Ameriprise Financial : How is the Dollar Impacting Markets?

How is the Dollar Impacting Markets?

Stocks resumed their losing ways last week, after two weeks of relative calm. The S&P 500 slid 3.1 percent, bringing its loss on the year to 8.0 percent. The weakness was localized among the sectors most sensitive to economic conditions, including consumer discretionary, technology, energy and financials, while utilities rose. There were two anomalies. The materials sector surged to an almost 5 percent gain after a sharp decline in the dollar midweek, and even industrial managed to post a fractionally positive return.

Approximately two-thirds of the S&P 500 have reported fourth quarter earnings, and the anticipated decline overall is now expected to be -3.8 percent. That represents an improvement from just a week ago when earnings for the quarter were on track to decline by 5.8 percent. A strong report from Alphabet helped. Unfortunately, for calendar 2016 the expected earnings growth rate fell to just 4 percent from 5 percent the week prior. Bond yields also reflected the lingering growth concern, as the ten-year note yield dropped from 1.92 to 1.84 percent, its lowest level in the past twelve months. The two-year yield fell to 0.72 percent from 0.78 percent. In Japan, the ten-year note yield fell to an almost imperceptible 0.2 percent.

The Dollar had a Wild Week

The dollar turned in a wild week. After the Bank of Japan (BOJ) initiated negative deposit rates the previous week, the yen plunged to 121.1 versus the dollar. However, following some softer economic data and comments from New York Fed President Dudley acknowledging that financial conditions had tightened since the Fed raised rates in December, the yen surged back to 116.9, wiping out all of the weakness from the Bank of Japan's move. The euro also strengthened against the dollar, climbing to 1.12 from 1.09. The DXY dollar index lost 2.4 percent. Oil prices enjoyed a brief surge midweek on the dollar's weakness, only to surrender the gains to end the week once again below $30 a barrel, down 12 percent from the previous week.

U.S. economic data last week did nothing to dispel the prevailing notion that activity has slowed. Manufacturing, construction spending, durable goods orders and even non-farm payrolls were all somewhat weaker than expected. The economy created 151,000 new jobs in January, below the 190,000 expectation and well below the 279,000 average of the past three months. There were, however, some points of notable strength in the report, complicating the Fed's outlook. Wage growth stayed elevated at 2.5 percent year-over-year, after climbing to a revised 2.7 percent in December. Both readings are the highest since 2009. In addition, the length of the average workweek edged higher by 0.1 hour to 36.4, matching its recovery high. And the manufacturing sector added 29,000 jobs for its strongest showing since November, 2014.

Stocks fell overseas last week as well. In local currency terms the EuroStoxx 50 dropped 5.4 percent, the Nikkei lost 4.0 percent, and the MSCI emerging market index fell 0.5 percent. Owing to the dollar's weakness however, in dollar terms those losses were trimmed to -2.9, 0.7, and 0.4 percent respectively. Stocks in China enjoyed a week of relative stability ahead of the lunar New Year. The Shanghai Composite gained 1 percent, but remains down 22 percent from the start of the year.

The Fed and the Dollar Likely to be top of Mind for Investors this Week

The economic calendar in the U.S. this week includes reports on retail sales and consumer sentiment. More importantly, Fed Chair Yellen is scheduled to testify before Congress on Wednesday and Thursday. What she says and how it impacts the dollar will dominate investor focus this week. In the Eurozone we will get a sense of how it ended last year with December industrial production and fourth quarter GDP.

In the absence of firming economic data investors continue to turn to central banks for evidence of interim support. The BOJ came through, but to what effect remains to be seen. The European Central Bank has hinted that it may do more in March. And this week it is the Fed's turn. Any relief from dollar strength would be welcome, so investors will be listening to Yellen's testimony for hint of a more dovish stance. Of course, some stronger economic data would be even better.

Important Disclosures:
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.

The U.S. Dollar Index (DXY) measures the dollar's value against a trade-weighted basket of six major currencies.

The Nikkei index is a price-weighted average of 225 stocks of the first section of the Tokyo Stock Exchange.

The MSCI Emerging Markets Index captures large and mid cap representation across 23 Emerging Markets (EM) countries. With 837 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The Shanghai Composite Index is a capitalization-weighted index of all stocks on China's Shanghai Stock Exchange.

The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.

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Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.

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Ameriprise Financial Inc. issued this content on 09 February 2016 and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on 09 February 2016 17:03:18 UTC

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