As the U.S.-China trade war escalates and overseas investors brace for another three months of seemingly daily shifts in U.S. policymaking and whiplashes on Wall Street, the dollar is sinking on fears of foreign capital flight from America.
Wall Street stocks suffered a relapse on Thursday, which wiped out a third of the prior day's surge. This was matched by an ongoing selloff in Treasury bonds. Now markets are bracing for a string of U.S. company profit warnings as the corporate earnings season kicks off in earnest later today.
But the dollar's slide and the dash for overseas havens may be generating the most anxiety, with the dollar's DXY index index hitting its lowest in three years, led by the euro's surge to its highest since early 2022 and the Swiss franc's climb to its strongest in 10 years.
Gold prices - now up 23% for the year so far - soared anew to record highs.
This all partly reflects the alarming levels of uncertainty and fears about the direction of the U.S. economy, but some economists reckon the move is also a matter of simple math. If Washington is intent on wiping out the U.S. trade deficit, it also has to accept an evaporation of the counter-balancing capital surplus, essentially the excess of overseas investments in America over U.S. investments abroad.
The resulting weaker dollar may be the holy grail that some in the administration are seeking to regain U.S. export competitiveness, but it could come with a huge and destabilising cost.
Bank of America's weekly tally of mutual fund flows suggests this flight was already underway this week. Foreign investors shed $6.5 billion of U.S. equity in the five trading sessions ending on Wednesday, while funds holding U.S. 'junk' bonds saw the biggest weekly outflow on record of almost $16 billion.
This relatively narrow set of fund metrics is small beer against the bigger picture of foreign exposure to U.S. markets, hence the growing concern playing out in the currency market.
Using Federal Reserve data, Apollo chief economist Torsten Slok showed how foreigners own a fifth of the U.S. equity market, with some $18.5 trillion of holdings, as well as almost one third of both the Treasury and U.S. corporate bond markets, some $7.2 trillion and $4.6 trillion, respectively.
TS Lombard chief economist Dario Perkins sliced the Fed numbers in a different way. He points out that the world has accumulated an exposure to U.S. equity of around $14 trillion since 2012, with Europe responsible for roughly half that, more than the entire market cap of the Euro Stoxx 50.
Meanwhile, the surging euro, on course for its biggest weekly rise since 2020, is pricing in the likelihood of another European Central Bank interest rate cut next week.
What next? As stocks around the world sink yet again on Friday, with the notable exception of China and Hong Kong bourses likely buoyed by official state buying, U.S. stock futures remained in the red ahead of earnings reports from the big U.S. banks today.
With China appearing ready to go toe-to-toe with the U.S., the two biggest economies in the world have now effectively placed trade embargoes on each other, intensifying fears of a global economic crunch.
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