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Beyond the Numbers

Surging Dollar May Contribute To Continued Weakness On Wall Street
9/26/2022 8:41 AM

The major U.S. index futures are currently pointing to a lower open on Monday, with stocks likely to see further downside following last week’s sell-off.

A continued surge in the value of the U.S. dollar is likely to weigh on the markets, with the greenback hitting a record high versus the British pound.

Aggressive interest rate hikes by the Federal Reserve continue to contribute to the increase by the dollar along with Britain's new chancellor Kwasi Kwarteng announcement of a sweeping package of tax cuts.

“Such U.S. dollar strength has historically led to some kind of financial/economic crisis,” said Morgan Stanley chief U.S. equity strategist Michael Wilson. “If there was ever a time to be on the lookout for something to break, this would be it.”

Concerns about the outlook for the global economy may also continue to weigh on the markets amid worries the increases in interest rates around the world will lead to a recession.

The Fed and other central banks have indicated they plan to continue raising rates in an effort to combat stubbornly elevated inflation.

In the coming days, traders are likely to keep an eye on reports on durable goods orders, consumer confidence, new home sales and personal income and spending.

Stocks moved sharply lower during trading on Friday, extending the notable downward move seen over the past several sessions. With the steep drop on the day, the Dow dropped to its lowest closing level in over a year, while the Nasdaq and the S&P 500 hit three-month closing lows.

The major averages rebounded from their lows of the session going into the close but continued to post steep losses. The Dow tumbled 486.27 points or 1.6 percent to 29,590.41, the Nasdaq dove 198.88 points or 1.8 percent to 10,867.93 and the S&P 500 plunged 64.76 points or percent to 1.7 percent to 3,693.23.

Closing lower for the fourth consecutive session, the major averages also posted steep losses for the week. The Dow slumped by 4.0 percent, while the S&P 500 and the Nasdaq plummeted by 4.7 percent and 5.1 percent, respectively.

Concerns about the outlook for the global economy continued to weigh on Wall Street following aggressive interest rate hikes by central banks around the world.

Traders remain concerned the central banks' efforts to combat elevated inflation will push the global economy into a recession.

The Federal Reserve raised interest rates by another 75 basis points earlier this week and signaled more significant rate hikes later this year.

While the Fed's projections pointed to an eventually tapering of rate hikes by next year, traders worry about the outlook for the global economy in the months ahead.

Fed Chair Jerome Powell spoke at a Fed Listens event this afternoon but did not specifically comment on monetary policy, instead commenting on the economy in general terms.

"We continue to deal with an exceptionally unusual economic set of disruptions. As policymakers, we are committed to using our tools to help steer the economy through what has been a uniquely challenging period," Powell said.

He added, "The insights you share in these events help us home in on the challenges and opportunities that are shaping what we might think of as the new normal of the American economy."

Energy stocks turned in some of the market's worst performances on the day amid a steep drop by the price of crude oil.

Reflecting the sell-off in the energy sector, the Philadelphia Oil Service Index plummeted by 8.3 percent, the NYSE Arca Oil Index tumbled by 7.3 percent and the NYSE Arca Natural Gas Index dove by 6.4 percent.

Gold stocks also moved sharply lower along with the price of the precious metal, dragging the NYSE Arca Gold Bugs Index down by 5.1 percent.

Concerns about a global recession also contributed to substantial weakness among steel stocks, as reflected by the 4.4 percent nosedive by the NYSE Arca Steel Index.

Airline, networking, and financial stocks also saw considerable weakness, moving lower along with most of the other major sectors.

Commodity, Currency Markets

Crude oil futures are sliding $0.86 to $77.88 a barrel after plummeting $4.75 to $78.74 a barrel last Friday. Meanwhile, after tumbling $25.50 to $1,655.60 an ounce in the previous session, gold futures are slipping $6.10 to $1,649.50 an ounce.

On the currency front, the U.S. dollar is trading at 143.98 yen versus the 143.31 yen it fetched at the close of New York trading on Friday. Against the euro, the dollar is trading at $0.9651 compared to last Friday’s $0.9687.

Asia

Asian stocks fell on Monday to extend recent losses, the dollar surged to new 20-year highs on rising yields, gold held at 2-1/2-year trough and oil extended last week's losses as recession fears gripped financial markets.

China's Shanghai Composite Index slumped 1.2 percent to 3,051.23 ahead of factory activity data due later in the week. Hong Kong's Hang Seng Index hit an 11-year low before recouping some losses to end the session 0.4 percent lower at 17,855.14.

The Chinese government raised the foreign exchange risk reserve requirements for financial institutions to stem a drop in the yuan, which touched a 28-month low against the dollar.

Japanese shares closed lower on concerns that high inflation and aggressive policy tightening could trigger a global economic recession. A measure of Japanese factory activity hit a 20-month low in September, adding to concerns about slowing global growth.

The Nikkei 225 Index plunged 2.7 percent to 26,431.55 as traders returned to their desks after a long weekend. The broader Topix ended 2.7 percent lower at 1,864.28.

Tech stocks led losses, with Tokyo Electron and SoftBank Corp falling 4-5 percent. Mazda Motor Corp. lost 5.6 percent on a Nikkei report that the automaker is discussing ending production in Russia.

Seoul stocks hit over two-year lows as a slew of weak European and U.K. business activity data as well as historic tax cuts unveiled by the British government fuelled fears of a global economic downturn.

The Kospi dove 3.0 percent to 2,220.94, extending losses for a fourth straight session and marking the lowest closing since July 27, 2020. Tech heavyweights Samsung Electronics and SK Hynix both fell over 1 percent, while LG Energy Solutions, Hyundai Motor and LG Chem lost 3-5 percent.

Daewoo Shipbuilding & Marine Engineering soared 13.4 percent after Hanwha Group was named as the preferred bidder to acquire the company.

Australian markets ended at a three-month low as a surging greenback weighed on the mining and energy stocks. The benchmark S&P ASX 200 Index dropped 1.6 percent to 6,469.40, while the broader All Ordinaries Index closed 1.8 percent lower at 6,667.50.

Fortescue Metals Group, BHP, Rio Tinto, Woodside Energy Group and Santos plummeted 5-7 percent as the dollar index climbed above 114.50 for the first time since 2002, supported by rising Treasury yields.

Gold miners also succumbed to selling pressure, while healthcare stocks gained ground, with CSL jumping 2.4 percent.

Europe

European stocks are turning in a mixed performance on Monday after suffering heavy losses last week on worries about an economic downturn.

A renewed sell-off in British gilts pushed euro zone yields higher after Britain's new chancellor Kwasi Kwarteng announced a sweeping package of tax cuts.

Investors were also digesting the victory of a right-wing bloc led by Giorgia Meloni in Italy's parliamentary elections on Sunday.

In economic news, the Ifo institute said its German business climate index fell to 84.3 in September from 88.5 in August, with both the current assessment component and expectations dropping significantly.

Expectations are now at their lowest level since the financial crisis as a result of high inflation and concerns over its implications on corporate costs and consumer demand.

While the French CAC 40 Index is up by 0.1 percent, the German DAX Index is down by 0.1 percent and the U.K.’s FTSE 100 Index is down by 0.8 percent.

Iberdrola has moved to the downside. The Spanish utility has reportedly hired Barclays to sell up to 49 percent in a portfolio of Spanish renewable power projects.

German utility RWE has also dropped. The company has entered into an agreement with Abu Dhabi National Oil Company (ADNOC) on liquefied natural gas (LNG) supplies.

Housebuilders Barratt Developments, Taylor Wimpey and Persimmon have also fallen on concerns that interest rates will rise a lot more than expected earlier.

Meanwhile, consumer goods giant Unilever has advanced on news its CEO Alan Jope will retire at the end of next year.

Valneva SE shares have also jumped. The French vaccine maker focused on infectious diseases said it is in active discussions with a prospective partner for potentially funding the development of a potential second-generation COVID-19 vaccine.

U.S. Economic Reports

Boston Federal Reserve President Susan Collins is scheduled to speak before the Greater Boston Chamber of Commerce at 10 am ET.

At 12 pm ET, Atlanta Federal Reserve President Raphael Bostic is due to participate in a Washington Post Live interview on the causes and impact of income and wealth inequality in the United States.

The Treasury Department is scheduled to announce the results of this month’s auction of $44 billion worth of two-year notes at 1 pm ET.

At 4 pm ET, Cleveland Federal Reserve President Loretta Mester is due to speak on the economic outlook and monetary policy before a hybrid Massachusetts Institute of Technology Golub Center for Finance and Policy Distinguished Speaker Series.
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