|Dow||-28.32 to 17,042.90|
|S&P 500||-5.51 to 1,972.29|
|Nasdaq||-12.46 to 4,493.39|
|10-YR Yield||+0.02 to 2.51%|
|Gold||-7.10 to 1,214.50|
|Crude Oil||-$2.94 to $89.83|
Stocks may be bouncing around like a rubber ball. But foreign currencies? They’re heading one way — SOUTH — and in a hurry!
The Japanese yen is plunging. The euro is plunging. The Canadian dollar is falling, and so is the Australian dollar. Heck, even that plucky New Zealand currency affectionately known as the “kiwi” is tanking!
So what the holy heck is going on?
First, the U.S. economy is outshining many other major economies around the world. I know, I know. This isn’t a 1980s or 1990s style boom. Job growth can and should be better, and excessive regulation and asinine tax policy are holding growth back.
But a broad range of indicators looks better here than they do overseas. Just to pick one: GDP expanded at a 4.6 percent rate here in the second quarter. That was the fastest since 2011. In Japan? It shrank a whopping 7.1 percent. Euro-zone GDP came in at 0 percent. A big, fat goose egg.
Second, foreign central banks are actively trying to devalue their currencies. The Bank of Japan is printing gobs of yen and buying assets willy-nilly. The European Central Bank is buying asset backed securities and other bonds, and is close to pulling the trigger on unsterilized QE that includes government debt.
Then this week the Reserve Bank of New Zealand announced that it dumped 521 million kiwis — about $404 million — in August. That was the largest currency market intervention since 2007, and it was designed to weaken the kiwi substantially. It fell to a 14-month low in response.
|The largest currency intervention since 2007 pushed the kiwi down to a 14-month low.|
Third, while many on Wall Street don’t want to hear it, the U.S. Fed IS moving toward tighter policy. It’s a fact, not an opinion. It has already slashed QE to $15 billion from $85 billion, and it’s on track to eliminate it entirely next month.
That’s a form of tightening plain and simple. What’s more, it’s being accompanied by a steady erosion in the price of Eurodollar futures.
You probably know what those are by now since I’ve mentioned them multiple times before. But simply put, they track expectations about the future direction of Fed policy. The more they fall in price, the more it signifies that investors are pricing in more Fed hikes, sooner Fed hikes, or some combination of both.
So what does this all mean for stocks? Well, the plunge in foreign currencies is bad news if you own foreign stocks. That’s because every yen, euro, kiwi, or what-have-you that you invest in them is worth fewer dollars when you repatriate the money.
So even if the stock you own remains completely flat in its home market, you will lose money — in dollar terms — on your investment. Even if you invest in dollar-based, U.S.-traded mutual funds or ETFs that track foreign markets, those negative currency translation impacts will get captured in the price of your shares. That’s one reason why, for instance, the iShares Europe ETF (IEV) is down around 2 percent year-to-date versus the 8.5 percent gain in the SDPR S&P 500 ETF (SPY).
U.S. multinationals may face currency-related earnings shortfalls, too. That’s because every yen or euro or what-have-you that they earn overseas also translates into fewer dollars at reporting time. The rising dollar can also put pressure on what I like to call “monetary commodities” — gold, silver, and so on. So while I still love gold for the long-term, I’m not surprised it’s struggling in the here and now.
But if you’re focused on U.S.-focused companies in U.S.-focused industries … like domestic energy, health care, select financials, steel, and so on … you can still generate nice returns for yourself. So that’s where I am focused — still — and that’s where I think you should be too.
Oh and if you took my advice and bought anti-euro investments, this may be a good time to take some profits off the table. I say that only because we’ve come so far, so fast and could see a short-term bounce.
|“If you took my advice and bought anti-euro investments, this may be a good time to take some profits off the table.”|
But I wouldn’t be surprised to see the euro fall to 1.20 against the dollar over time — and possibly as low as PARITY (meaning 1 euro only buys 1 dollar) even farther out in the future.
So how closely do you watch the currency markets? Are you following these moves I’m pointing out — or better yet, are you profiting from them? What do you think will happen to the dollar over the longer term?
And what will it mean for U.S. multinationals or other stocks? Can the market hold up, or even prosper, as foreign currencies tank? Or will the pressure be too much for stocks to bear? Share your thoughts and ideas by clicking here.
|Our Readers Speak|
Several of you weighed in on the stock market and the movements we’ve seen in the euro lately, so I wanted to tackle those comments today.
Reader Anthony G. said: “Bad choices and actions by politicians all over the world have the economy in a bad condition. The masses feel hopeless. The global economy will slow as a result.”
Plus, Reader Donald L. said: “I recall a number of years ago when the euro reached $ parity. The world did not end and a few, very few, beneficial changes were made to EU monetary policy and some pious mutterings about fiscal change that lasted about as long as effective European ‘unity.’
“We should simply resign ourselves to having a weak trading partner and use the whole thing as an example of something to avoid at home.”
But Reader Fred thinks we could see at least a short-term trend change soon. His comments: “The euro is way oversold. Look at a chart. Maybe a few more ticks but that should be about it. Should see a rally for a while and then it will start heading back down again.”
It’s not very often I agree with two different people on two different sides of the same debate! But this is one case. Yes, the euro is deeply oversold and due for a short-term bounce, Fred. But yes, Donald, I also believe that ultimately the euro could be headed back to parity given the different economic and policy tracks the U.S. and Europe are on.
Finally, Reader Rosalindr had the following to say about the stock market here: “After years of trying to chase the market and hitting that million dollar jackpot, I have finally grown wise in my old age and buy only solid companies with good dividends. No more speculation. I love boring stocks.”
Nothing wrong with boring, Rosalindr! Some of my best winners have been in safe, supposedly “boring” stocks. They can deliver great returns over time!
Don’t forget — this a great place to share your thoughts and insights with me and other investors. Do so by clicking here.
|Other Developments of the Day|
• eBay (EBAY, Weiss Ratings: C) is finally bowing to investor pressure and planning to split out its PayPal payments business. The online auction firm bought PayPal for $1.5 billion in 2002, but the two companies will trade independently starting next year. eBay shares surged on the news.
• Protests in Hong Kong continue to grab the attention of investors worldwide. They’re waiting to see whether this turns into another ugly battle between protestors and the government like we saw in Greece a few years ago … or if the protestors and the Chinese government pull back from the brink.
• We get some heavy-hitting economic data later this week in the form of the national ISM reading on manufacturing and the September payrolls report. But in the meantime, we got a softer reading on home prices from S&P/Case-Shiller (up 6.7 percent YOY vs. a forecast of 7.4 percent) and an ever-so-slightly softer Chicago PMI reading on regional manufacturing (60.5 vs. a forecast of 61.5).
As for consumer confidence, the Conference Board’s main index fell to 86 in September from 92.4 in August. That was worse than the average forecast of 92.
• The ruble is another currency whose value is collapsing, for different reasons than the ones I mentioned earlier. President Vladimir Putin’s sabre-rattling is driving foreign capital away. Anti-Putin sanctions are also harming the economy, giving foreign investors and Russian citizens another reason to dump rubles and ruble-based investments.
That’s reportedly forcing the Russian central bank to consider temporary capital controls. Some $100 billion has fled Russia so far in 2014, driving the ruble to a record low against a basket of foreign currencies.
Until next time,