Dollar Surge Tends to End in Crisis, Says Morgan Stanley

The recent US dollar rally has created an untenable situation for risky assets, including stocks. In the past, the kind of dollar strength was found to lead to a kind of economic or financial crunch, per one of Wall Street’s most vocal bears.

The chief US equity strategist, Michael Wilson of Morgan Stanley, while it is difficult to predict such kinds of events, some conditions are in place for just one, as he stated in a note, referring to the global financial crisis of 2008, like the sovereign debt crisis and conclusion of the tech stock bubble of 2000. The US Dollar Index was found to have surged by 19%, but US stocks have dropped by 23%.

Wilson also assumes that there will be an eventual low in the benchmark of the S&P 500 Index later during the present year or at the beginning of next year at levels 3000 and 3400. This only implies a downside of 13% at the midpoint. On Monday, the futures contract benchmark dropped by 0.7%, extending the gauge to last week’s rout.

Big Test

The escalating dollar has been hurting the value of the sales of international companies, while Morgan Stanley has been calculating every 1% change in the Dollar Index, which is found to have a negative 0.5% impact on the profits. In the fourth quarter, earnings of the S&P 500 Index are expected to face a headwind of 10% from a stronger currency, aside from the other issues that comprise soaring input costs, as stated by Wilson.

The strategist that forecasted the drop in US stocks in the present year stated the reaction to the warnings of FedEx Corp’s at the beginning of this implied that the big earnings disappointments have not yet been priced into the consensus estimates.

Bloomberg News reports that in the meantime, Bank of America Corp strategist, implying EPFR Global data, reported on Friday that investors have been turning to cash and keeping aside almost every other asset class as they have become utterly pessimistic since the financial crunch worldwide.

Morgan Stanley’s Wilson also stated that it is amazing that the dollar strength is taking place despite major central banks tightening monetary policy at a time when the pace is historically hawkish. If there are any instances to look out for something that might break, this is it.