More Fed induced pain for the share market
After a brief pause yesterday, the share market’s valuation response to Friday’s strong US employment report will continue this morning.
There are two drivers behind the US stock market sell-off in response to Friday’s jobs number. The first is valuations. Markets are positioning for the possibility of higher interest rates and many world stock markets go into this adjustment from a starting point of relatively high PE values meaning making them vulnerable to a pull back. The second driver is the strong $US, which will have a negative impact on earnings for many US companies.
To the extent that the decline in US stocks is a response to the negative impact of a stronger dollar on the earnings outlook, it should not impact other markets. Indeed for some, especially European companies this is a positive. While markets outside the US are likely to follow the US down in any negative valuation adjustment they may not move as far. Interest rates will stay low for longer elsewhere and currency moves could be a positive for company earnings. In Australia’s case, however, the stronger US Dollar is also driving down commodity prices and this will be a negative for both resource stocks and the broader economy.
Resource and energy stocks look set for a weak opening this morning following lower overnight prices in iron ore, oil, gold and copper. However, release of China’s monthly data for February also has potential to influence sentiment on this sector later in the day.
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Frequently Asked Questions about this Article…
The US stock market is experiencing a sell-off due to two main factors: high valuations and a strong US dollar. High valuations make the market vulnerable to adjustments, especially with the possibility of higher interest rates. Additionally, a strong US dollar negatively impacts earnings for many US companies.
A strong US dollar can negatively impact US companies by reducing their earnings. This is because a stronger dollar makes US exports more expensive and less competitive abroad, potentially decreasing sales and profits for companies that rely on international markets.
While the decline in US stocks may influence other global markets, the impact might not be as severe. For some markets, especially in Europe, a stronger US dollar could be beneficial. Additionally, interest rates are expected to remain low outside the US, which could mitigate the impact of a US stock market decline.
The Australian market is negatively affected by the strong US dollar as it drives down commodity prices. This decline in commodity prices impacts resource stocks and the broader Australian economy, leading to a weaker market opening for resource and energy stocks.
Lower commodity prices negatively impact resource stocks by reducing their revenue and profitability. As prices for commodities like iron ore, oil, gold, and copper decrease, companies in the resource sector may see a decline in their financial performance.
Yes, China's monthly data release has the potential to influence sentiment in the resource sector. Since China is a major consumer of commodities, any positive or negative data could impact commodity prices and, consequently, the performance of resource stocks.
High PE (price-to-earnings) values are a concern because they indicate that stocks may be overvalued. When interest rates are expected to rise, high PE values make stocks more vulnerable to price adjustments, leading to potential market sell-offs.
Investors should consider the potential impact of higher interest rates and a strong US dollar on their portfolios. It's important to assess the vulnerability of high-valuation stocks and the implications of currency fluctuations on earnings, especially for companies with significant international exposure.
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