Summary
The impacts of the US dollar ‘wrecking ball’
US dollar now at 20-year highs. Some valuations are getting extreme, but drivers are fundamental and authorities intervention unlikely. Negative impacts range from tighter financial conditions, to pressure on commodities, emerging markets, and US tech. But are benefits to many European and Japanese exporters, and it is helping ease US inflation. The slumping GBP shows the pros and cons. FTSE 100 worlds top performer.
Markets react to less-bad news
Some equities relief with a more stable US dollar and 10-yr bond yields after recent surges. Data saw US services ISM strength, weak China trade, Europe’s energy support plans and biggest ever ECB rate hike. Corporate highlights were AAPL iPhone 14 launch and CINE.L $9bn bankruptcy. Coming week focus is on the US inflation report, ETH merge, and TWTR takeover vote. See video updates, and twitter @laidler_ben.
Europe’s political tests
Big month for Europe’s politics got bigger. A new UK PM, and Sweden, Italy elections. Big spending response to energy crisis is a short term relief to stressed markets. @EuropeEconomy.
Rising power of passive
September key month for world’ equity indices with rebalances from S&P 500 to FTSE. With $9 trillion in ETFs, double 2018. Boosted managers (like BLK) to index providers (MSCI).
Opportunity in commodity laggards
Many commodities surged past year. But not all. See case for opportunities in base (aluminium) and precious (like silver) metals.
Savers finally getting a little help
Hard-pressed savers finally seeing benefit of rising interest rates. But rates still way behind inflation, pushing investors up the risk curve, and helping banks. @TheBigBanks.
Crypto focus on Ethereum ‘merge’
Crypto assets helped by the stronger equity, and especially tech, performance. Focus this week’ is the Ethereum (ETH) merge, to boost scalability, improve supply/demand, and slash energy use. Bitcoin (BTC) saw concern over possible 140,000 coin overhang from the Mt. Gox pay-out. New US Fed supervision head Barr says stablecoin regulations a top priority.
Commodities held back by energy
Symbolic 100,000bpd OPEC production cut not enough to offset demand concerns. Whilst EU natgas prices fall as Europe responds with price caps and windfall taxes, impacting from carbon ETS to US natgas. Long-suffering precious metals helped by stabler dollar and yields.
The week ahead: Inflation leads busy week
1) Hope for another US inflation fall, with est. 8.2% vs prior 8.5%. 2) BoE delayed meeting after Queen’ death. 3) ‘Triple-witching’ F&O expiry plus S&P 500 rebalancing to drive big volume. 4) ORCL, ADBE, ITX.MC, HM-B.ST, MANU earnings. 5) Long awaited ETH ‘merge’ to PoS
Our key views: Inflation remains the focus
Easing US inflation key to sight of an end to Fed rate hikes and less recession risk. Supports from both resilient consumers and corporates, But recovery likely U not V shaped. Gradually lower inflation will be a bumpy ride but slowly de-risks market. Would allow higher-risk assets, big tech to crypto, alongside core defensives.
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | 2.66% | -4.77% | -11.52% |
| SPX500 | 3.65% | -4.97% | -14.66% |
| NASDAQ | 4.14% | -7.17% | -22.58% |
| UK100 | 0.96% | -2.00% | -0.45% |
| GER30 | 0.29% | -5.13% | -17.61% |
| JPN225 | 2.04% | -1.16% | -2.00% |
| HKG50 | -0.46% | -4.03% | -17.25% |
*Data accurate as of 12/09/2022
Market Views
Markets sensitive to less-bad news
- Equities got some relief with a more stable US dollar and 10-yr bond yields after recent surges. Macro data saw US services ISM strength, China trade weakness, and Europe’s big energy support plans and biggest ever ECB rate hike. Corporate highlights included the AAPL iPhone 14 launch and CINE.L $9 billion bankruptcy. Coming week focus is on the US inflation report, the ETH merge, and TWTR takeover vote.
Europe’s political tests
- A big month for Europe’s politics got even bigger. A new Conservative UK prime minister, Sweden’ election, and the Right to win Italy’s Sept. 25 elections. Plus the energy and cost-of-living crisis coming to a head after the Nord stream shut-off, and ECB’s biggest interest rate hike ever, +0.75%.
- There are no good European policy options but the coming big spending plans may be a relief to hard pressed markets. It will mechanistically cut inflation, prevent deep recession, mean seen top for gas prices. But at cost of higher bond yields and weaker EUR. @EuropeEconomy.
The rising power of passive
- September is a key month for changes to world’ equity indices, from S&P 500 to FTSE 100. Have surged in importance with the huge growth of passive exchange traded fund (ETF) industry that tracks. ETFs manage $9 trillion globally, doubling since 2018. There are now 40% more ETFs than stocks listed on the NYSE and NASDAQ.
- ETFs remorselessly attracted flows, through up and down markets. Benefit from being liquid, low-fee, tax efficient, diversified. Listed ETF managers (BLK to STT) and index providers (MSCI to SPGI) have done very well on back of this trend.
Opportunity in commodity laggards
- Bloomberg commodity index +23% past year. With cash it’s the only positive asset class. The post-covid demand rebound and decade of supply under investment drove big gains for most. But not all.
- China demand-focused base metals lost out. As did US dollar and interest rate sensitive precious metals. There are opportunities, under the right circumstances, even as commodity cycle cools. The energy crisis could tighten industrial metals, like aluminium, supply more than it hits demand. Whilst real-economy precious metals, silver and PGM’s, would benefit from a stabler dollar and less recession risk, with valuations very low.
Savers finally getting a little help
- Hard-pressed savers finally seeing benefit of rising interest rates. Especially welcome in regions, like Europe with aging populations and high savings. Yet bank savings rates sharply lag inflation and policy rates. Could keep pushing savers to higher yield and riskier bonds and dividend yield equities.
- It also helps banks (XLF), typically slow to pass rate rises to savers. The varying speed is driven by levels of bank consolidation, competition, and the need to meet loan demand. See @TheBigBanks.
Global ETF industry: Assets and Number of funds (15-years)
Crypto focus on long-awaited Ethereum ‘merge’
- Crypto assets were helped by the stronger equity, and especially tech, performance. Bitcoin (BTC) rose back towards $22,000.
- The long-awaited Ethereum (ETH) ‘merge’ from proof-of-work (PoW) to proof-of-stake (PoS) estimated for September 15th. Set to significantly boost its scalability, improve the supply/demand balance, and dramatically slash its energy use.
- Bitcoin (BTC) concerns over imminent overhang from 140,000 Mt. Gox payout from 2014 robbery.
- New US Fed supervision head Michael Barr said would make stablecoin regulation a top priority.
Commodities held back by energy
- Previously high-flying energy prices combined with further weak China trade data to hold back commodity complex. The Bloomberg commodity index is now down 14% from its June high.
- OPEC+ meeting agreed to symbolic 100,000 bpd production increase, and ready to cut more if demand risks build or Iran production returns.
- Elsewhere EU and UK natgas prices plunged as policymakers forcefully moved to cap prices ahead of the winter after Russia cut all Nord stream gas supplies unless sanctions were lifted.
- Precious metals, from silver to PGM’s were rare winners as recently surging US dollar stabilised.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | 3.59% | -4.49% | -25.06% |
| Healthcare | 4.54% | -1.13% | -9.89% |
| C Cyclicals | 5.15% | 0.26% | -21.12% |
| Small Caps | 4.04% | -1.57% | -16.14% |
| Value | 3.18% | 0.03% | -9.06% |
| Bitcoin | 7.21% | -7.37% | 54.96% |
| Ethereum | 9.65% | 1.93% | -54.00% |
Source: Refinitiv, MSCI, FTSE Russell
The week ahead: inflation leads a busy week
- We look for another US inflation fall (Tue) from 8.5% to 8.1%, on lower oil. As the Fed considers a 0.75% hike at its Sept. 21 meeting.
- The Bank of England delayed its scheduled meeting, set for a sharp 0.75% hike and 7th straight rate rise, after the death of the Queen.
- Friday see’s the ‘triple-witching’ of stock and index futures and options expiry. Plus the S&P 500 quarterly rebalance. To drive big volumes.
- See earnings from big tech’s ORCL and ADBE, European clothing retailers ITX.MC and HM B.ST plus football club MANU.
- 2nd biggest crypto asset Ethereum (ETH) to ‘merge’ from proof of work to proof of stake.
Our key views: Inflation remains the focus
- Easing US inflation key to sight of end to Fed rate hikes and easing of recession risks. Market supports in the meantime from both resilient consumers and corporates, But recovery to be U not V shaped. Gradually lower inflation will be a bumpy ride but it would slowly de-risk markets and allow room for more higher-risk assets, from big tech to small cap and crypto.
- Focus on core cheap and defensive assets to be invested in this ‘new’ world, of higher inflation and lower growth, and to manage still high risks. Sectors, like healthcare, defensive styles like div. yield, and related UK to China markets.
Fixed Income, Commodities, Currencies
| 1 Week | 1 Month | YTD | |
| Commod* | -0.49% | -3.80% | 19.51% |
| Brent Oil | 0.27% | -7.04% | 18.58% |
| Gold Spot | 1.11% | -4.31% | -5.62% |
| DXY USD | -0.51% | 3.16% | 13.55% |
| EUR/USD | 1.97% | -1.03% | -10.73% |
| US 10Yr Yld | 11.57% | 47.60% | 180.09% |
| VIX Vol. | -10.52% | 16.69% | 32.35% |
Source: Refinitiv. * Broad based Bloomberg commodity index
Focus of Week: The US dollar ‘wrecking ball’
US dollar at 20-year highs, with fundamental drivers making intervention unlikely
The US Dollar index hit 110 last week, a 20-year high against major currencies. Key levels were broken for the Yen (140), Euro (1.00), and Pound (1.15). The drivers remain two-sided. Higher US interest rates and global risk aversion boosting the dollar. Energy crisis and highly negative real interest rates depressing others. The Brazilian Real (BRL) and Russian Ruble are only major currencies up against the dollar this year. Some major crosses are reaching levels that saw previous intervention. With the 1985 Plaza accords to weaken the dollar, and 1998 Japanese and US intervention to bolster the Yen. Such concerted action seems unlikely now, with weakness fundamentally driven and many valuations (see below) now especially low..
Negative impacts of tightening financial conditions, commodities, EM, and tech
The stronger dollar has plenty of negative impacts, tightening financial conditions across the planet. In emerging markets (EEM), by raising financing and debt pressures, though less than historically. For commodities (DJP), by making them more expensive in local currency terms, therefore hurting demand. No surprise the stronger dollar has coincided with recent commodity weakness. For US tech (XLK) where a stronger dollar makes them less competitive abroad. 60% their sales come from overseas, the most of any sector. It also makes the inflation battle harder by ‘importing’ higher prices – like for oil – from abroad.
Example of the British Pound shows some of the pros and cons
Sterling (GBP) been in recent firing line. The UK current account deficit is at records and new government spending plans to worsen the 5% fiscal deficit. This draws parallels with weak emerging markets. But overlooks the freely floating exchange rate and zero foreign debt. This will make life more uncomfortable for consumers. With gasoline, US intellectual property from movies to music, and US holidays all more expensive. The silver linings are the benefits to inbound tourism, high-end property, and the FTSE 100. But the trade-weighted GBP could still get cheaper, with weakness focused so far vs US dollar and not other FX.
Benefits for many European and Japanese exporters, and for key US inflation
Weaker currencies can help export-focused company competitiveness. Especially in UK, Europe, and Japan that are full of these stocks, and where the US is a big major export market. The Nikkei225 has been positively correlated with a weaker Yen, which has helped boost some of the world’s lowest net profit margins. Similarly, it has helped the FTSE 100, whose components get 65% of sales abroad, successfully decouple from the dire UK domestic situation to be the ‘least bad’ major market performer this year. US inflation would be even worse without the strong dollar dampening imported inflation. This has helped support the recent 9.1% US inflation peak and outlook for a Christmas end to the Fed rate hiking cycle.
Real effective exchange rates* (10-years)
Key Views
| The eToro Market Strategy View | |
| Global Overview | Geopolitical risks alongside the Fed hiking cycle is boosting uncertainty and weakening markets. We see this as slowly fading, the global growth outlook secure, and valuations more compelling. Focus on cheap cyclical and defensive assets within equities, like Value, plus commodities, crypto. Relative caution on fixed income and the USD. |
| Traffic lights* | Equity Market Outlook |
| United States | World’s largest equity market (60% of total) seeing slowing GDP growth but still-resilient earnings growth. Valuations led market rout, and now at average levels, and are supported by peaked bond yields and high company profitability. Faster Fed hiking cycle is boosting recession risks. Focus on traditional cash-flows defensives, like healthcare and high dividend. Big-tech supported by structural growth outlook. See a gradual ‘U-shaped’ rebound as inflation falls. |
| Europe & UK | Favour defensive and cheap UK equities (‘Economies are not stock-markets’) over high risk/high return continental Europe. Recession risks high with Russia and energy crisis, threatening to overwhelm ‘buffers’ of rising fiscal spending (defence and refugees), low interest rates (slow to raise ECB), and weak Euro (50%+ sales from overseas). Equities partly cushioned by lack of tech, and 25% cheaper valuations vs US. Favour cheap and defensive UK over Continent. |
| Emerging Markets (EM) | China, Korea, Taiwan dominate EM (60% wt), and more tech-centric than US. Positive on China as economy reopens, cuts interest rates, and eases tech regulation crackdown. Valuations 40% cheaper than US and market out of favour. Recovery helps global sectors from luxury to materials. More cautious rest of EM on rising rates and strong USD. |
| Other International (JP, AUS, CN) | Canada and Australia benefit from strong equity market weight in commodities and financials, as global growth rebounds and bond yields set to rise. Japanese equities among cheapest of any major market and vaccination rates accelerating, but has structural headwinds of low GDP growth, an ageing population, and world’s highest debt. |
| Traffic lights* | Equity Sector & Themes Outlook |
| Tech | ‘Tech’ sectors of IT, communications, parts of consumer discretionary (Amazon, Tesla), dominate US and China. Expect more subdued performance as bond yields rise. But are structural stories with good growth, high margins, fortress balance sheets that justify high valuations. ‘Big-tech’ the new defensives. ‘Disruptive’ tech more vulnerable. |
| Defensives | Core positions as macro risks rise and bond yields are better priced. Consumer staples, utilities, real estate attractive defensive cash flows, less exposed to rising economic growth risks, and robust dividends. Offset impact of higher bond yields. Healthcare most attractive, with cheaper valuations, more growth, some rising cost protection. |
| Cyclicals | Higher risk cyclical sectors, like discretionary (autos, apparel, restaurants), industrials, energy, and materials, are cheap and attractive in a ‘slowdown not recession’ scenario. Are sensitive to re-opening economies, resilient GDP growth, and higher bond yields, with depressed earnings, cheaper valuations, and have been out-of-favour for many years. |
| Financials | Benefits from higher bond yields, charging more for loans than pay for deposits. Also one of cheapest P/E valuations, and room for large dividend and buyback yields. But is being outweighed by rising recession risks, with lower loan demand and higher defaults. Banks most exposed. Insurance and Diversifieds (like Berkshire Hathaway) least. |
| Themes | We favour Value over Growth on GDP resilience, lower valuations, rising bond yields, under-ownership after decade under-performance. Dividends and buybacks recovering with cash flows. Power of dividends under-estimated, at up to 1/2 of total long term return. Secular growth of Renewables and Disruptive Tech themes. |
| Traffic lights* | Other Assets |
| Currencies | USD well-supported for now by rising Fed interest rate outlook and ‘safer-haven’ bid on virus fourth wave virus. This is likely more modest than prior USD rallies as rest of world growth recovers and virus fears ease. A strong USD traditionally hurts EM, commodities, US foreign earners, such as tech, but helps EU and Japan exporters. |
| Fixed Income | US 10-year bond yields to rise modestly as inflation above 2% average Fed target, ‘real’ inflation-adjusted yields negative, Fed to gradually tighten policy. Will be modest as inflation expectations already high, wide spread to other market bond yields, and structural headwinds of all-time high debt, poor demographics, and low productivity. |
| Commodities | Lower but above average prices helped by GDP growth, ‘green’ industry demand, supply under-investment, recovering China, and Russia supply crisis. Industrial metals and battery materials well positioned. Oil by slow return of OPEC+ supply and Russia 10% world supply problems. Gold helped by risk-aversion but held back by rising bond yields. |
| Crypto | Institutionalization of bitcoin market barely begun, as asset class benefits from very strong risk-adjusted returns and low correlations with other assets. Clear supply rules a benefit as inflation high. Volatility still high, with the 16th -50% pullback of the last decade. Adoption and development continuing regardless. See Ethereum merge to Proof-of-Stake. |
| *Methodology: | Our guide to where we see better risk-adjusted outlook. Not investment advice. |
| Positive | Overall positive view, and expected to outperform the asset class on a 12-month view. |
| Neutral | Overall neutral view, with elements of strength and weakness on a 12-month view |
| Cautious | Overall cautious view, and expected to underperform the asset class on a 12-month view |
Source: eToro
Analyst Team
| Global Analyst Team | |
| CIO | Gil Shapira |
| Global Markets Strategist | Ben Laidler |
| United States | Callie Cox |
| United Kingdom | Adam Vettese Mark Crouch Simon Peters |
| France | Antoine Fraysse Soulier David Derhy |
| Holland | Jean-Paul van Oudheusden |
| Italy | Gabriel Dabach |
| Iberia/LatAm | Javier Molina |
| Poland | Pawel Majtkowski |
| Romania | Bogdan Maioreanu |
| Asia | Nemo Qin Marco Ma |
| Australia | Josh Gilbert |
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