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Strong Dollar Chews Up Exporter Earnings

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January 27, 2015

The Northeast storm that wasn’t (easy for me to say from this perch) may still leave trading desks operating with skeleton crews today. That could make for interesting— as in small volume/big move— trading across financial markets. That’s especially true because the news flow does not stop for weather. Major earnings hit after Monday’s bell and early today. The big development there? A strong dollar (trading at multi-year highs against the euro, yen, and others) is taking a toll on U.S. companies with global footprints.

More than a few export-heavy tickers—Procter & Gamble (PG) and Pfizer (PFE) for two— blamed a beefy buck for less-than-stellar quarterly earnings results. And overnight futures traders in turn blamed these reports for souring broad-market sentiment. Not to be lost in the manufacturers’ dispatches, Microsoft (MSFT) stumbles early as a host of analyst downgrades after weak commercial sales tainted its quarterly report. Needless to say, big pressure on Apple (AAPL) to deliver the bulls a tasty bite in its after-hours Tuesday report.

FIGURE 1: The CBOE Volatility Index (VIX) lost ground last week and to start this week, closing well off the closely watched “20” line, and diverging slightly from the choppy tone of the S&P 500 (SPX) that VIX tracks. Data source: CBOE. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

No Purr for CAT. Caterpillar (CAT), usually swept up in currency-market swings, this time pointed its blame in another direction. Execs for the equipment-maker cited a negative tug to sales from weak commodities prices, particularly oil. Perhaps most important to traders, the strong dollar/weakening commodity picture was only heating up in the timeframe that the earnings releases from CAT and the other major manufacturers covered. The same macro factors continue in the current quarter. In fact CAT cut its view for the year. It expects to post per-share earnings of $4.75 a share on revenue of $50 billion for 2015. Analysts polled by Thomson Reuters had projected $6.67 a share in earnings on $55 billion in revenue.

Durable Goods —Unexpected Plunge. Orders for durable U.S. goods plunged 3.4% in December, the fourth decline in the past five months and much worse than the skinny 0.1% consensus rise expected among Street economists. What’s more, durable-goods orders for November were revised to show a 2.1% decline instead of a drop of 0.9%. Transportation led the decline in December, dropping 9.2%. Orders for core capital goods —a measure of business investment— fell 0.6% in December for the second straight month.

Few Necks Sticking Out Pre-Fed. Trade could also be skewed today as some major participants square up and hunker down for the Wednesday afternoon conclusion of the latest Federal Reserve meeting. It’s the first of the year and the first since a host of central bank action and economic revelations have filtered in from around the world. Let’s see if our Fed sticks to the script from late last year (moving slow but with an upside rate bias) or waivers a bit?

Good trading,
JJ
@TDAJJKinahan

JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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