Thursday’s market action and early Friday’s recovery could preview the next month of heightened market activity. The biggest US banks unofficially kicked off the third-quarter earnings season, which will run until around mid-November. This is a crucial time for markets as investors react to a barrage of corporate earnings. The AI bubble, or lack thereof, remains at the forefront of traders’ interest.
Stock markets tanked on Thursday after stronger-than-expected US CPI data. Higher interest rates typically weigh on high-valuation tech stocks. The selloff quickly reached the forex market, where the dollar strengthened alongside gold as investors sought safe havens. Despite the recovery, the move suggests considerable nervousness among traders. Major tech earnings could trigger substantial market swings throughout the season. These moves could quickly affect the dollar, gold and other currencies that respond to corporate earnings.
How Forex Navigates the Diverging Market
While overall growth in US stock indices looks spectacular, a major concern lies beneath the surface. There is a distinct split between equal-weighted and market-cap-weighted indices. This suggests that a narrow group of large-cap firms drives much of the stock market’s upward momentum. Nvidia and Micron alone account for 36% of the S&P 500’s total growth. Excluding tech and energy, most stocks are actually in the red.
This lopsided market creates significant downside risks if key companies like Micron, Google, Microsoft and Nvidia fail to meet expectations. Rising bond yields suggest investors are increasingly nervous about the market’s long-term viability.
Higher interest rates generally support the currency but weaken gold. However, growing market uncertainty could drive both gold and the dollar higher simultaneously. Because markets price gold in dollars, this could produce much wider swings against other currencies. The euro and commodity currencies could be particularly vulnerable.
Rising Dollar Creates Market Risk
Rising yields increase borrowing costs for companies and make stock purchases more expensive for investors. This puts downward pressure on share prices. A stronger dollar also reduces the nominal value of foreign sales. The largest US companies generate 42% of their revenue from overseas. This threatens to further undermine their performance and drag share prices lower.
Markets are pricing in a higher risk that big tech companies will underperform. In doing so, they are also increasing the likelihood of that outcome. This kind of yield-EPS spiral can significantly affect the dollar. The 2023-24 stock drop and the dollar reaching parity with the euro illustrate this risk.
What Markets Are Looking For
The market has high expectations for Q3 earnings, making it harder for companies to deliver positive surprises. The median consensus forecasts earnings growth of 29.6%, marking the third consecutive quarter of growth above 25%.
If companies meet those expectations, markets could move higher in relief. This could support the dollar while weakening gold. Commodity currencies might also gain support compared to economically underperforming regions, such as the UK and the eurozone.
Dollar pairs could see substantial volatility around major tech earnings releases. Markets will also watch major retail companies for signs of resilient consumer demand. Investors will look for evidence that companies are passing higher energy costs on to consumers.
Big miners will report in the second half of the earnings season, potentially creating volatility in the AUD. Meanwhile, energy firms will report at the end of this month, which could generate volatility in the CAD.
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