Morning Brief – A is for..

A is for..

A LOT of Money. In an otherwise tranquil and unremarkable market environment yesterday, US technology stock Apple managed to secure a $2 Trillion Dollar valuation. The company known for making iPhones and other such sought after gadgets has one of the healthiest profit margins on the Nasdaq, routinely registering in excess of 20%. In the first few weeks of the pandemic the company was set back by fears of supply chain disruption and a deteriorating global environment within which to sell its product. Tensions have been building between the US and China following the reimposition of tariffs on Chinese Tech giant Huawei protracting fears of supply chain disruption within Apple’s products. Skyrocketing unemployment across the US and Apple’s core markets has also given credence to concerns of a surprise to sales as the consumer struggles. Nonetheless Apple has more than doubled its share price since the lows reached during the first weeks of the pandemic.

One reason for Apple’s surge has been its defiance of the global economic backdrop, posting sales growth of 11% in Q2 2020. If fact all five of its main products posted sales revenue growth in the second quarter, positively surprising a market that was braced for the worst. The valuation of Apple at the $2 trillion mark is overstretched. The price-to-earnings ratio is now at 35 times; its highest since the end of 2007. The rebound of the equity market has surprised many commentators and if there is a sharp correction in stock valuations the volatility signals could spill over into the foreign exchange market.

The Federal Reserve last night struck a very cautious tone pushing the foreign exchange market into risk-off mode. The Fed noted that the ongoing tensions between the US and China and the health crisis could manifest in below-expectation economic growth in the second half of 2020. With market dynamics having not favoured the US currency in recent months the news alone would likely have encouraged further losses for the greenback as the US economy on these forecasts looks set to underperform its peers. However, it is debasement fears caused by over-accommodative monetary policy that have done the heavy lifting in the Dollar’s shift.

Despite having expanded the balance sheet by several trillion Dollars during the course of the pandemic the market had been anticipating further action from the Fed. In particular the market has been anticipating two measures to potentially have been discussed in recent Fed meetings: new inflation targets and explicit yield curve control. Both would have had severe impacts upon the cost and reward of buying and selling US Dollars in the FX market and ultimately produce a headwind to the greenback. Minutes of the Reserve’s July meeting were released last night where the majority of members shared the view that, “yield caps and targets would likely provide only modest benefits in the current environment”. Therefore “many participants judged that yield caps and targets were not warranted”. The news led the market to price out its expectation for the imposition of these extraordinary measures, supporting the US Dollar in the process.

Discussion and Analysis by Charles Porter

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