Today marks the unofficial start of the third quarter earnings season, with the four largest banks in the US reporting before the market opens. Naturally earnings season is generally more something that affects equities, and stock traders will be paying close attention to what’s going on.
The extra volatility in markets can also have an important impact on forex trading, particularly in the current fraught environment. Traders are still not convinced that the US economy is really going to avoid a recession. And China remains a mystery as to whether it will finally have that post-covid rebound, or it will follow Europe into something akin to China’s version of stagnation. Really important clues about that will be able to be drawn from the earnings reports of major companies that are bellwethers for the economy. It will be a surprise if forex markets aren’t significantly shaken up by the end of earnings season about mid-way through November.
What to look out for: Banks.
The start of earnings season might bring fireworks, given what’s been going on in financial markets. We have to remember that it was back in March that a series of regional banks in the US collapsed (and also so did Credit Suisse), pressured by higher interest rates. Since then, the situation has only become worse, as the value of debt around the world plummeted in the face of higher yields.
Investors are likely to be looking closely at the banks’ reports to figure out two major things: First, if the banks themselves are seeing problems from the high interest rates that could prompt the Fed to ease up on the “higher for longer” rhetoric in order to shore up the banking sector. Second, whether banks keep loaning out to customers, a key element of supporting economic growth and dynamism. And inflation.
Getting the money in line
The Fed has been trying to control inflation by reigning in the amount of credit being offered. By making loans more expensive, people would presumably borrow less. But the recent spike in the cost of living has pushed many people to borrow more in order to afford their lifestyle. Banks have a front-row seat to whether consumers continue to spend, or they are finally starting to run out of capacity to keep the economy going.
That leads to the second group of companies that report which could shake up the currency markets: Retail and logistics. Major retailers like Walmart, Tesco and Carrefour will give insight into whether the consumers in their respective economies are still spending. If they are not, inflation could ease up sooner than anticipated, and central banks could start cutting rates. If price pressures remain in place, then central banks might be forced to keep the pressure on.
Safe haven or risk time?
Logistics firms, such as FedEx and Maersk, are likely to be under increased scrutiny by forex traders as they are clear indicators of the flow of global trade. If the market is inclined to accept more risk, then trade would be expected to expand. If the economy is still expected to contract, then logistics companies will see underperformance.
Recently, the dollar has been gaining thanks to a general move away from risk. If earnings generally disappoint, then the dollar could stay king. But if earnings generally provide optimism, then the trend in the greenback might finally reverse, and commodity currencies could have their day in the sun.
