Wall Street Breakfast: Dollar Vs. Stocks

Sep. 27, 2022 7:01 AM ETUSDOLLAR, SPY, DWAC, PSNY, GOEV, F, XOM, AMGN, AZN, BIIB, QQQ29 Comments
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Dollar vs. Stocks

The U.S. dollar (USDOLLAR) is on the back foot Tuesday morning, but the move down looks more like a one-day reprieve after the jump in the previous session and greenback strength is expected to continue.

Pound sterling hit an all-time low yesterday, but BoE Governor Andrew Bailey ruled out an emergency hike in rates between meetings. In addition, the People's Bank of China said it is raising risk reserve requirements for banks involved in forward foreign exchange trading to 20% from 0%.

The greenback's strength is also a problem for stocks, but could hasten the end of the bear market, according to Morgan Stanley.

Crisis: The "recent move in the US dollar creates an untenable situation for risk assets that historically has ended in a financial or economic crisis, or both," equity strategist Mike Wilson said. "While hard to predict such 'events,' the conditions are in place for one, which would help accelerate the end to this bear market."

"In the meantime, we remain convicted in our eventual low for the S&P 500 (SP500) (SPY) coming later this year/early next between 3000-3400 (in line with our base and bear case tactical views, respectively)," Wilson said.

"On a year over year basis, the DXY is now up 21% and still rising," he added. "Based on our analysis that every 1% change in the DXY has around a -0.5% impact on S&P 500 earnings, 4Q S&P 500 earnings will face an approximate 10% headwind to growth all else equal."

"This is in addition to other headwinds we have been discussing for months - i.e., payback in demand and higher costs from inflation to name a few. It's also important to note that such US dollar strength has historically led to some kind of financial/economic crisis."

"What's amazing is that this dollar strength is happening even as other major central banks are also tightening monetary policy at a historically hawkish pace," Wilson said. "If there was ever a time to be on the lookout for something to break, this would be it. Like our rates team, our currency team raised its forecast for the USD. On a DXY basis, they are now forecasting a year-end target of 118, which means no relief in sight, at least fundamentally speaking."

"In our view, such an outcome is exactly how something does break, which leads to MAJOR top for the US dollar and maybe rates, too. However, until that happens, we think the screws will only get tighter for earnings growth and financial conditions."

Capitulation coming? "US rates are rising as the market reprices peak Fed Funds higher, and equities are being repriced lower," Societe Generale macro strategist Kit Juckes said. "This has all the hallmarks of the start of the final stage of the dollar’s rally (a stage which has the capacity to be violent and volatile)."

From a technical standpoint, BTIG's Jonathan Krinsky says that the dollar index has room to move up to 120 (it stands below 114 at the moment), but that it at least needs to pause for equities to bottom.

Foreign exchange volume is also at a critical level, Krinsky said.

Volume hasn't "spent much time above 12 in the last decade," he said. "Doing so would suggest something might be breaking, but also tends to indicate capitulation ala March 2020." (0 comments)

DWAC PO Box

Trump SPAC Digital World Acquisition (DWAC), which is taking Trump's social media company and platform Truth Social public, has changed its listed address to a post office box at a UPS store in Coconut Grove, Florida.

The new address was listed in some of DWAC's most recent regulatory filings. The address, 3109 Grand Ave., #450, Miami, FL 33133, is listed between an Italian restaurant and a nail salon, according to a Google image search. A person who answered the phone at the UPS store declined to say if #450 was a PO box office at the store. The address change comes as DWAC late Friday disclosed that it has received termination notices from PIPE investors representing $138.5 million of the $1 billion PIPE investment disclosed in December. The investors gave the notices between Monday and Friday, according to an 8-K filing. (146 comments)

Polestar plunge

Polestar Automotive Holding (PSNY) plummeted to a new low on Monday, extending losses for the Swedish EV manufacturer.

Shares of the Gothenburg-based partner of Volvo Cars fell about 5% to an intraday low of $5.65, the lowest on record for the 2022 IPO. The stock has declined over 30% in the past month, leading much of the pack of loss-making EV startups over that span. The decline was only outdone by Canoo (GOEV) in terms of its immediate peers. (17 comments)

S&P struggle

The S&P 500 (SPY) closed Monday at a 2022 low of 3,655.04, but RBC Capital Markets argues the index could shed another roughly 4% to reach 3,500 – or even 3,050 if equities experience a 1970s-style meltdown.

“We think stocks are on the cusp of an important test,” Lori Calvasina, RBC’s head of U.S. equity strategy, wrote in a note. “If the S&P 500 experiences its typical recession drawdown of 27%, the index will fall to 3,501. … A 63% contraction, similar to the 1970s, would take the P/E to 14x, implying a move to 3,052.” (88 comments)

Today's Market

In Asia, Japan +0.53%. Hong Kong +0.03%. China +1.94%. India -0.05%. In Europe, at midday, London -0.20%. Paris +0.20%. Frankfurt +0.27%. Futures at 6:30, Dow +0.72%. S&P +0.92%. Nasdaq +1.04%. Crude +1.28% to $77.69. Gold +0.52% to $1641.95. Bitcoin +4.46% to $20.144.5. Ten-year Treasury Yield -3 bps to 3.84%.

Today's Economic Calendar

3:30 Fed's Evans Speech
6:15 Fed's Evans Speech
8:30 Durable Goods
9:00 S&P Corelogic Case-Shiller Home Price Index
9:00 FHFA House Price Index
9:55 Fed's Bullard Speech
10:00 Consumer Confidence
10:00 New Home Sales
10:00 Richmond Fed Mfg.
1:00 PM Results of $44B, 5-Year Note Auction
1:00 PM Money Supply
8:35 PM Fed's Daly Speech

Companies reporting earnings today »

What else is happening...

Crude oil sinks deeper into eight-month lows as dollar extends surge.

Ford (F) to seek new trial after $1.7B jury verdict in truck rollover case.

U.S. steel industry activity rate slides to lowest since January 2021.

Exxon (XOM) among top oil ideas at BofA despite stock's eighth straight daily loss.

Amgen (AMGN), AstraZeneca's (AZN) Tezspire for severe asthma gets approval in Japan.

U.S. Department of Justice says Biogen (BIIB) agrees to $900M drug kickback settlement.

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