Today marks the unofficial start of the Q4 Earnings Season. It’s the biggest of the four earnings seasons, with pretty much every major publicly traded company in the world issuing financial statements over the next six weeks.
Evidently, its biggest impact is on the stock market, but since earnings can shift market sentiment, forex ends up being affected as well. This time around there is a chance for extra volatility and impact as equity markets are in a somewhat precarious situation. Forex traders are looking for any clues for direction particularly of monetary policy, andthe Q4 Earnings Season provide a very strong signal about the economy and prices – the two most important factors affecting central bank decision making.
What To Look Out For
One of the key factors for markets right now is the high valuation of equities. What this means is that the stock price has risen substantially faster than earnings, leading many traders to worry that stock markets (particularly in the US) are overvalued. If corporate earnings don’t match the expected growth to justify those stock prices, then the stock market could fall. If it falls fast enough, it could open up the possibility of a recession and emergency cutting of rates across the board.
The Fed is seen keeping rates elevated to fight off a resurgence in inflation. But those high rates put pressure on the stock market, because it increases the cost to borrow in order to invest in shares. Additionally, higher borrowing costs make it harder for businesses to expand, and consumers to access credit to buy. Underperformance across the board in corporate names would renew pressure on the Fed (and other central banks) to ease rates, as it would be a sign that monetary policy is too restrictive.
How This Affects Currency Markets
The practical upshot of that is that if the stock market falls due to poor earnings, the market will move to price in more easing from the central bank, weakening the currency. This is the opposite of the general dynamic where currencies often move in opposition to equity markets due to the flow of capital in and out of stocks and bonds.
This effect can be moderated by company reports around pricing. If businesses are increasing their prices either to make up for higher costs or seeing more demand and are trying to expand their margins, that would provide upward pressure on inflation. This would leave markets speculating that central banks will keep rates elevated, and strengthen the currency.
Specific Areas of Concern
Some companies by virtue of their size can provide additional insight into the economic situation, and can by themselves affect the whole market. This is the case of companies like, for example, Nvidia which is the leader of the AI-driven tech sector. A disappointment in Nvidia’s earnings could push the market towards a risk-off pattern and boost safe havens.
Other companies that have the capacity to move markets include Walmart, which is closely monitored to see how resilient consumer demand is. FedEx’s logistics services provide insight into consumer trends, such as being willing to buy more or cutting back on spending. Finally, major banks will update the market on the behavior of their customers’ debt and credit habits. A contraction in debt-based spending would imply monetary policy is too restrictive, and could concern central banks that they are hesitating too much on easing
