its back, so this will only offer further upside,” Chris Weston, head of research at Australian brokerage Pepperstone told MarketWatch in an email.

    With the U.S. election later this year, “Biden needs to strike a balance between increasing aggression that potentially puts U.S. serviceman lives in danger and could potentially raise the cost of living…while also showing a defiant stance that shows his resolve against terror,” Weston said.

    Oil prices have seen short-lived rallies around developments in the Middle East since the start of the Israel-Hamas war, but have failed to build in a lasting geopolitical risk premium. West Texas Intermediate crude
    CL00,
    +1.22%

    CL.1,
    +1.22%    ,
    the U.S. benchmark, remains around $15 below its 2023 peak in the mid-$90s set in late September. Brent crude
    BRN00,
    +1.15%    ,
    the global benchmark, pushed back above $80 a barrel last week.

    Attacks by Iran-backed Houthi militants on Red Sea shipping have forced a rerouting of tankers and cargo ships. For crude, that’s had implications for the physical market but hasn’t interrupted the flow of crude from the Middle East.

    A move by Iran aimed at closing off the Strait of Hormuz, the world’s biggest oil-transportation chokepoint, remains a top worry.

    The strait is a narrow waterway that links the Persian Gulf with the Gulf of Oman and the Arabian Sea. At its narrowest point, the waterway is only 21 miles wide, and the width of the shipping lane in either direction is just two miles, separated by a two-mile buffer zone.


    Energy Information Administration

    Around 21 million barrels a day of crude moved through the waterway in the first half of 2023, equivalent to around a fifth of daily global consumption, according to the U.S. Energy Information Administration.

    The U.S. stock market has largely looked past Middle East tensions, with the S&P 500
    SPX
    returning to record territory this month, while the Dow Jones Industrial Average
    DJIA
    has also set a series of records.

    Dow futures
    YM00,
    -0.20%
    were off 94 points, or 0.3% as Asian trading got under way, while S&P 500 futures
    ES00,
    -0.22%
    fell 12 points, or 0.2%, and Nasdaq-100 futures
    NQ00,
    -0.24%
    lost 0.3%.

    Read: Stock-market rally faces Fed, tech earnings and jobs data in make-or-break week

    Away from oil, there were no signs of a significant surge in demand for instruments that traditionally serve as havens during periods of increased geopolitical tension. Futures on U.S. Treasurys
    TY00,
    +0.21%
    saw a modest rise of 0.2%, while the U.S. dollar
    DXY
    was little changed versus major rivals and gold futures
    GC00,
    +0.41%
    ticked up 0.4%.

    Escalating Middle East tensions won’t go unnoticed by traders, but probably doesn’t warrant a “solid derisking,” Weston said, particularly with investors facing a barrage of major market events in the week ahead.

    For U.S.-focused investors, the week ahead features a Federal Reserve policy meeting, earnings from tech industry heavyweights and a crucial December jobs report.

    The Middle East situation “won’t take us too far off the rates, growth track, but we have an eye on whether this escalates,” Weston said.

    —Associated Press contributed.



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  • The U.S. dollar had a strong start to 2024. Here’s why it’s unlikely to last.

    The U.S. dollar had a strong start to 2024. Here’s why it’s unlikely to last.

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    The U.S. dollar has had a relatively strong start to 2024 — but some analysts believe the greenback is still more likely than not to depreciate over the course of this year. 

    The ICE U.S. Dollar Index
    DXY,
    which tracks the currency against a basket of six major rivals, has climbed about 2.1% so far this year, per Dow Jones Market Data.

    The dollar has risen as traders scale back their expectations on when the Federal Reserve will begin cutting interest rates this year, according to analysts at BofA Global Research. 

    As recently as late December, traders were pricing a likelihood as high as 90% for a rate cut in March — but those chances have since fallen to around 46% as of Friday, according to the CME FedWatch Tool. Meanwhile, the total amount of rate cuts priced in for this year, which reached as high as 170 basis points in mid-January, has now slipped to around 135 to 150 basis points.

    However, the greenback is likely to see depreciation throughout the rest of this year, analysts at the investment bank wrote in a Thursday note, adding that much of the retreat would likely happen in the second half of 2024.

    The BofA analysts said expect no recession this year and anticipate that the Federal Reserve will start cutting its key policy rate in March. Such a scenario is negative for the dollar, as the Fed’s easing would likely support risk assets with U.S. economic growth remaining resilient, according to the analysts.

    Based on historical data, the ICE U.S. Dollar Index’s performance has been mixed from the onset of the Fed’s first rate cut over the past six cycles, and has been relatively flat on average over the following quarters, the analysts said.

    “This is due in large part to the USD’s perceived ‘safe haven’ status and its negative correlation to risk, as cutting cycles have often been associated with recessions,” they wrote.

    Jonathan Petersen, senior market economist at Capital Economics, echoed that point in a Thursday note. He expects the dollar to face headwinds from strong risk appetite in global markets and falling bond yields in the U.S. over the course of the year, and anticipates the greenback will remain rangebound against most major currencies for most of 2024.

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  • Oil prices post first weekly gain in 8 weeks amid ship attacks in Red Sea

    Oil prices post first weekly gain in 8 weeks amid ship attacks in Red Sea

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    Oil futures fell on Friday, but finished off the session’s lows to eke out a gain for the week — the first for U.S. and global benchmark crude prices in eight weeks.

    Attacks on ships traveling through the Red Sea, blamed on Yemen’s Houthi rebels, raised the potential for disruptions to the transport of oil and other goods, providing some support for prices.

    Oil saw larger declines early Friday after a Federal Reserve official walked back dovish comments made earlier this week by the Fed Chair Jerome Powell, helping to strengthen the U.S. dollar.

    Price action

    • West Texas Intermediate crude for January
      CL00,
      +0.49%

      CL.1,
      +0.49%

      CLF24,
      +0.49%
      declined by 15 cents, or 0.2%, to settle at $71.43 a barrel on the New York Mercantile Exchange, with prices ending 0.3% higher for the week, according to Dow Jones Market Data.

    • February Brent crude
      BRN00,
      +0.52%

      BRNG24,
      +0.52%      ,
      the global benchmark, fell 6 cents, or nearly 0.1%, to $76.55 a barrel on ICE Futures Europe, settling 0.9% higher for the week.

    • January gasoline
      RBF24,
      -0.16%
      added 0.9% to $2.14 a gallon, up almost 4.3% for the week, while January heating oil
      HOF24,
      +0.20%
      climbed 1.1% to $2.62 a gallon on Nymex, marking a weekly rise of 1.5%.

    • Natural gas for January delivery
      NGF24,
      -0.88%
      gained 4.1% to $2.49 per million British thermal units, but still logged a weekly loss of 3.5%.

    Price support

    Danish shipping company A.P. Moeller-Maersk
    MAERSK.A,
    +7.52%
    said it will pause all of its container shipments through the Red Sea until further notice and detour them around Africa, Reuters and Bloomberg reported Friday, amid rising risks to its fleet posed by Houthi militants.

    The Red Sea is “one of the hot pockets of seaborne crude flows,” accounting for approximately 10% of global volume, said Manish Raj, managing director at Velandera Energy Partners. “Although the attackers lack sophistication … shipping crews are even less sophisticated, making them easy targets.” 

    A potential blockage of the Red Sea route would be “chaotic indeed, but not nearly as detrimental as blockage of [the] Strait of Hormuz near Iran, for which there is no viable alternative,” Raj said.

    Read from the AP: How are Houthi attacks on ships in the Red Sea affecting global trade?

    For now, there is concern over higher insurance costs for these ships, said Phil Flynn, senior market analyst at the Price Futures Group.

    “With ships in the Red Sea continuing to be at high risk, ‘it won’t take that much for the market’ to see oil prices spike if an oil tanker should be hit.”


    — Phil Flynn, Price Futures Group

    Obviously, the risk to oil supply is large, although “so far, most of the attacks have been on cargo ships and not oil-related ships,” Flynn told MarketWatch.

    However, as ships in the Red Sea continue to be at high risk, “it won’t take that much for the market” to see oil prices spike if an oil tanker is hit, Flynn said.

    For the week, both U.S. and global benchmark crude prices posted gains.

    “The combination of lower U.S. inventories, stronger economic data, and improved OPEC compliance [with production cuts] for the month of November were the highlights of the week,” said Peter McNally, global head of sector analysts at Third Bridge.

    “However, there are ongoing seasonal challenges that forced OPEC to sustain production cuts through the first quarter of 2024, so it remains to be seen if they have done enough to prevent inventories from continuing their upward trend,” he said.

    Read The Year Ahead: Why oil may not see a return $100 a barrel in 2024

    Price pressures

    Oil had been trading lower early Friday after New York Federal Reserve President John Williams told CNBC that it is “premature” to discuss whether it is time to cut interest rates. “We aren’t really talking about cutting interest rates right now,” Williams said.

    That ran contrary to Powell’s comments Wednesday that Fed officials were starting to discuss when to cut rates.

    After the euphoria in the U.S. stock market over the Powell “pivot party” on Wednesday, we got a “wake-up call” from Williams when he pushed back on market expectations for a March rate cut, Michael Hewson, chief market analyst at CMC Markets UK, said in market commentary.

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  • Why the U.S. economy isn't out of the woods as stock market soars

    Why the U.S. economy isn't out of the woods as stock market soars

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    A rally in the U.S. stock and bond markets in the past week defied the bears and fueled hopes for more gains to come by year-end and in 2024 as Wall Street bought into the idea that the economy will pull off a “soft landing” after a run of interest-rate hikes by the Federal Reserve.

    But market skeptics are putting investors on alert that the “soft-landing” scenario is still at risk with consumer spending and job growth slowing, along with corporate earnings.  

    “The equity market is misguided,” said Josh Schachter, senior portfolio manager at Easterly Investment Partners, in a phone interview with MarketWatch. “The markets are behaving in almost a bipolar fashion — some asset classes such as bonds
    BX:TMUBMUSD10Y,
    oil
    BRN00,
    -0.29%    ,
    and dollar
    DXY,
    are being priced for a recession, while other assets such as equities and bitcoin
    BTCUSD,
    +2.16%    ,
    are priced risk-on.” 

    U.S. stocks built on their November gains in the past week, with the S&P 500 index
    SPX
    ending at new 2023 high on Friday and the Dow Jones Industrial Average
    DJIA
    logging its fifth week in the green. The rebound in stocks was due in part to bond investors starting to believe the Fed is done raising interest rates and is likely to begin cutting them by the first quarter of 2024. 

    Meanwhile, the narrative that a resilient labor market and steadier-than-expected economic growth should keep a recession at bay has gained traction, bolstering the “goldilocks” scenario for the financial markets. 

    See: These two leading indicators suggest a U.S. recession has already begun, according to Wall Street’s favorite permabear

    However, signs are emerging that consumer spending, which accounts for about 70% of the U.S. economic output and has boosted the economy this year, has likely run its course following the post-pandemic recovery. Credit card and car loan delinquency rates are rising, student loan payments have resumed, consumer spending is cooling, and there are warnings from top retailers.

    Joseph Quinlan, head of CIO market strategy for Merrill and Bank of America Private Bank, said the “softness” in the U.S. consumer sector is visible but not huge, referring to that as “a canary in a coal mine,” he told MarketWatch via phone on Thursday. 

    The pullback in consumer spending is welcome news for Fed officials, who have increased interest rates 11 times since March 2022 to get inflation back to its preferred target of 2%. However, some analysts are worried that high interest rates and a decline in pandemic savings could eventually translate to weaker consumers in 2024, potentially another sign of a long-predicted slowdown in the U.S. economy.

    “One of the things I’m most concerned about is consumers’ ability to continue to pace the economy — you’ve got several headwinds that haven’t really borne completely out yet,” said Jason Heller, senior executive vice president at Coastal Wealth. “Does the consumer continue to behave the way they behaved the last 36 months? I think you will eventually see a slowdown in consumer spending which is going to mandate a slowdown in the labor market.” 

    Lauren Goodwin, economist and portfolio strategist at New York Life Investments, acknowledged that a modest slowdown in inflation and employment growth means that a “Fed relief rally” in stocks can be sustained, but her concern is this late-cycle limbo is no different than those of the past, which is a moment of “goldilocks” before the very reason that inflation is moderating — slowing economic growth and employment — becomes clear in the data.

    See: ‘We Are Still Headed for a Pretty Hard Landing,’ Ex-Treasury Secretary Larry Summers Says

    That’s why the November employment report, which will be released by the Bureau of Labor Statistics next Friday at 8:30 a.m. Eastern, will be key for investors to watch. The U.S is expected to add 172,500 jobs in November after a 150,000 increase in the prior month, according to economists polled by Dow Jones. The percentage of jobless Americans seeking work is forecast to stay the same at 3.9%, leaving it at the highest level since the beginning of 2022.

    See: U.S. job growth pick up on the radar this coming week

    In fact, nonfarm payroll report publication days have been among the most volatile for stocks in 2023, compared with the release of monthly consumer-price index readings, which sparked some of the biggest daily up and down moves for the S&P 500 and other major indexes in 2022. 

    See also: Do CPI days still rock the stock market? How 2023 stacks up to 2022

    This year, the S&P 500 saw an absolute average percentage change of 1.12% on employment situation release dates, compared with an average percentage move of 0.64% on CPI days, according to figures compiled by Dow Jones Market Data. 

    That said, analysts are skeptical if the employment data is able to tell “a radically different story” but suggest the labor market will remain relatively tight into 2024, said Quinlan and Lauren Sanfilippo at Merrill and Bank of America Private Bank, in a phone interview. 

    See: What 2024 S&P 500 forecasts really say about the stock market

    Too much optimism in 2024 earnings growth

    Corporate America and their shares are telling investors a different story about next year. 

    With an estimated average S&P 500 earnings growth of 11.7% next year, the U.S. stock market is nowhere near recessionary concerns, said Heller. “We’ve [the stocks] priced in pretty significant growth in 2024.” 

    Strategists at Merrill and Bank of America Private Bank are in the camp of expecting a “mid-single digit” earnings growth for the S&P 500 in 2024, as earnings have troughed and the economy will fall back to the 2%-level of real growth after high rates confine consumer spending and corporate profits, cooling a red-hot economy. 

    To be sure, Wall Street analysts tend to overestimate the earnings-per-share (EPS) for the S&P 500, said John Butters, senior earnings analyst at FactSet. 

    The current bottom-up EPS estimate for the S&P 500 in 2024 is $246.30. If that holds true, that would be the highest EPS number reported by the large-cap index since FactSet began tracking this metric in 1996. 

    However, over the past 25 years, the average difference between the EPS estimate at the beginning of the year and the actual EPS number has been 6.9%, meaning analysts on average have overestimated the earnings one year in advance, said Butters in a Friday note (see chart below).

    SOURCE: FACTSET

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  • Long U.S. dollar now seen as the most crowded trade, but bodes ill for the greenback

    Long U.S. dollar now seen as the most crowded trade, but bodes ill for the greenback

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    Long positions in the U.S. dollar is now considered the most crowded trade, according to a survey conducted by the Bank of America with global fund managers, but the greenback is likely near a peak, the bank said.

    The bank surveyed 67 fund managers managing $997 billion assets under management from the United States, United Kingdom, Continental Europe and Asia from October 6 to 11.

    The response represents a shift from early August as fund managers surveyed became more concerned about interest rates in September, according to the Bank of America note. 

    The latest survey bodes ill for the U.S. dollar
    DXY,
    as the equity rally this year has partially corrected and bond yields risen, after earlier making it to the most crowded trade, according to the bank’s strategists. 

    “We believe USD is near the peak, further strength requires a change in narrative,” the strategists wrote. 

    The ICE U.S. Dollar Index
    DXY,
    which measures the greenback’s strength against a basket of rivals, has slightly pulled back from its highest close in 11 months at 107 reached on Oct. 3, according to FactSet data. The index is mostly flat on Friday at around 106.6.

    Strong economic data in the U.S. coupled with a relatively more hawkish Federal Reserve than other major central banks, could be the most likely reason to support further strength in the dollar, according to the fund managers surveyed.


    BofA Global Research

    Meanwhile, the biggest downside risk to the greenback is if the U.S. economy sees a hard landing which will prompt the Federal Reserve to cut its policy interest rates. 


    BofA Global Research

    Respondents of the survey think that rate cuts are currently underpriced, and they think the Fed is likely to cut rates the most among major central banks. 

    “This should erode faith in USD strength, and suggests that USD longs may indeed be vulnerable,” the strategists noted. 

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  • Dow Jones ekes out gain Friday, stocks mostly advance for the week as Israel-Gaza war escalates

    Dow Jones ekes out gain Friday, stocks mostly advance for the week as Israel-Gaza war escalates

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    U.S. stocks closed mostly lower Friday, but the Dow Jones and S&P 500 posted weekly gains, as the Israel-Gaza war appeared to escalate heading into the weekend. The Dow Jones Industries
    DJIA,
    +0.12%
    rose about 39 points, or 0.1%, on Friday, ending near 33,670, according to preliminary FactSet data. The S&P 500 index
    SPX,
    -0.50%
    fell 0.5% and the Nasdaq Composite Index
    COMP,
    -1.23%
    closed 1.2% lower. The S&P 500’s energy segment outperformed Friday, gaining 2.3%, as U.S. benchmark crude surged nearly 6% after Israel ordered more than a million people in Gaza to evacuate to the south. Treasury yields fell, with the 10-year Treasury
    TMUBMUSD10Y,
    4.626%
    rate retreating to 4.628% Friday, snapping a 5-week yield climb, according to Dow Jones Market Data. Bond prices and yields move in the opposite direction. Investors bought other haven assets too, including gold
    GC00,
    +0.23%
    and the U.S. dollar
    DXY,
    +0.07%    .
    Wall Street’s “fear gauge”
    VIX,
    +15.76%
    also touched its highest level in more than a week. Even so, the Dow Jones booked at 0.8% weekly gain, the S&P 500 advanced 0.5% and the Nasdaq fell 0.2%.

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  • U.S. stocks end higher despite climbing oil prices, Israel-Gaza war

    U.S. stocks end higher despite climbing oil prices, Israel-Gaza war

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    U.S. stocks booked back-to-back gains on Monday, despite rising oil prices and a deadly weekend assault on Israeli by Hamas that left hundreds dead. The Dow Jones Industrial Average
    DJIA,
    +0.59%
    rose about 197 points, or 0.6%, ending near 33,604, shaking off earlier weakness, while the S&P 500 index
    SPX,
    +0.63%
    advanced 0.6% and the Nasdaq Composite Index
    COMP,
    +0.39%
    gained 0.4%, according to preliminary FactSet data. U.S. benchmark oil prices
    CL00,
    +4.34%
    rose 4.3% to $86.38 a barrel as traders gauged potential implications of the Israel-Gaza war on crude supplies from the Middle East. Investors also flocked to haven assets, including gold
    GC00,
    +1.62%
    and the U.S. dollar
    DXY,
    +0.03%    ,
    while cash trading in the $25 trillion Treasury market was closed for the Columbus Day and Indigenous Peoples Day holiday. Israel on Monday seal off the Gaza Strip from food, fuel and other supplies as the conflict between Israel and Hamas intensified, according to the Associated Press.

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  • ‘Fear trade’: What Israel-Hamas war means for oil prices and financial markets

    ‘Fear trade’: What Israel-Hamas war means for oil prices and financial markets

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    Oil traders on Sunday said crude prices were likely to remain supported in the near term, as investors assessed the fallout from the surprise attack by Hamas on Israel and focused on the role played by Iran and the potential impact on that country’s petroleum exports.

    The conflict may also hold market-moving consequences for talks aimed at normalizing relations between Saudi Arabia and Israel.

    “While in the short term there is no impact directly on supply, it’s obvious how things play out over the next 24 to 48 hours could change that,” Phil Flynn, an analyst at Price Futures Group in Chicago, told MarketWatch.

    Brent crude futures
    BRN00,
    +4.17%    ,
    the global benchmark, and West Texas Intermediate oil futures
    CL00,
    +4.35%

    CL.1,
    +4.35%
    jumped more than 3% when the market opened Sunday night. U.S. stock-index futures
    ES00,
    -0.66%
    traded lower, while traditional havens, including gold
    GC00,
    +0.98%
    and the U.S. dollar
    DXY
    rose.

    Movements in oil prices, meanwhile, will also serve as a gauge for broader market worries around the conflict, analysts said.

    See: Israeli stocks slump in first day of trade since Gaza attack

    Hamas, the Iran-backed, Palestinian militant group that controls the Gaza Strip, staged a sweeping attack on southern Israel early Saturday. News reports put Israeli deaths at more than 700. The Gaza Health Ministry said 413 people, including 78 children and 41 women, were killed in the territory as Israel retaliated, according to the Associated Press. Injuries in Israel and Gaza were both said to be around 2,000.

    Israeli troops on Sunday were engaged in fierce fighting in an effort to retake territory in southern Israel as Hamas launched further barrages of missiles. Israeli citizens and soldiers were captured and are being held hostage in Gaza, according to the Israeli military.

    Read: Israel declares war, approves ‘significant’ steps to retaliate after surprise attack by Hamas

    The Wall Street Journal reported that Iranian security officials helped Hamas plan the attack. U.S. officials said they haven’t seen evidence of Iran’s involvement, the report said.

    “Iran remains a very big wild card and we will be watching how strongly [Israeli] Prime Minister Netanyahu blames Tehran for facilitating these attacks by providing Hamas with weapons and logistical support,” said Helima Croft, head of global commodity strategy at RBC Capital Markets, in a Sunday morning note.

    Iranian crude exports have risen in recent years, indicating the Biden administration has adopted a soft approach to sanctions enforcement, Croft said. Some analysts have put Iranian crude production at more than 3 million barrels a day and exports above 2 million barrels a day — the highest levels since the Trump administration pulled the U.S. out of the Iranian nuclear accord in 2018, according to the Wall Street Journal. Sales fell to around 400,000 barrels a day in 2020 as the U.S. reimposed sanctions.


    RBC Capital Markets

    Hedge-fund manager Pierre Andurand, one of the world’s best energy traders, said in a social-media post that a large price spike for oil isn’t likely in coming days, but emphasized the market focus on Iran.

    “Now, over the last six months we have seen a very large increase in Iranian supply due to weak enforcement of sanctions. As Iran is also behind Hamas’ attacks on Israel, there is a good probability that the U.S. administration will start enforcing those sanctions on Iranian oil exports more tightly,” he wrote. “That would further tighten the oil market. Also the probability that this will lead to direct conflict with Iran is not zero.”

    Meanwhile, the Wall Street Journal late Friday reported that Saudi Arabia had told the White House it would be willing to boost oil production next year if crude prices remained high, as part of an effort aimed at winning goodwill in Congress for a deal that would see the kingdom recognize Israel and in return get a defense agreement with the U.S.

    A Saudi production cut of 1 million barrels a day that was implemented in July and recently extended through the end of the year has been given much of the credit for a rally that took global benchmark Brent crude within a few dollars of the $100-a-barrel threshold before retreating this past week. The U.S. benchmark last week briefly topped $95 a barrel for the first time in 13 months.

    In a statement, Saudi Arabia’s foreign ministry called on both sides to halt the escalation and exercise restraint, but also recalled its “repeated warnings of the dangers of the explosion of the situation as a result of the continued occupation, the deprivation of the Palestinian people of their legitimate rights, and the repetition of systematic provocations against its sanctities.”

    With the Israeli government vowing an unprecedented response, “it is hard to envision how Saudi normalization talks can run on a parallel track to a ferocious military counteroffensive,” said RBC’s Croft.

    Beyond oil, much will depend on the potential for the conflict to widen.

    Stocks have stumbled, retreating from 2023 highs set in late July, as yields on U.S. Treasurys have jumped. The yield on the 30-year Treasury bond
    BX:TMUBMUSD30Y
    rose 23.2 basis points last week to end Friday at 4.941%, its highest since Sept. 20, 2007. The 10-year Treasury note yield
    BX:TMUBMUSD10Y
    topped 4.80% on Oct. 3, its highest since Aug. 8, 2007, and ended the week at 4.783%. Yields and debt prices move opposite each other.

    The U.S. bond market will be closed Monday for the Columbus Day and Indigenous People’s Day holiday, while U.S. stock markets will be open.

    The S&P 500 index
    SPX
    rose 0.5% last week, breaking a streak of four straight weekly declines, while the Dow Jones Industrial Average 
    DJIA
    fell 0.3% and the Nasdaq Composite
    COMP
    gained 1.6%.

    “I think there will be a negative reaction. However, I don’t see a meltdown,” Peter Cardillo, chief market economist at Spartan Capital Securities, told MarketWatch.

    Traditional haven plays, including gold, the dollar and U.S. Treasurys may see a strong move upward, with price gains for Treasurys pulling yields down.

    “Geopolitical crises in the Middle East have usually caused oil prices to rise and stock prices to fall,” said economist Ed Yardeni, president of Yardeni Research Inc., in a note. “More often than not, they’ve also tended to be buying opportunities in the stock market.”

    The broader market reaction will depend on whether the crisis turns out to be a short-term flare-up or “something much bigger, like a war between Israel and Iran,” he said. The latter is unlikely, but tensions between the two are likely to escalate.

    “The price of oil may be a good way to assess the likelihood of a broader conflict,” he said.

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  • S&P 500 scores best day in 3 weeks as bond yields ease back

    S&P 500 scores best day in 3 weeks as bond yields ease back

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    U.S. stocks finished higher on Wednesday as yields on long government bonds retreated from 16-year highs, helping lift the S&P 500 to its best day in three weeks. The Dow Jones Industrial Index
    SPX,
    +0.81%
    gained about 125 points, or 0.4%, ending near 33,128, according to preliminary FactSet data. The boost, however, failed to push the blue-chip index back into the green for the year, a day after its gains for 2023 were erased. The S&P 500 index
    SPX,
    +0.81%
    rose 0.8%, marking its biggest daily climb since September 14, according to FactSet data. The Nasdaq Composite Index
    COMP,
    +1.35%
    shot up 1.4%. U.S. bond yields have surged since late September when the Federal Reserve indicated that rates likely will stay higher for longer than initially anticipated as it works to keep inflation in check. The sharp bond-market repricing has made buyers reluctant to step in, sending yields higher and creating ripples in financial markets. The 10-year Treasury
    TMUBMUSD10Y,
    4.739%
    fell 6.6 basis points Wednesday to 4.735%, while the 30-year Treasury yield
    TMUBMUSD30Y,
    4.868%
    shed 6 basis points to 4.876%, after briefly topping 5% late Tuesday. Investors remain focused on political upheaval in Washington and the prospect of a November government shutdown. Friday also brings the monthly jobs report for September, which is expected to show a cooling labor market, but still a low 3.7% unemployment rate.

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  • Japanese yen sees wild swing amid intervention fears after falling to nearly 1-year low versus dollar

    Japanese yen sees wild swing amid intervention fears after falling to nearly 1-year low versus dollar

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    The Japanese yen roared back violently against the dollar Tuesday amid fears of intervention by Tokyo after trading at its weakest in nearly a year after a round of strong U.S. employment data.

    The U.S. dollar fetched 148.92 Japanese yen
    USDJPY,
    -0.42%    ,
    down 0.6%, after trading as low as 147.415 yen in a sharp tumble from a session high of 150.18 yen. The dollar hadn’t traded above the 150-yen level since Oct. 21, 2022, according to FactSet data.

    Japanese authorities in the fall of 2022 intervened in the market, selling dollars and buying yen as the Japanese currency slumped. Currency traders had been on the lookout for renewed intervention as the yen extended its recent weakness. Japan’s Ministry of Finance has issued several verbal warnings over recent weeks, but they have failed to arrest the yen’s fall.

    Finance Minister Shunichi Suzuki earlier Tuesday had warned that “all measures are on the table with a high sense of urgency,” according to Nikkei.

    But FX analysts were skeptical the yen’s bounceback was due to intervention.

    “Talk of intervention but I am skeptical.  It seems like the market is doing it to itself with orders to sell dollar above JPY150.  BOJ intervened three times last year, none was during US time zone,” said Marc Chandler, managing director at Bannockburn Global Forex, in a note to clients.

    The dollar had initially extended its rally versus the yen and other major currencies after data showed U.S. job openings jumped unexpectedly to 9.6 million in September, up from a revised 8.9 million in August. Analysts surveyed by The Wall Street Journal had expected a reading of 8.8 million.

    Continued strength in the labor market added to a rise in Treasury yields
    BX:TMUBMUSD10Y,
    which in turn boosted the dollar. The ICE U.S. Dollar Index
    DXY,
    a measure of the currency against a basket of six major rivals, remained up 0.1% at 107.06, after trading at its highest since November.

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  • Why a surging U.S. dollar is about to become a problem for stock-market bulls

    Why a surging U.S. dollar is about to become a problem for stock-market bulls

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    Analysts are ringing alarm bells over a surge by the U.S. dollar, warning it may be set to serve as another “headwind” for U.S. stocks as they struggle through a losing September.

    “Since early August, the USD (U.S. dollar) has climbed above its average [second-quarter] level. That means that for corporates, the USD switched back from tailwind to headwind…and an increasing one” as investors close out the third quarter this week, said Andrew Greenebaum of Jefferies, in a Saturday note.

    A rapidly strengthening dollar is often seen as a problem for big, U.S. multinationals. A stronger dollar makes their goods more expensive to overseas buyers. And income earned overseas will be less valuable on their income statements.

    The U.S. dollar went on a tear in 2022 as Treasury yields surged in response to the Federal Reserve’s aggressive series of interest-rate hikes. The ICE U.S. Dollar Index
    DXY,
    a measure of the currency against a basket of six major rivals, hit a 20-year high last September, but then retreated sharply.

    The pullback, which saw the index drop from a high near 115 last fall to a low below 100 in July, was seen as a tailwind for stocks. The S&P 500
    SPX
    saw its bear-market bottom in October of last year, and built on its rally through the winter and spring. Since late July, stocks have suffered a pullback, with the large-cap benchmark down around 5.5% from its 2023 high set on July 31.

    “After creating a substantial headwind to profits for U.S. multinationals, it’s been a tailwind [year to date]. But that all changed roughly 10 weeks ago,” Greenebaum wrote.

    The DXY has ripped higher by around 4% in that short time frame, a move more than one standard deviation outside the norm, he noted. And that sort of move has tended have implications for both company fundamentals and asset allocation.


    Jefferies

    The chart above breaks out the average performance of key indexes, including the S&P 500, S&P 500 cyclicals, small-caps (RTY), the Nasdaq-100
    NDX
    and the MSCI All-World excluding U.S.

    Small-caps are typically expected to outperform during periods of dollar strength, since most of their revenues come from within the U.S. Cyclical stocks are expected to suffer.

    A rising dollar also tightens financial conditions, adding to other headwinds for stocks heading into the fourth quarter, said analysts at Morgan Stanley, in a Monday note (see chart below).


    Morgan Stanley Wealth Management

    “With the 10-year real rate at a 16-year high above 2.0%, the U.S. dollar is surging, producing meaningful headwinds for U.S. multinationals,” they wrote.

    “Oil is becoming a constraint as well, with West Texas Intermediate crude
    CL00,
    +0.01%
    up more than 30% from its spring trough. Together with indications that bank lending and credit availability are already shrinking, these factors suggest the liquidity backdrop may worsen,” they wrote.

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  • U.S. dollar scores first ‘golden cross’ since July 2021, signaling more trouble for stocks ahead

    U.S. dollar scores first ‘golden cross’ since July 2021, signaling more trouble for stocks ahead

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    The U.S. dollar has completed its first “golden cross” since July 2021, which could mean the greenback is going higher, creating more problems for stocks.

    Heading into Friday’s settlement, the 50-day average on the ICE U.S. Dollar Index
    DXY,
    a gauge of the buck’s value against a basket of its biggest rivals that’s heavily weighted toward the euro, stands at 103.15, higher than the 200-day moving average, which was 103.11.

    The index itself finished at 105.56 on Friday, trading at its highest level since March 10, 2023, the day that the Silicon Valley Bank collapsed, sparking a brief rally in safety plays like the dollar. It climbed 0.2% this week, booking its 10th straight weekly advance, its longest such streak since a 12-week sprint that ended in October 2014.


    FACTSET

    A golden cross occurs when the 50-day moving average closes above the 200-day moving average. It’s a popular signal among technical analysts and often — though definitely not always — signals that momentum is building in a given direction.

    On the other hand, a “death cross” occurs when the 50-day moving average breaks below the 200-day. A “death cross” in the U.S. dollar occurred on Jan. 10. Afterward, the buck trended lower for the next six months, ultimately hitting its lowest level of 2023 on July 14. Since then, the buck has been in a sustained uptrend that some currency strategists think has grounds to continue, now that the Federal Reserve bolstered its forecast to keep interest rates above 5% through 2024.

    According to an analysis by Dow Jones Market Data, the dollar typically continues to climb during the three months following a golden cross, gaining an average of 1.9%, while trading higher 79.2% of the time over. Performance is more mixed one year out, with the buck higher 58.3% of the time, with an average gain of 1.5%.

    And if the previous golden cross is any guide, the dollar’s recent gains could be just the beginning of a larger advance. After a previous golden cross on July 29, 2021, the dollar index gained roughly 25%, advancing from about 91 to just shy of 115 in late September of 2022, when it touched its strongest level in two decades, according to FactSet data.

    Some analysts have warned that the dollar’s advance, alongside rising Treasury yields, could create more problems for stocks. The S&P 500
    SPX
    fell more than 1.6% on Thursday, its biggest drop in a single day since March 22, according to Dow Jones Market Data.

    “A new cycle high in yields and a golden-cross in the dollar are strong headwinds for the market,” said Jeffrey deGraaf, a technical strategist at Renaissance Macro Research, in a note to clients.

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  • Here’s the ‘triple power play’ that may rule stock-market returns, other assets for next 5 years

    Here’s the ‘triple power play’ that may rule stock-market returns, other assets for next 5 years

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    Three powerful dynamics in the global economy are expected to play a significant role in investors’ multi-asset allocations over the next five years, according to a 132-page report from Rotterdam-based asset manager Robeco.

    The first is labor’s likely increased bargaining power, with the outcome of any tussle between businesses and their workers probably being determined by wages in a sticky inflation environment, based on the report compiled by strategists Laurens Swinkels and Peter van der Welle on behalf of the multi-asset team at Robeco, which manages $194 billion in assets. The second is the end of monetary-policy leniency and the potential for central banks to lock “horns” with governments over the appropriate level of borrowing costs. The third is the dawn of “multipolarity” as the U.S. and China struggle for power.

    Taken together, this “triple power play” is already starting to unfold, shifting investors into a world of higher risk-free rates and lower expected equity risk premiums, according to the asset manager. Risk premium is a gauge of relative value for stocks, helping investors understand what their short-term gain might be when taking on the additional risk of buying equities or investing in stock funds.

    Robeco provided its forecasts for five-year annualized, projected returns on a range of assets held by euro- and dollar-based investors — including developed- and emerging-market equities, bonds, and cash.

    The firm’s base-case scenario, which Robeco’s team refers to as a “stalemate,” calls for a mild recession in 2024, consumer-price inflation in developed economies to remain around 2.5% on average heading toward 2029, and real GDP in the U.S. to average 2.3% or below what the S&P 500 index
    SPX
    currently implies.

    That benign growth outlook is expected to be accompanied by macroeconomic volatility, plus a “tug of war” between central bankers reluctant to lower interest rates and governments in need of low borrowing costs — which “means there is not enough monetary policy tightening to remove demand-pull inflation.” Under such a scenario, developed-market equities are likely to underperform their emerging market counterparts and domestic bonds should offer a higher return than cash for dollar-based investors, according to Robeco.


    Source: Robeco. Returns shown are annualized.

    “Looking ahead, a key question is: are we eyeing the start of a new bull market that will broaden and pave the way for another streak of above-historical excess equity return?” the Robeco team wrote in the report released on Tuesday. “In our base case, we expect developed markets’ earnings growth to end up below current 5Y forward consensus projections, which are high single-digit or even still low double-digit for the U.S. and eurozone.

    “The reason we foresee a decline in profitability is linked to our overarching macro theme, the triple power play. Equities will likely bear the brunt of the power play in geopolitics,” according to the report. In addition, efforts by global corporations to shift production toward geopolitically-friendly powers or closer regions “will prove more costly and lower efficiency.” Plus, “further pressure from margins will come from a lagged response from past policy rate hikes.”

    Under Robeco’s bull-case scenario, early and rapid adoption of artificial intelligence across sectors and industries would likely spawn above-trend growth and push inflation back to central banks’ targets. The result is “an almost Goldilocks scenario in which things are running neither too hot nor too cold,” central banks could take a break from tightening policy, and developed- and emerging-market equities may both be able to come out with double-digit annualized returns from 2024 to 2028.

    The firm’s bear-case scenario envisions a world in which mutual trust between the world’s superpowers hits rock bottom, governments are “in the crosshairs” of central banks, and labor loses bargaining power in the services sector. A “stagflationary environment emerges, intensifying the policy dilemma for central bankers” as inflation stays stubbornly high at 3.5% on average and growth comes in at just 0.5% annually for developed economies. In that situation, developed-market equities would eke out an annualized return of 2.25% for dollar-based investors over the four-year period, which would be below the expected return on cash.

    On Thursday, all three major U.S. stock indexes
    DJIA

    SPX

    COMP
    finished higher as investors digested a batch of better-than-expected U.S. data and continued to expect no action by the Federal Reserve next week. Officials are seen as likely to leave their main policy rate target at a 22-year high of 5.25%-5% on Wednesday.

    As investors continued to monitor the possibility of a strike by United Auto Workers, 2-
    BX:TMUBMUSD02Y
    and 10-year Treasury yields
    BX:TMUBMUSD10Y
    ended at one-week highs and the ICE U.S. Dollar Index
    DXY
    jumped 0.6%. In a separate development earlier this week, Air Force Secretary Frank Kendall warned that China is preparing for a potential war with the U.S.

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  • ‘Complicated’ inflation report produces wavering U.S. stocks, keeps higher-for-longer theme in rates intact

    ‘Complicated’ inflation report produces wavering U.S. stocks, keeps higher-for-longer theme in rates intact

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    Investors were evaluating a less-than-straightforward take on U.S. inflation Wednesday, with August’s consumer price index coming in close to or in line with expectations while providing reasons for the Federal Reserve to hike again by year-end.

    U.S. stocks
    DJIA

    SPX

    COMP
    were higher, though wavering, in New York afternoon trading as traders weighed the chances of another rate hike in November. Three-month through 1-year T-bill rates were up slightly, though 2- through 30-year Treasury yields slipped. And the ICE U.S. Dollar Index
    DXY,
    which moves according to the market’s expectations for U.S. rates relative to the rest of the world, swung between gains and losses.

    Rising gas prices in August had Wall Street anticipating higher headline inflation figures of 0.6% for last month and either 3.6% or 3.7% year-on-year ahead of Wednesday’s session, and on that score August’s CPI report met expectations. The as-expected headline readings appeared to offer some comfort to many investors, even though the monthly gain was the biggest increase in 14 months and the annual rate jumped versus the prior two months.

    Still, Ed Moya, a senior market analyst for the Americas at OANDA Corp. in New York, said “this was a complicated inflation report” and price gains are failing to ease by enough for the central bank to abandon its hawkish stance. Core readings which matter most to Fed policy makers came in a bit above expectations at 0.3% for last month, driven partly by a jump in airline fares, as the annual core rate dipped to 4.3% from 4.7% previously. According to Moya, “inflation will likely still be running well above the Fed’s 2% target for the rest of the year.”

    “Today’s uptick in CPI could slightly increase the likelihood of a November interest rate hike and potentially delay the timing of any rate cuts until deeper into 2024,” said Joe Tuckey, head of FX analysis at London-based Argentex Group, a provider of currency risk-management and payment services.

    As of Wednesday afternoon, however, August’s CPI wasn’t putting much of a dent in expectations for fed funds futures traders. They see a 97% likelihood of no rate hike next Wednesday, which would keep the fed funds rate at between 5.25%-5.5%, and a more-than-50% chance of the same in November and December, according to the CME Fed Tool. They also continued to price in the likelihood of no rate cuts through the early part of 2024.

    While August’s CPI report failed to move the needle in stocks, the dollar, or fed funds futures, there was one corner of the financial market where the data did make more a difference: Traders of derivatives-like instruments known as fixings now foresee five more 3%-plus annual headline CPI readings starting in September, after adjusting their expectations to include January.

    If those expectations play out, that would bring the total number of 3%-plus readings to six months, including August’s data, and produce a scenario that investors may not be entirely prepared for — the possibility that headline inflation doesn’t meaningfully budge from current levels soon.

    Read: Why financial markets may be unprepared for a fourth-quarter ‘inflation surprise’

    Central bankers care more about less-volatile core readings, but pay attention to headline CPI figures because of their potential to affect household expectations.

    “While these numbers do not change our, and the market’s, expectations that the Fed will hold the target fed funds rate unchanged at the September meeting, the slightly stronger number can influence the tone of the press conference and Summary of Economic Projections,” said Greg Wilensky, head of U.S. fixed income at Denver-based Janus Henderson Investors, which manages $322.1 billion in assets.

    “We continue to expect some reduction in the number of participants projecting further hikes, but probably not enough to move the median projection of one more rate hike,” Wilensky said in an email. “That said, we believe that we have likely seen the last rate hike for this cycle, as the economic data that the Fed will see over the coming months will keep them on hold and allow the impact of 5.25% of prior hikes to slow the economy and inflation.”

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  • U.S. dollar defies China, Russia and Wall Street skeptics as 2023 rebound continues

    U.S. dollar defies China, Russia and Wall Street skeptics as 2023 rebound continues

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    The U.S. dollar is proving its haters wrong.

    Not only is the buck defying the expectations of Wall Street strategists who had anticipated that it would weaken this year, it’s also proving once again that talk of de-dollarization has been over-hyped.

    In financial markets, a gauge of the dollar’s value against its biggest rivals is nearing its highest level in six months. The ICE U.S. Dollar Index
    DXY,
    a gauge of the dollar’s strength against the euro
    EURUSD,
    -0.01%
    and other major currencies like the Japanese yen
    USDJPY,
    -0.09%
    and British pound
    GBPUSD,
    +0.21%    ,
    traded at its highest level since early June on Friday after Federal Reserve Chairman Jerome Powell helped catapult it higher by talking up the possibility of more interest-rate hikes.

    The index was adding to those gains on Monday, trading 0.1% higher at 104.13, according to FactSet data. A break above 104.70 would put it at its highest intraday level since March 16. The index is up 0.5% since the start of the year, having erased earlier year-to-date losses over the past six weeks.

    Earlier this year, dollar weakness occurred against the backdrop of U.S. rivals like China and Russia making strides in their efforts to wean themselves off the buck.

    But despite their efforts, data released last week by SWIFT, the nexus of international interbank financial transactions, showed that the dollar has never been more popular as a means of settling international trade and transactions.

    SWIFT’s data showed that 46% of interbank payments conducted on the platform in July involved the U.S. dollar, a record high. The data also showed that the Chinese yuan’s share of international payments had ticked higher while the euro’s declined.

    As if to underscore this point, the data from SWIFT arrived late last week just as a summit hosted by the BRICS nations in Johannesburg, South Africa, was breaking up.

    Rather than being a watershed event for opponents of the U.S. dollar, as some had feared, statements from the group’s members revealed internal disagreement on the subject of a BRICS currency intended to offer an alternative to the greenback.

    What’s more, while the economic alliance announced plans to admit a spate of new member nations in its first expansion in 13 years, one notable holdout seemed to spoil the party.

    Indonesian President Joko Widodo opted to keep his country, one of the world’s most populous, with a fast-expanding economy, out of the economic alliance, at least for now.

    To be sure, as MarketWatch reported back in April, talk of de-dollarization is hardly a new phenomenon, but it has received renewed attention as China, Russia and others have redoubled efforts to try and push for countries to conduct more trade in their own currencies as opposed to the dollar.

    But Russia and China aren’t alone in their disappointment at the dollar’s resilience.

    Read more: Opinion: China is nowhere near deflation, and global investors aren’t ready for what’s coming

    A compilation of 2023 year-ahead outlooks produced by Bloomberg News back in December showed investment houses in Europe and the U.S. widely expected the buck to weaken this year, with some reasoning that the two-decade high reached by the dollar index in late September likely marked its peak for the cycle.

    The ICE index traded as high as 114.78 on Sept. 28, its highest level since May 2002, according to FactSet data. The milestone marked the peak of a torrid rally that saw the buck emerge as one of the few havens from a punishing selloff in stocks and bonds that defined global markets in 2022. But the gauge has fallen 9.3% since then.

    Now, with real yields in the U.S. pushing higher and Federal Reserve Chairman Jerome Powell hinting at the possibility of more interest-rate hikes later this year, strategists say the conditions are ideal for the U.S. dollar to climb even higher.

    “Interest-rate differentials and relative economic strength are the foundation [of dollar strength],” Matt Miskin, co-chief investment strategist for John Hancock Investment Management, said during a phone interview with MarketWatch.

    China’s struggles to revive its flagging economy have helped bolster the dollar while pushing the Chinese yuan
    USDCNY,
    -0.01%
    toward its weakest level since late last year. The offshore yuan traded at 7.29 to the dollar on Monday, near its weakest level since November.

    Read this next: Opinion: The debt supercycle that hit the U.S. and Europe has now come for China

    A weakening eurozone economy has weighed on the euro and boosted the dollar. PMI survey data released earlier this month showed Europe’s services sector weakening alongside manufacturing. GDP data released by Eurostat, Europe’s official economic statistics agency, has been tepid compared to the U.S. The latest reading on second-quarter GDP put it at 0.3%.

    Right now, the dollar will be tough to beat given the twin tailwinds created by rising real interest rates and still-robust economic growth.

    The yield on the 10-year Treasury Inflation-Protected Security note
    912828B253
    was trading north of 2.2% Friday, according to data from the St. Louis Fed. The 10-year TIPS yield hit its highest level since 2009 earlier this month when it broke north of 2%. The inflation-protected security is often cited as a proxy for U.S. “real” yields, which refers to the return bond investors receive after adjusting for inflation.

    On the growth side of the equation, the Atlanta Fed’s GDPNow forecast estimated the rate of growth for the third quarter at 5.9% according to its latest reading dated Thursday. A year ago, even the most optimistic economists on Wall Street were expecting growth of about 2%, and top Fed officials had a median projection of 1.2% growth for 2023, according to projections released in September.

    “It’s hard to beat the dollar when it is a high yielder among safe havens in a risk-off environment,” Steve Englander, head of North America macro strategy at Standard Chartered, said in comments emailed to MarketWatch.

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  • U.S. stocks end higher after Fed Chair Powell’s Jackson Hole remarks, S&P 500 snaps 3-week losing streak

    U.S. stocks end higher after Fed Chair Powell’s Jackson Hole remarks, S&P 500 snaps 3-week losing streak

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    U.S. stocks ended higher Friday after Federal Reserve Chairman Jerome Powell warned the central bank may need to raise interest rates even higher to temper a strong U.S. economy and quell inflation, while assuring investors that monetary policy would proceed cautiously.

    How stock indexes traded

    For the week, the Dow fell 0.4%, the S&P 500 gained 0.8% and the Nasdaq climbed 2.3%, according to Dow Jones Market Data. The Dow booked back-to-back weekly losses, while the S&P 500 and technology-heavy Nasdaq Composite each…

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  • U.S. dollar could soon wipe out all of its post-pandemic gains, Soc Gen strategist warns

    U.S. dollar could soon wipe out all of its post-pandemic gains, Soc Gen strategist warns

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    The slide in the U.S. dollar in the last eight months could mean that mean all of its gains in the wake of the coronavirus pandemic will soon be lost, according to Kit Juckes, a macro strategist at Société Générale who has been a long-time currency analyst.

    Juckes said in a note shared with SocGen clients and the media on Tuesday that he expects the greenback could return to its lows from December 2020, the level it fell to during the pandemic given the market is pricing in an end to interest rate rises by the Federal Reserve this year.

    “As was the case in January/February before the SVB mini crisis, the market is anticipating the peak in US rates and a further narrowing relative rates. If nothing happens to scupper those expectations (another upside surprise in US growth, or further European growth disappointment) I would expect the Dollar Index to move closer but not all the way to, the lows at the end of 2020,” he said.

    “That won’t happen in a straight line and will require further interest rate convergence between the U.S. and other major economies, however.”

    Over the past week, investors’ expectations about the outlook for where U.S. interest rates are headed have shifted. Following lower-than-expected readings last week on U.S. June inflation, as measured by the consumer price index and the producer price index, many investors expect the Fed will raise its benchmark interest rate only once more when the central bank holds its policy meeting next week.

    Read this next: U.S. stocks benefiting from ‘sense of urgency’ as investors rush into equity mutual funds

    Fed-funds futures, which are used to bet on the expected path of interest rates, are pricing in nearly a 100% probability of a hike in July, but analysts also think rate cuts could come by the Fed’s January policy meeting, where futures markets already see a nearly 40% probability of a cut, according to CME’s FedWatch tool.

    This shift in expectations has triggered a wave of dollar-bearishness across Wall Street, with many top currency analysts opining that the path of least resistance for the U.S. dollar is likely lower.

    The ICE U.S. Dollar Index
    DXY,
    +0.13%    ,
    a gauge of the dollar’s strength against a basket of major currencies, was trading modestly higher on Tuesday, up 0.1% at 99.96, but on Monday, the index touched its lowest level since mid-April 2022.

    Back in December 2020, it briefly broke below 90 to what was at the time its weakest level in more than two years.

    Read more: Why stocks could get a boost from a falling U.S. dollar

    Another important question for markets will be whether the dollar’s peak in late September 2022, when the dollar index traded just shy of 115, its highest level in more than two decades, will mark a long-term cyclical peak. As Juckes notes, the dollar has traded at a succession of higher lows since 2007.

    Another issue on Juckes’ radar: the prospect that the U.S. dollar and Chinese yuan
    USDCNY,
    +0.35%
    could weaken in tandem. Juckes said he expects the yuan to climb to 7.40 against the dollar by the end of the year, a level it hasn’t seen in roughly 15 years.

    The onshore renminbi, which incorporates the yuan’s more tightly controlled exchange rate within China, was trading at 7.18, with the dollar climbing 0.1%.

    While American consumers could see the price of imported goods rise and international travel become more expensive, a weaker dollar could also help boost U.S. equity prices, as earnings of exporters get a boost from the currency’s slide, and the chances of a global recession eases, as MarketWatch reported on Monday.

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  • Stocks are riding a wave of optimism as U.S. inflation recedes, but there are dangers lurking

    Stocks are riding a wave of optimism as U.S. inflation recedes, but there are dangers lurking

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    As U.S. inflation continues to cool, stocks are riding a wave of optimism.

    During the past week, the S&P 500
    SPX,
    -0.10%
    climbed above 4,500 for the first time in more than 15 months, after both the consumer price index and producer price index data showed cooler-than-expected inflation in June. 

    Some bulls expect an improved economic outlook to send the S&P 500 to an all-time high later this year. The large-cap equities gauge hit a record close of 4,796.56 in January, 2022, according to Dow Jones market data. 

    In that camp stands Scott Ladner, chief investment officer at Horizon Investments. “This is increasingly looking like an economy that just can’t get knocked off its footing,” said Ladner in a phone interview. 

    “We see the nominal GDP coming in the 5% to 7% range this year. And earnings are priced at 0% right now. So we think there’s some room for earnings to catch up,” Ladner said. 

    Meanwhile, the Federal Reserve may be be close to the end of its year-long campaign to raise interest rates to slow the economy and lower inflation and steady or lower borrowing costs add more fuel to the rally, noted Ladner. 

    The market consensus is that the Fed will raise its interest rate at least one more time before the year concludes. Future funds traders are pricing in an over 95% chance the U.S. central bank will raise its bench mark interest rate in July by 25 basis points to the range of 5.25% to 5.5% and a 23% likelihood that it will deliver one more hike after July, according to CME Fed Watch.

    “We might have already seen the peak of interest rates. That’s actually some fuel for multiples to be able to expand,” said Ladner. 

    Greg Bassuk, chief executive at AXS Investments, echoed the point. “While we do anticipate at least one more rate hike, we think the ending of a two-year track of rate hikes is going to put more certainty into the market and very importantly, have the U.S. economy achieve a soft landing and avoid a recession.”

    Adding to the tailwind for risky assets is a weakening U.S. dollar. The ICE U.S. Dollar Index
    DXY,
    +0.03%
    fell to 99.96 as of 4 pm Eastern on Friday, the lowest close since April 2022, according to Dow Jones market data.

    If the Fed is close to being done with increasing its benchmark interest rate, while other central banks are not, it would weigh on the greenback even further, noted Ladner. 

    Dangers lurking

    Still, there are several challenges that may impede stocks from extending their rally.

    Raymond Bridges, portfolio manager of the Bridges Capital Tactical ETF
    BDGS,
    -0.10%    ,
    said he expects U.S. stocks to end the year lower, citing further tightening of credit conditions. 

    Read: The U.S. stock-market rally seems unstoppable, so why does bearishness still persist

    The Fed’s balance sheet has been shrinking for the past few months, after the central bank again expanded it in March by setting up a new emergency loan program and lending more than $300 billion to provide liquidity when some regional banks failed during the first quarter of the year.  

    “Those bank term funding programs added a lot of liquidity into the marketplace to stave off a recession, or a credit crunch,” Bridges said. “It was a nice lifeline [for banks], but I think that’s what extended this bear market rally that we’ve had.”

    As the Fed’s balance sheet declines to levels seen before March, some banks will have to pay back the emergency loans to the Fed which have a tenor of up to a year, “that’s actually a net liquidity draw,” according to Bridges.

    “I see all of that occurring as well as another rate increase. We’re gonna need something to change policy-wise and some blow-out earnings to get a continuation in the [upward] trend in stocks,” Bridges said. 

    What’s more, if the Fed ends up delivering more interest rate hikes after July, it could significantly undermine the U.S. economy. The Fed’s dot-plot forecast in June showed that officials expected two more rate hikes by the end of the year.

    Also read: Fed’s Waller, unimpressed by inflation data, calls for two more rate hikes this year

    Philip Colmar, managing partner and global strategist at MRB Partners, said while he doesn’t think the credit conditions are tight enough for a recession to hit this year, if the Fed “is forced to do more than another 25 basis point hike before it pauses or if yields were to move meaningfully higher, then maybe we’re getting that catalyst [for a recession] in place.” 

    Check out: Why markets are misjudging the Fed’s ability to raise rates even though inflation is slowing

    Analysts at Capital Economics are even more bearish, saying the U.S. economy is already heading into a mild recession.

    “While we do think AI is a transformative technology that will give rise to a much stronger stock market in 2024 and 2025 as investors seek to crystallise its benefits upfront, we are sticking to our forecast that the S&P 500 will drop back a bit in H2 2023 as the US economy flags in the meantime,” John Higgins, Capital Economics’ chief markets economist, wrote in a recent note. 

    What’s more, while many analysts expect inflation to continue head downward, there might be bumps in the road, with prices rising more than expected for certain months, noted AXS’s Bassuk.

    “A lot of factors contribute to the CPI, the PPI. And all it takes is a slight change in any one of these months,” Bassuk said. 

    U.S. stocks ended the past week higher, with the Dow Jones Industrial Average
    DJIA,
    +0.33%
    up 2.3%. The S&P 500
    SPX,
    -0.10%
    gained 2.4% and the Nasdaq Composite
    COMP,
    -0.18%
    finished the week 3.3% higher.

    For the coming week, investors will be expecting U.S. retail sales data on Tuesday, housing starts numbers on Wednesday, and initial jobless claims data on Thursday. 

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  • Why markets are misjudging the Fed’s ability to raise rates even though inflation is slowing

    Why markets are misjudging the Fed’s ability to raise rates even though inflation is slowing

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    Parts of the financial markets are struggling to adapt to the idea that the Federal Reserve might keep raising interest rates even after this week’s data clearly pointed to decelerating inflation.

    Late Thursday, Federal Reserve Gov. Christopher Waller indicated he remains unmoved by June’s consumer price index and that he supports two more rate hikes this year even though monthly core inflation was just 0.2%, or half of what was seen in May.

    By Friday morning, parts of fixed-income markets “refused to play along,” with rates on overnight index swaps pricing in “just one more hike, not two — suggesting still that the Fed’s hawks have lost some of their credibility,” said Thierry Wizman, Macquarie’s global FX and currencies strategist.

    The bottom line from Waller’s speech is that it’s not solely inflation data that’s driving the Fed’s decisions, complicating the assessments made by traders and investors from here. Policy makers want to make sure that the recent deceleration in inflation feeds through broadly across goods and services sectors, and doesn’t revert back to persistently high core readings, according to the Fed governor. What’s more, “the robust strength of the labor market and the solid overall performance of the U.S. economy gives us room to tighten policy further,” he said.

    Some important corners of the financial markets did respond to his remarks, namely the Treasury market. Treasury yields were broadly higher on Friday, with the policy-sensitive 2 year yield
    TMUBMUSD02Y,
    4.733%
    jumping off a one-month low, as fed funds futures traders boosted the likelihood of a post-July rate hike by November. Traders now see a 30.1% chance that the fed funds rate target will either get to 5.5%-5.75% or higher in four months — up from a current level of 5%-5.25% and after factoring in a widely expected quarter-of-a-percentage-point hike on July 26.

    However, equity investors were largely focused on other things. U.S. stocks
    DJIA,
    +0.36%

    SPX,
    -0.15%

    COMP,
    -0.34%
    mostly reacted to Friday’s batch of good earnings reports from major banks, as well as fresh data from the University of Michigan. Meanwhile, the U.S. Dollar Index
    DXY,
    +0.16%    ,
    which typically reacts to changes in U.S. interest-rate expectations, was up by just 0.1% after dropping earlier in the day.

    “Inflation coming down has led to market anticipation that the Fed does not have much more tightening to do,” said David Donabedian, chief investment officer of CIBC Private Wealth US, which has $94 billion in assets under management and administration. “And the big banks are looking solid with recent earnings reports. While this might be a short-term swing in sentiment, the market is not fighting the optimism and seems to be pricing in economic nirvana,”

    “While we are pleased to see progress on the inflation front, we continue to have concerns about a weakening economy and lower demand that would result to a challenge for corporate earnings,” Donabedian wrote in an email. “There are some economic indicators that look good — like jobs — but these are telling us how the economy is doing yesterday and today. They don’t predict the future.”

    As of Friday afternoon, stocks were headed for their fifth day of gains, helped partly by the optimism unleashed from Wednesday’s consumer price report and Thursday’s producer price data. All three major U.S. stock indexes opened higher — brushing aside Waller’s comments — and pared gains only after data from the University of Michigan showed 5-10 year inflation expectations rising this month.

    Waller’s speech, delivered to the Money Marketeers of New York University, clearly articulates areas that investors may be missing in their assessments of where the Fed could go with rates, analysts said. In his mind, the impacts of policy tightening from last year “are feeding through to market interest rates faster than typically thought.” In addition, Waller said, households and firms appear to be adapting more rapidly to the dramatic, fast pace of interest-rate changes seen since March 2022.

    “If one believes the bulk of the effects from last year’s tightening have passed through the economy already, then we can’t expect much more slowing of demand and inflation from that tightening,” Waller said in his prepared comments.

    “To me, this means that the policy tightening we have conducted this year has been appropriate and also that more policy tightening will be needed to bring inflation back to our 2 percent target,” he said. “Pausing rate hikes now, because you are waiting for long and variable lags to arrive, may leave you standing on the platform waiting for a train that has already left the station.”

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  • S&P 500 ends above 4,500 level for first time in 15 months as stocks gain ahead of bank earnings

    S&P 500 ends above 4,500 level for first time in 15 months as stocks gain ahead of bank earnings

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    Stocks rose for a fourth day in a row on Thursday, a day ahead of second-quarter earnings from America’s biggest lenders. The Dow Jones Industrial Average
    DJIA,
    +0.14%
    rose about 46 points, or 0.1%, ending near 34,394, according to preliminary data from FactSet. But the S&P 500 index
    SPX,
    +0.85%
    gained 0.9% to end at 4,509, clearing the 4,500 mark for the first time since April 5, 2022 when it ended at 4,545.86, according to Dow Jones Market Data. The Nasdaq Composite Index
    COMP,
    +1.58%
    scored another blockbuster day, up 1.6%. Investors have been optimistic as inflation pressures ease and as perhaps the best-telegraphed U.S. economic recession in recent history has yet to materialize. The S&P 500 and Nasdaq have been charging higher on buzz about AI technology, with much of this year’s stock-market gains fueled by a small group of stocks. The risk-on tone ahead of earnings from JPMorgan Chase and Co.,
    JPM,
    +0.49%
    Wells Fargo
    WFC,
    +1.04%
    and Citigroup
    C,
    +0.63%    ,
    had the U.S. dollar
    DXY,
    -0.74%
    earlier on pace to end at its lowest level since early April 2022. Treasury yields also continued to fall, with the 10-year
    TMUBMUSD10Y,
    3.768%
    rate back down to 3.759%, after topping 4% in recent weeks. The six biggest banks are expected to issue a deluge of fresh debt after earnings, despite the Federal Reserve having sharply increased rates and borrowing costs for businesses and households to tame inflation.

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