(Financial News) Soon, another risk for investors who are already worried about the prospects for the global economy due to the outbreak of coronavirus may be the growth of the US dollar.
The US currency has shown steady growth since last month, when the number of people infected with the virus began to increase, which pushed the WSJ Dollar index, which tracks the dynamics of the dollar against 16 major world currencies, to a maximum since the beginning of October. Many analysts fear that the risks to Chinese GDP will negatively affect the growth of the global economy, and investors continue to hold on to US assets. This allowed the S&P 500 to recover from a fall in late January and reach a new record last week.
Although the growth of major stock indices and the dollar is happening in parallel, American companies, including Johnson & Johnson, Coca-Cola Co., Ford Motor Co. and 3M Co., talk about the negative effects of currency fluctuations on profits.
The negative effects of a dollar increase could increase the risk associated with the spread of coronavirus
In the 4th quarter, the profits of the companies included in the S&P 500 index did not seem to practically change compared to the previous year, this trend was already observed earlier in 2019. Sluggish growth of the world economy and a stronger dollar increase the likelihood that companies’ profits this year will again disappoint investors. The negative effects of a dollar increase could increase the risk associated with the spread of coronavirus, which many companies have already forced – from Starbucks Corp. to Nike Inc. – temporarily suspend the work of its structures in China.
Some firms, including McDonald’s Corp. and Yum China Holdings Inc., the operator of Pizza Hut and KFC in the country, have already begun to discuss the effects of the virus.
“No one knows how the flash situation will unfold, and we don’t know how this will ultimately affect us,” said the head of Royal Carribean Cruises Ltd. Richard Fein. The company has already canceled a number of cruises from China.
The growth of the dollar also affects the dynamics of emerging and commodity markets
Analysts expect S&P 500 earnings growth to accelerate to 10% or more in the 3rd and 4th quarters of 2020, according to FactSet, but some investors fear that now this forecast will be difficult to justify. Investors continue to monitor the results of companies, which this week, including PepsiCo Inc., Cisco Systems Inc., will report. and Nvidia Corp.
The growth of the dollar also affects the dynamics of emerging and commodity markets, increasing the cost of investments in dollars for foreign buyers. In addition, this leads to an increase in debt service costs in dollars for developing countries.
Investors have been expecting for several years that global economic growth will weaken the dollar, but the dynamics of the American national currency suggests the opposite. US President Donald Trump has been speaking out for several years about the negative effects of the dollar, arguing that it is robbing the US of its competitive advantage. Trump calls on the US Federal Reserve (Fed) to continue to cut its key rate.
Multinational companies are already feeling the negative consequences: the profits of the S&P 500 companies, which receive more than half of the revenue outside the United States, were worse than those of companies that were more focused on the US market, the main part of last year.
The growth of the dollar and investments related to the US economy exceeded the pace of other assets over most of 2019. With the start of the new year, many investors expected this trend to change due to a deal between Washington and Beijing and clarity on Brexit. Now, traders are wondering if global economic growth will accelerate.
“We continue to prefer the United States because it’s the best option in terms of economic growth,” said Emily Rowland, an expert at John Hancock Investment Management.
Some analysts do not believe that dollar growth will exceed current ranges
Meanwhile, some analysts do not believe that dollar growth will exceed current ranges, especially given the fact that the Fed has signaled plans to keep rates low. Many are skeptical of the assumption that a factor such as the outbreak of coronavirus, which temporarily contributed to the growth of the dollar, will provide the American national currency with support in the long run, without jeopardizing the growth of the US economy.
Nevertheless, at present, investors continue to invest in US assets. Yields on 10-year US Treasuries last week fell to a minimum since early October. Yields fall when bond prices rise.