Morgan Stanley Says Greenback Surge Tends to Finish in Disaster

(Bloomberg) — The US greenback’s latest rally is creating an “untenable scenario” for danger belongings together with shares, and up to now this type of greenback energy has led to some form of monetary or financial disaster, in response to one in every of Wall Avenue’s most vocal bears.

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“Whereas laborious to foretell such ‘occasions,’ the situations are in place for one,” Morgan Stanley’s chief US fairness strategist Michael Wilson wrote in a be aware, referencing the 2008 world monetary disaster, the 2012 sovereign debt disaster and the top of the tech-stock bubble in 2000. The US Greenback Index has risen 19% this 12 months, whereas US shares have plunged 23%.

Wilson sees an “eventual low” for the benchmark S&P 500 Index coming later this 12 months or early subsequent on the 3,000 to three,400 point-level. That means 13% draw back on the midpoint. Futures contracts for the benchmark fell 0.7% Monday, with the gauge set to increase final week’s rout.

The surging greenback hurts the worth of US corporations’ worldwide gross sales, with Morgan Stanley calculating that each 1% change within the Greenback Index has a destructive 0.5% affect on income. Fourth-quarter S&P 500 earnings will face an approximate 10% headwind from the stronger foreign money, along with different points like hovering enter prices, Wilson mentioned.

The strategist, who appropriately predicted the droop in US shares this 12 months, mentioned the response to FedEx Corp.’s warning earlier this month confirmed that large earnings disappointments usually are not but priced in to consensus estimates.

In the meantime, Financial institution of America Corp. strategists, citing EPFR World knowledge, mentioned on Friday that traders are flocking to money and shunning nearly each different asset class as they flip probably the most pessimistic because the world monetary disaster.

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“What’s wonderful is that this greenback energy is occurring at the same time as different main central banks are additionally tightening financial coverage at a traditionally hawkish tempo,” Morgan Stanley’s Wilson wrote. “If there was ever a time to be looking out for one thing to interrupt, this could be it.”

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