Market Mondays #20

Big tech sell-off, euro's rally and more...

Last week in the financial markets

· Germany’s first green bond sale for up to €6bn of 10-year debt

· NYSE approves IPO alternative

· Big tech sell-off, dragging the tech-heavy Nasdaq 100 index down 3.1 for the week, the worst for the benchmark since the Covid-19 sell-off in March

· Tesla left out of the latest additions to the S&P 500, despite meeting the index’s criteria

Driving forces for the week ahead

Euro’s strong rally

The euro has been rallying – and it’s making Eurozone companies and policymakers nervous. The currency has seen its biggest advance since 2017, rising by 5.6% against the dollar this year. Nearly at an all-time high, the euro surpassed $1.20 on September 1st for the first time since May 2018.

There’s a number of factors that justify this strong appreciation of the euro, such as the Eurozone’s stronger than expected rebound from the pandemic and the EU’s €750bn recovery fund. Although at first, this may seem like a positive sign of economic recovery for the bloc, it could very soon slow down recovery and pose as a big problem if not watched closely. 

Why is a strong euro not all good news?

Exports. Exports. Exports. The Eurozone’s open market is unusually dependent on global demand. When the euro is strong, it makes exports such as machinery, cars and chemicals from the Eurozone more expensive for foreign buyers. This in turn results in much weaker demand and consequently, European companies are faced with large declines in profits. 

According to the Wall Street Journal, “for every 10% that the euro strengthens against the dollar, eurozone corporates stand to lose about 3% in profits, whereas for S&P 500 companies, a 10% appreciation in the dollar costs companies up to 2%.” This goes to show the heavier reliance on international demand for Eurozone companies compared to US businesses who receive much of their income from domestic buyers. Companies such as car-makers like Fiat Chrysler and Ferrari, whose sales are largely outside of the eurozone are certainly among the companies most affected by the rise of the euro. To put things into perspective, about 70% of Fiat Chrysler’s revenues come from North America sales. 

ECB to the rescue?

There’s uncertainty as to whether the European Central Bank will take steps to halt the appreciation of the currency, and so many investors will be keeping a close eye on ECB’s meeting this Thursday. However, the euro’s strength plays a key role in any monetary policy decisions made by the central bank, some expecting the ECB to cut interest rates and add pressure for more monetary stimulus. 

What else we’re reading

· U.K. races to fix “critical gaps” in Brexit border plan

· Covid vaccine front runners will soon see their moment of truth

· European stocks rise after Wall Street sell-off

· This US stock bubble could rank among the biggest in history

This week’s key events and data releases

Tuesday: Brexit talks resume as the EU and the UK enter the final phase of negotiations

Wednesday: Bank of Canada Policy rate

Thursday: ECB meeting

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