The dollar may continue to strengthen in the future, but the European market is ringing an alarm. Will last year’s scene be repeated?
Since the US dollar hit a high of 98.33 last month, there has been a marked increase in fatigue recently. However, this week, the US dollar has seen a strong rebound. The rise of the US dollar is regarded by some investment banks as the "canary" of the European market. (Indicative signals that are sensitive to potential risks, initially applied only in mining and then extended to other areas.)
Although the Fed’s position is more dovish than last year and the real rate of return is declining, the dollar does not seem to have much impact and remains strong.
NordicbankEarlier pointed out that a strong dollar may come back. On the one hand, the United States is about to enter the tax season, and the dollar liquidity will be further tightened. Do not underestimate the impact of taxation on the liquidity of the US dollar. From April this year, the tax expenditure of the US household sector is equivalent to a reduction of 200 million US dollars. On the other hand, recent economists have raised their expectations for the US economic growth this year, while the economic expectations for the euro zone countries remain unchanged or even lowered. This shows that economists believe that the economic growth of the United States and the euro zone has to open some gaps. This is a good thing for the dollar, but the euro is likely to be under pressure.
Bank of America Merrill Lynch believes that the dollar's rise will affect European assets through emerging markets, and the same thing happened once last year.
Bank of America Merrill Lynch's Barnaby Martin reviewed the 2018 scenario in a new report released on Tuesday, benefiting from tax reforms, which last year led economic growth ahead of other economies. From the performance of the US stock market and the US dollar, we can see the state of the US economy at that time, from April 18 to September 18 last year.NasdaqIncreased by 17% during the same periodMorgan StanleyThe emerging market stock index fell by 11% and the dollar appreciated by about 7%.
Martin said that the strength of the dollar last year was called the "canary" of the European market, which caused two negative effects on European assets.
First, the market's demand for US short-term Treasury bonds is a strong evidence to explain the decline in risk appetite last year. When the dollar appreciates, this effect will be magnified, and European retail investors will prefer to buy US short-term government bonds and abandon European bonds. At present, similar situations seem to be re-emerging, and US Treasury bonds are more attractive to European investors.
Second, Bank of America Merrill Lynch reviewed the relationship between emerging markets and European risk assets last year. As European companies have increased their exposure to emerging markets in the past 10 years, the impact of emerging market exchange volatility on European stock markets has been greater. In contrast, the impact of weak emerging markets on the US stock market is not that big.
At the same time, Martin has mentioned on several occasions that European high-yield bonds are very sensitive to foreign exchange fluctuations in emerging markets. As the market once again chased the rate of return, the gap between European junk bond spreads and reality, coupled with last week's risk events triggered market concerns about the dollar's strength and emerging market turmoil, these are not good for European assets.
Martin said that foreign exchange trading volume in emerging markets climbed this month, although much lower than the peak in August last year, but the emerging market foreign exchange team of Bank of America Merrill Lynch stressed that the current foreign exchange trading volume is very large. If the US dollar goes higher, these positions Both will be at risk. Given the links between the aforementioned European assets and emerging markets, European assets will also be affected.
Bank of America Merrill Lynch’s European credit team said that the way the dollar affects European assets in 2018 will still be effective today, so it is best for investors to “keep their attention” to these factors.
(Article source: Golden Ten data)