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Dollar Gains Momentum, Earnings in Focus, and Central Bank Decisions Loom in 2Q2024
Dr. Mahnoosh Mirghaemi
October 20, 2024
4 min read
The U.S. dollar is making a strong comeback, grabbing the attention of long-term investors. For the second week in a row, net-long positions have increased, as reported by the CFTC (Commodity Futures Trading Commission). With the U.S. economy remaining robust and the Federal Reserve not rushing toward rate cuts, the dollar appears well-positioned for further gains. Investors have room to increase their bets, as the current level of long positions is still below the peak seen earlier this year. In U.S. equity markets, the S&P 500 is holding near record highs, but a notable rotation is happening. Defensive sectors, like utilities, outpaced growth last week, while energy stocks lagged behind as oil prices dipped. The market's breadth is encouraging, as it’s not entirely dependent on tech giants. However, financial stocks are looking stretched, with many companies appearing overbought—a potential red flag that may signal a short-term correction.
European equities have been more restrained compared to the U.S., but they continue to move upward thanks to central bank support. The Stoxx Europe 600 has been consolidating gains, with inflation easing and expectations of more rate cuts from the ECB. Yet, Europe’s economic backdrop remains shaky, especially in Germany, where the economy is shrinking for the second year in a row. Earnings season in Europe is mixed, with major players like ASML and LVMH falling short of expectations. Despite these disappointments, European markets are proving resilient. Sentiment among investors has improved, with hopes pinned on monetary easing to sustain the rally intothe year-end. However, risks remain, particularly in the banking sector, which has been one of the top performers in 2024 but could be vulnerable to changes in global trade policies and interest rates.
Looking ahead, the spotlight is on the Bank of Canada (BoC) as it weighs a potential rate cut. Economists are split on the size of the cut, with predictions ranging from 25 to 50 basis points, while a few are expecting no move at all. Despite the yield gap widening between U.S. and Canadian bonds, the loonie has remained relatively firm, though a larger rate cut could trigger weakness.In the U.S., bond yields remained relatively stable last week despite several potential catalysts. With a five-year TIPS auction and a small $20 billion reopening on the calendar, bond supply could provide more direction for yields. Traders will also closely watch remarks from several Federal Reserve officials, although little change is expected in the overall rate outlook.
Investment-grade corporate bond sales spiked following the earnings season, particularly from financial institutions eager to capitalize on low spreads before potential market volatility sets in ahead of the U.S. election. With corporate bond spreads at their tightest in nearly 20 years, borrowers are rushing to secure favourable rates. However, this disconnect between spreads and credit fundamentals raises concerns that a correction could be looming. Investors should remain cautious, as the current market conditions may not last. While tight spreads can offer short-term opportunities, the risk of a correction grows as corporate earnings and macroeconomic conditions evolve.
Next week will be pivotal for market sentiment, with key earnings reports from Tesla and Boeing taking centre stage. Tesla faces increasing scrutiny after disappointing vehicle sales and growing doubts about its robotaxi strategy. A weaker performance could weigh on tech stocks, which have been driving much of the year’s gains. Boeing is also under the microscope as it looks to raise capital while avoiding a downgrade to junk status. The market will be watching closely, as Boeing's financial health could impact both equity and bond markets. With several Federal Reserve officials scheduled to speak next week, investors will be looking for clues about future policy direction. However, with little new economic data on tap, corporate earnings and bond markets will likely drive market movements.
As we approach the final stretch of 2024, the markets are showing both strength and fragility. In the U.S., the dollar’s momentum and solid economic data offer a supportive backdrop, while Europe remains buoyed by central bank action despite slower economic growth. Investors should remain cautiously optimistic but vigilant, particularly in sectors like financials where valuations appear stretched. Earnings season, particularly reports from Tesla and Boeing, could introduce volatility, and bond market conditions warrant careful attention. Investors should stay nimble, adjusting strategies as the earnings season unfolds and central bank policies become clearer. Diversification across assets and sectors remains key to navigating the market uncertainties ahead.
