The dollar will weaken and these stocks could outperform, says Evercore

Stock Market


Hopes that the Federal Reserve may be less aggressive in hiking borrowing costs than previously feared have rippled swiftly across markets in the past week. Stocks have rallied as bond yields have dropped. And it has brought the dollar’s rampage to a shuddering halt.

The dollar index DXY,
+0.11%,
which hit a 20-year high above 108.5 in July, is now near 105.5.

“Risks to dollar dominance may be rising,” says Evercore, and investors should position for the benefit a softer buck may bring to certain parts of the stock market.

There are two factors that will weigh on the greenback, one short term and the other long term, reckons the investment bank.

More immediately, softening inflation expectations could allow the Fed to slow the pace of monetary tightening, or even pause. Thus the interest-rate differentials with other major economies that have been supporting the US currency will moderate.

This should also feed into equities more broadly. “A pause — or the end of the hiking cycle, only known in hindsight (which investors may have overzealously discounted this past week) — has tended to see stocks rally, albeit with elevated volatility,” says Evercore.

Looking further ahead, Evercore warns that US government debt service costs are expected to rise to record levels, affected by quantitative tightening, “and the secular move to higher interest rates and the ever-ballooning debt, prospectively pressuring the ‘World’s Reserve Currency.’ “

So, how best to benefit in stocks? Choose those with the highest international revenue exposures and for whom a weaker buck provides a competitive advantage. And it is also good if the rest of the world’s growth improves relative to the US

Source: Evercore ISI

Evercore has dubbed this group the ‘Dollar Down Dominators’ and they can be found within the technology, energy, industrial communication services, consumer staples and discretionary sectors. Even better if many in the market have been betting against them.

“Names from these dollar-sensitive sectors with greater than 70% foreign revenue exposure and high short interest, underperforming their peer group in 2022…could outperform,” says Evercore.

For example, Nvidia NVDA,
+1.53%,
with its 84% ​​foreign revenue exposure and the stock’s recent struggles, is a top pick.

Source: Evercore ISI

Conversely, stocks from these sectors with less than 30% foreign revenue exposure, low short interest, which have outperformed their peer group year-to-date — and which Evercore calls ‘Falling Dollar Falling Angels’ — could underperform. These include Lockheed Martin LMT,
+1.32%,
Devon Energy DVN,
-2.04%
and Kraft Heinz KHC,
+1.63%.

Markets

S&P 500 futures ES00,
-0.56%
slipped 0.5% to 4,100 early Tuesday, easing back from near two-month highs. WTI crude futures CL.1,
+0.35%
dropped 1% to $93.07 a barrel ahead of the latest meeting of the Organization of the Petroleum Exporting Countries on Wednesday. Gold GC00,
+0.44%
fell 0.1% to $1,787 an ounce and bitcoin BTCUSD,
-0.67%
lost 0.8% to $22,841.

The buzz

Markets are jittery, with Asian bourses notably weak, as traders worry about deteriorating relations between the US and China over House Speaker Nancy Pelosi’s visit to Taiwan. Hong Kong’s Hang Seng Index HSI,
-2.36%
dropped 2.4% on Tuesday.

Pinterest PINS,
+2.62%
shares are surging 19%, after activist investor Elliot Management said it had become the group’s biggest investor.

The yield difference between US 10-year Treasurys and 3-month notes has shrunk to just 9 basis points. An inversion of this spread would be seen as another market confirmation of recession in the world’s biggest economy.

It is another busy day for corporate earnings. Uber UBER,
+4.90%,
DuPont DD,
-1.68%
and Caterpillar CAT,
-1.71%
are among those releasing their numbers before the market opens. After the close comes another big batch, including Advanced Micro Devices AMD,
+2.45%,
Starbucks SBUX,
+0.15%,
PayPal PYPL,
+2.35%,
Airbnb ABNB,
+0.20%
and MicroStrategy MSTR,
-3.61%.

US economic data on Tuesday includes JOLTS job openings for June, due at 10 am Eastern.

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The chart

Remote work for millions of workers during the COVID-19 pandemic meant fewer visits to coffee shops near offices, notes Bank of America. And despite the end of lockdowns and other restrictions, surveys suggest workers still spend one third of all paid work days working from home. BofA has crunched its own merchant transaction data and found that: “while coffee shop sales volume rebounded significantly since the initial lockdown in 2020, it has plateaued in recent months and is still below prepandemic levels. This highlights the continuing structural change in the nature of work.”

Source: Bank of America

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 am Eastern.

Tickers

Security names

TSLA,
+0.04%

Tesla

GM,
+2.26%

GameStop

AMC,
+5.56%

AMC Entertainment

NIO,
+2.28%

NIO

AAPL,
-0.62%

Apple

AMTD,
+18.18%

AMTD IDEA Group

AMZN,
+0.33%

Amazon

GOVX,
+42.86%

GeoVax Labs

TIDE,
+18.93%

Getty Images

BABY,
+1.09%

Alibaba

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