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NEWS: Dollar losing ground versus the EUR, GBP, JPY and CHF January 31, 2020 at 04:36PM

fcfx

Holding in vs the commodity currencies.
As stocks had lower, yields had lower, and gold moves higher, the dollar is getting hit versus the EUR, GBP, JPY and the CHF.

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Scrimmage Line: Month-End Profit-Taking Might Weigh, Along With Pre-Weekend Fears

Key Takeaways:

  • Stocks have a weaker tone amid pre-weekend virus fears
  • Amazon up sharply as investors cheer its earnings results
  • Overnight trading Sunday could be important in setting Monday’s tone

It looks like many investors are running routes out of town before the big football weekend. Disappointing earnings news from Caterpillar (CAT) and Exxon Mobil (XOM), more coronavirus fears, and some end-of-the month positioning blocked rally attempts early on.

New cases of the virus in Russia appeared to spook markets early on, and it’s also hard to have a good start when two heavyweights like CAT and XOM are getting tackled. Also, today’s the last day of January, and many investors had a great month in the market. The end of the month can sometimes see a little profit taking come in.

As we saw last Friday, some people could feel the risk of exposure—not necessarily to the disease itself but rather the market impact of any coronavirus news that were to come out over the next two days when the markets are closed. So we might see some load-lightening today, regardless of any fresh negative developments. Maybe investors think they can more easily enjoy the game Sunday without worrying so much about the stock market.

Today In: Money

That said, investors might want to keep in mind that futures trading starting this Sunday night (yep, right around game time) is probably going to be important for setting Monday’s tone. The market in Shanghai will be back open after the extended holiday—the Shanghai market has been closed since Jan. 23—so that could be a big one to watch. Also, remember to consider watching U.S. futures trading once it starts Sunday to get a sense of the tone.

CAT got hit by what some analysts called weak guidance. CAT’s call could be an interesting one because of the company’s heavy exposure to China. Missed earnings at XOM just reinforced the struggles of the Energy sector.

The early weakness today is kind of surprising in one sense, when you consider where things ended up Thursday. Stocks really turned it around to end the session after the sharp earlier losses. Sometimes a strong finish can set up a positive tone for the next day, but not this time, apparently. Hong Kong stocks fell again Friday, but less than 1%.

Staying overseas here for a minute, Britain formally leaves the European Union tonight, but that’s more symbolic than anything else. The country still has until Dec. 31 to work out its future relationship with Europe. Negotiations begin in March. If they break down or don’t make progress, it could set up a day of reckoning down the road. Just another geopolitical thing to keep investors on their toes this year.

Double-Digit Gains for AMZN

Amazon’s (AMZN) solid earnings after the closing bell yesterday did give the market some temporary excitement. Shares of the online retailer/cloud/delivery/grocery store/streaming mega-giant jumped more than 10% in pre-market trading to move back above $2,000 for the first time since late July.

Guidance came in right around the middle of the Street’s consensus and might have seemed a bit conservative to some, but the 21% growth in Q4 revenue solidly beat analysts’ projections and EPS was in the stratosphere at $6.47 vs. the $4.04 that analysts expected. Closely-watched Amazon Web Services (cloud) business revenue rose 34% and slightly edged out consensus views. It looks like gains on the services side of things might have helped gross margins, but shipping expenses do keep growing.

Those rising costs are a concern, but AMZN appears to be doing a good job with the “sell them the razor and they’ll keep buying the blade” approach. With paid Prime customers now at 150 million, the company has a big base that’s probably not leaving AMZN’s ecosystem anytime soon. In sector terms, it’s as if AMZN has shifted from discretionary to staple in many households.

Meanwhile, Visa (V) shares fell in pre-market trading as investors reacted to the company’s outlook. As Reuters noted, V said revenue this year would be crimped by incentives it provides to banking clients.

IBM (IBM) shares went the other way, rising sharply in pre-market trading as the company announced a CEO change.

Gong, Gong, Gong

The markets are ringing like a giant bell this week, gyrating around without a firm sense of direction. Things went back and forth from big losses to slight gains in stocks yesterday, but bonds, gold, crude, and copper all kept pointing toward fear being a big overhang as the coronavirus officially became a World Health Organization (WHO) emergency. The 10-year yield slipped below 1.55% for the first time in four months, but volatility did fade a bit late Thursday as stocks mounted their late comeback. Yields remained around 1.56% early Friday.

Some of the late recovery yesterday might have reflected investors climbing back in after selling on anticipation of the WHO move. The decision was announced pretty late in the session and many had expected it. The WHO declaration tells countries that the situation is “grave,” and allows governments to decide whether to close borders, cancel flights, screen people arriving at airports, or take other protective measures.

Some of that is already happening, and travel stocks took it on the chin again Thursday. The Dow Jones Transportation Average ($DJT) posted more losses and is down about 3% over the last five sessions as airline stocks lose altitude. Worries about Boeing’s (BA) 737 MAX issues already had the $DJT hurting, but the virus just pours salt in the wound.

Semiconductors also got chipped Thursday, with Intel (INTC), Nvidia (NVDA), and Texas Instruments (TXN) all losing ground at times during the session. Overall, the sector finished just a little lower yesterday, but is down almost 5% over the last week as old fears about Chinese demand rose again like a vampire haunting investors. Still, it’s hard to get too dizzy when you’re talking about a part of the market that’s up more than 45% from a year ago.

Two other big names continued climbing Thursday as Microsoft (MSFT) and Tesla (TSLA) rallied off their respective earnings. Both maintained big gains even when the market was hitting its lows Thursday.

MSFT saw a bunch of upgrades as positive news about their web services show the company making up more and more ground vs. competitors. They’ve completely remodeled their business in a brand new area and investors and analysts seem to love it. The stock took the market on its back last year and continues to lead.

February Frenzy Begins Monday: After this crazy week of earnings, 60% of the S&P 500 companies will have reported. If you think things could quiet down next week, however, you’re in for a surprise. Some of the big burners opening their books the first few days of February include medical giants Merck (MRK), Bristol-Myers Squibb (BMY), and Abbvie (ABBV), FAANG member Alphabet (GOOGL), entertainment industry behemoth Walt Disney (DIS), consumer products firm Philip Morris (PM), and automakers General Motors (GM) and Ford (F).

Dollar Watch: Six months ago, the Fed began to lower rates after nearly four years of hiking them. At that point, the dollar index stood just above 98. Now, after three rate cuts and the Fed resolving again this week to keep a low rate policy, where is the dollar? It traded around 97.9 on Thursday afternoon. Economics textbooks will likely tell you that a low rate environment tends to weaken the dollar, and maybe the Fed hoped its policy would do that and lower the cost of U.S. goods for customers overseas. If that was a goal, it failed, possibly because of all the geopolitical fears over the last six months. From Iran to trade with China to Washington politics to Brexit to the coronavirus, people have been scurrying for “safety,” in bonds and the dollar. At one point this month the dollar index fell to 96.39, but that’s as far down as it’s been.

If the dollar starts to lose ground, it might be one clue that fears are fading and might be a positive signal for the stock market. In the meantime, there’s no relief from the strong dollar’s painful impact on earnings for multinational corporations, and while some recent surveys of economists show expectations for the dollar to fall in 2020, some analysts aren’t buying it. The dollar bulls say economic growth just isn’t necessarily strong enough outside of the U.S. to make the greenback cheaper anytime soon.

Calling TINA: An acronym we’ve been seeing more of might have gotten some reinforcement with the Fed’s decision to keep rates unchanged Wednesday. When bonds rally this hard and cash pays nearly nothing, a few people are starting to say “There Is No Alternative” (TINA) to buying stocks. That’s how some analysts explain the fierce rally since last October. When investors can’t find good reasons to put their money into Treasuries or leave it in the bank, they might feel forced toward equities. And not just any equities. Look how Utilities are doing, up more than 6% year-to-date and 28% over the last year. That’s usually a pretty sleepy sector, but with bond yields well below 2% and investors chasing income, Utilities become more and more in demand. Now the sector is close to all-time highs, so maybe investors could start looking elsewhere. Money’s been pouring into corporate bonds, driving down yields even for some lower-quality ones. U.S. investment-grade bonds now yield an average of just 2.8%, while high yield goes for 5.1%, Barron’s said recently. If you’re thinking about parking money in high-yield corporate bonds, remember to know the risks going in, which include possible default and loss of your investment.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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Euro-Dollar Forecasts Point Higher but U.S.-EU Tariff Rhetoric Underlines Key Risk for 2020

– EUR softens Thursday though market looks for gains in 2020.

– But U.S. rhetoric highlights underappreciated risk to outlook.

– U.S.-EU trade tensions are increasing, risk of conflict rising.

– Trump may use EU as trade bogeyman in election campaign.

– Could harm confidence and threaten vital economic recovery.

Image © Adobe Images

– EUR/USD Spot rate: 1.1089, down 0.06% today

– Indicative bank rates for transfers: 1.0701-1.0779

– Transfer specialist indicative rates: 1.0923-1.0989 >> Get your quote now

The Euro softened early in the morning session Thursday although markets continue to expect it to advance on the Dollar this year even as rhetoric from President Donald Trump and other U.S. officials increasingly underlines what is an often underappreciated risk to the single currency.

President Donald Trump said from Davos, Switzerland Wednesday that his threat to impose tariffs on imports of European cars will be succesful in delivering a long-elusive trade agreement and likely before the November presidential election, raising the spectre of an election campaign in which the EU plays the bogeyman role that was reserved for China back in 2016.

This was after the White House incumbent said Tuesday that he’ll “strongly consider” tariffs on European cars if a deal is not reached. The U.S. has long complained of lopside car tariffs and EU ‘protecionism’ that shuts U.S. farmers out of the continental market for agricultural goods, although 18 months of talks have yet to produce tangible results. EU trade commissioner Phil Hogan asked for a reset of the trade relationship with the U.S. when in Washington last week, although he also said there would be “no unity” on this in the short-term.

“The ink on the deal was barely dry before President Trump had returned to making trade threats, this time in an attempt to strongarm the European Union into opening its agricultural markets to the US and to encourage Europe to co-operate with American policy on Iran,” says Raoul Leering, head of international trade analysis at ING. “The prospect of further trade conflicts is never far away while he is in the White House. So there is little reduction in uncertainty.”

Above: Euro-to-Dollar rate shown at hourly intervals.

Ironically, the Euro converted a modest intraday loss into a profit shortly after mid-day on Wednesday and around the same time Trump hit the airwaves, even though a tariff conflict with the U.S. could have more severe repercussions for the Eurozone economy than the U.S.-China tariff fight did. And that recently de-escalated dispute was enough to put Germany’s economy close to the door of recession even though there was no direct involvement of European countries.

The impact of the U.S.-China dispute on the Eurozone and Trump’s rhetoric underline one of the most underappreciated risks to an otherwise rosy consensus outlook for the Euro-to-Dollar rate this year.

Markets see the Euro rising to 1.15 by year-end while some tip it even higher than that, based in part on the expectation that safe-haven flows into the greenback will dry up alongside the ink on the much vaunted ‘phase one deal’ with China that finally appeared in writing this month.

“We certainly see more risk now from a blow up in the US-EU trade spat following EU Trade Commissioner Phil Hogan’s visit to the US,” says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG in a note to clients last week.

Safe-haven demand was a notable crux of support for the Dollar last year while economic underperformance weighed on the Euro as the German and European factory sectors suffered in sympathy with the Chinese as well as broader global economies. So great was investor unease about the outlook for global growth, that not even three interest rate cuts from the Federal Reserve could dislodge the greenback from its upward trajectory.

Above: Euro-to-Dollar rate shown at daily intervals.

And dislodged from its upward trajectory the Dollar must be if the Euro is to have any hope of exiting a narrow multi-month range and recovering from losses wrought on it since the early months of 2018. But with weakness in the Dollar aside, the only way the Euro can recover lost ground is through an economic recovery that enables the ‘normalisation’ European Central Bank interest rate policywhich would require a U.S.-EU trade conflict to be avoided

“Now that the phase one deal between the US and China has been signed, the US will shift focus to the EU. Frustrations have been increasing on both sides of the Atlantic. The EU has made little progress on US requests related to defense spending, China policy and trade policy. We expect the EU to continue negotiations in the usual way, through stalling techniques and retaliations if need be,” says Philip Marey, a senior U.S. strategist at Rabobank.

The Euro is one of the lowest yielding major currencies thanks to the negative interest rate policy of the ECB and for that reason it has become a popular ‘funding currency’ that investors borrow and then sell in order to fund bets on higher yielding assets. That, and the current 1.75% cash rate of the Fed explain why the Euro-to-Dollar rate has remained within such a narrow range against the Dollar even during bouts of weakness in U.S. exchange rates.

Talk of tarifs on EU cars comes amid a growing spat between the U.S. and some EU countries, including the UK and France, over a new and contentious ‘digital services tax’. This will target technology company revenues and profits, much to the ire of a U.S, that hosts and headquarters many of the world’s leading technology firms. The U.S. is also threatening tariffs for those countries that go ahead with such levies, which puts the UK and France in the firing line.

Above: Euro-to-Dollar rate shown at weekly intervals.

“Under Section 301 procedures the US government is legally permitted to implement tariffs against foreign countries that violate existing agreements or engages in “unjustifiable” or “unreasonable” acts. The digital services tax has been deemed as such,” MUFG’s Halpenny says.

In October 2017 the EU threw its weight behind an Organisation for Economic Co-operation and Development initiative that both say is aimed at updating international tax rules to make them fit for the digital era, although the OECD’s work has gone beyond the scope of existing tax treaties and now includes a proposal for minimum levels of taxation among all signatories.

The EU’s official stance is to proceed alongside the OECD although France introduced a tax of its own accord in January which has since been suspended and the UK is moving toward one under Prime Minister Boris Johnson.

The U.S. has threatened retaliation against both, although French Finance Minister Bruno Le Maire said Thursday that Paris is close to a deal with Washington that would avert hostilities on the matter.

“I expect business to continue their ‘wait and see’ approach with regards to investments, which implies only modest growth of industrial production. Therefore growth in world trade will be limited to around half of one per cent. That is pretty dismal,” says ING’s Leering.

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