A Weaker U.S. Dollar Helps Strengthen Stocks

(Friday Market Open) Equity index futures are pointing to a higher open on a day light on economic news.

Potential Market Movers

Investors look to end the shortened trading week on a positive note as the S&P 500 futures were up 0.69% ahead of the opening bell. If the bulls can hold on to these gains, they’ll have three-day winning streak heading into the weekend.

The Cboe Market Volatility Index (VIX) shows that investor confidence is higher because the VIX is lower. Yesterday, the VIX fell back below the key level of 24.5. Today, the VIX was even lower as it approached the 23 level ahead of the opening bell.

One reason for the positivity is a weaker U.S. dollar. The U.S. Dollar Index ($DXY) was down 0.64% ahead of the opening bell on what has already been a volatile day for the greenback. The euro had a big push against the dollar in the spot market, but the greenback was able to push back and reduce some of its losses against the euro.

In a day like today it’s important to be mindful of volumes because light-volume rallies often reverse quickly.

In the absence of economic news, several companies are dominating headlines.

Tesla TSLA was up 1.3% in premarket trading on news that the company is considering building a lithium refinery for its electric vehicle battery production in Texas.

Navient NAVI was downgraded by Barclays because the student loan servicer’s earnings are expected to take a hit under President Biden’s loan forgiveness program.

A few more stocks reported earnings as well. Kroger KR reported earnings ahead of the opening bell that were better than expected and then boosted its full-year profit forecast. The news prompted the stock to rally 3.72% in the premarket session.

After the market closed on Thursday, a couple of cloud companies reported earnings. DocuSign DOCU reported better-than-expected earnings and revenues causing the stock to rally 19% in extended-hours trading. At about the same time, Zscaler ZS reported better-than-expected earnings and revenue. The cloud security company increased its forward earnings guidance prompting the stock to rally 10.6%.

Two outdoor companies may be hunting for some help after disappointing earnings reports yesterday evening. Smith & Wesson Brands SWBI saw sales fall to a 13-year low leading to lower-than-expected earnings. SWBI tumbled 4.47% in afterhours trading. Meanwhile, American Outdoor Brands AOUT plunged 6.52% after its earnings were way off target. AOUT surprised investors with a loss for the quarter instead of the seven cents per share profit analysts had predicted.

Luxury furniture retailer RH RH beat on earnings and revenues but offered a weaker-than-expected revenue outlook after the bell yesterday. The stock was down about 1% in after-hours trading but was up 1% by the premarket session.

Reviewing the Market Minutes 

The European Central Bank (ECB) raised its key interest rate by 75 basis points yesterday, which was in line with market expectations. The only real surprise was that the ECB didn’t cut its economic growth outlook as much as expected. The move was expected so European stocks were relatively unaffected by the announcement. The Europe STOXX 600 rose 0.50% on the day.

The U.S. Dollar Index ($DXY) traded lower on the news as the euro appreciated against the dollar.

The weaker dollar didn’t help stocks as investors appeared to be hesitant to build on Wednesday’s gains. However, a late-day surge did take the major indexes into positive territory. The S&P 500® index (SPX), Nasdaq ($COMP), and the Dow Jones Industrial Average ($DJI) rose respectively 0.66%, 0.60%, and 0.61%.

A lower-than-expected weekly jobless claims report showed that the jobs market continues to be strong. That’s been a red flag for the Federal Reserve and their goal to curb inflation. Fed Chairman Jerome Powell also reiterated the central bank’s resolve to bring down inflation during a televised CATO Institute Monetary Conference yesterday morning. In reaction to the inflationary news, the 2-year Treasury yield rose about five basis points to 3.49% and the 10-year Treasury yield (TNX) rose three basis points to 3.29%.

Investors appeared to shun two defensive sectors— utilities and consumer staples—and they were the only sectors to finish the day in the red. However, fellow defensive sector health care was the top performer. 

Energy finished in the middle of the pack as the WTI crude oil futures mounted a rally but failed to clear the old support level that appears to be resistance now. Oil finally settled at $83.26 per barrel for a gain of 1.7%. 

CHART OF THE DAY: The U.S. Dollar/Canadian Dollar Spot (USD/CAD—candlesticks) rises when the greenback is stronger than the loonie but falls when the loonie is stronger than the dollar. The USD/CAD often moves inversely to WTI crude oil futures (/CL—pink) because nearly all of Canada’s oil and gas is exported to the U.S. Data Sources: ICE, S&P Dow Jones Indices. Chart source: the thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

BALANCE OF PAYMENTS: During 2022, we’ve seen how a currency can be strengthened by increasing interest rates to attract foreign investors to exchange their currency for the higher-yielding currency. Another influence on the strength of a currency is the balance of payments. This is the need to exchange one currency to buy goods and services in another currency. For example, U.S. companies may need to buy oil from a Canadian oil company. The U.S. firm must exchange their U.S. dollars for Canadian dollars which increases the supply of greenbacks and the demand for loonies. 

CANADA’S CURRENCY: The Canadian dollar had an interesting week this week because the Bank of Canada hiked its key interest rate 75 basis points, which should have strengthened the loonie. However, falling oil prices suggest declining demand for oil and a decrease in the balance of payments which could weaken the loonie.

FRACKING & DRILLING: Along with the U.K.’s plan to cap energy costs for British citizens, the same bill could also reopen fracking and offshore drilling to energy companies. The news is likely to be a boon for U.K. shale gas companies that employ fracking techniques like IGas Energy PLC and Egdon Resources PLC. Offshore drilling companies like UK Oil & Gas, Union Jack Oil, and BP PLC (BP) could also benefit.

Separately, the New York Stock Exchange paused for a moment of silence in honor of the passing of Britain’s Queen Elizabeth II.

Notable Calendar Items 

Sep 12: Earnings from Oracle (ORCL)

Sep 13: August Consumer Price Index (CPI) and earnings from United Natural Foods (UNFI)

Sep 14: August Producer Price Index (PPI)

Sep 15: August U.S. Retail Sales, Philadelphia Fed Manufacturing Index and earnings from Adobe (ADBE)

Sep 16: Michigan Consumer Sentiment 

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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