Stocks week ahead: Political instability is another strike against the dollar

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What’s happening: Political instability often weighs on currencies around the world, and the violence incited by President Donald Trump is unlikely to bolster confidence in the US dollar at a moment of weakness.

Currency markets largely looked beyond last week’s chaos, according to TD Securities strategist Ned Rumpeltin.

“In some ways that resilience is encouraging,” he told me. “We can’t necessarily take that for granted, however.”

Eurasia Group, the political risk consultancy, called out a divided United States as the top risk for 2021. Domestic political dynamics, along with the country’s mismanagement of the pandemic, will make it difficult for President-elect Joe Biden to reassert America’s global leadership role despite his best efforts, according to Ian Bremmer, the group’s president.

“The US is by far the most politically dysfunctional and divided of all the world’s advanced industrial democracies,” Bremmer tweeted last Thursday.

Investor insight: Since spiking during the period of market turmoil last March, the dollar has dropped more than 12% against a basket of other major currencies. The consensus on Wall Street is it still has room to fall.

“The stars very much seem aligned for dollar weakness,” Rumpeltin said.

There are three main reasons the dollar has been on the back foot. The primary driver is faith in the global recovery thanks to the rollout of Covid-19 vaccines. When the United States and the global economy are powering ahead, the dollar — a safe-haven currency — tends to weaken. Last week, top banks upgraded their forecasts for US growth in 2021 on the assumption that Democratic control of both chambers of Congress will clear the way to another stimulus package.

Expectations that central banks will maintain ultra-easy monetary policy while the recovery heats up have also been also a contributor. So has a belief that a Biden presidency will usher in period of greater predictability, reducing demand for safe-haven assets.

The big question, though, is whether political chaos will feed a longer-term erosion of faith in the US dollar, the world’s preeminent reserve currency. For now, the risk seems limited, in part because of the sheer volume of trades in dollar-denominated assets.

But as Eurasia Group points out, America’s global dominance faces real headwinds. One piece of evidence: Europe has just finalized an investment agreement with China, designed to rebalance its trading relationship with the world’s second largest economy, despite US concerns.

“Biden’s term opens the era of the asterisk presidency, a time when the occupant of the Oval Office is seen as illegitimate by roughly half the country,” the group said in its 2021 outlook. “Such a political reality has never occurred in another G7 country, but it’s the reality of the world’s most powerful democracy today.”

Just how bad was 2020 for much of Corporate America?

A handful of tech companies thrived during the pandemic. But for most firms, it was a dismal year — and as earnings season kicks off, we’re about to learn the extent of the damage.

The stream of companies sharing results for the October to December period picks up this week. A number will also disclose full-year figures.

On the docket: Delta Air Lines, Citigroup, JPMorgan Chase and Wells Fargo.

Investors have been paying close attention to bank earnings given what they can tell us about the state of the economy. Considering the United States shed 140,000 jobs in December, far worse than what economists had predicted, there will be plenty of questions about loan quality and whether executives are confident in current levels of reserves.

Much of the focus, though, will be on the future. The KBW Bank Index, which tracks top US bank stocks, has jumped nearly 40% since the beginning of November.

That’s because Wall Street is looking ahead to the economic recovery it thinks will be in full swing by this summer. The fortune of banks is closely tied to how the economy is doing. The prospect of higher interest rates down the line, which can increase how much money banks earn from lending, also helps.

“There should still be another 10 to 15% relative move higher in bank stocks and potentially more if the economic recovery lasts several years (before the next downturn),” Deutsche Bank analysts said in a recent note to clients.

Up next

Monday: CES, the consumer electronics show, kicks off virtually

Wednesday: US inflation data

Thursday: Initial US unemployment claims; Jerome Powell speech; Tesco, BlackRock, Charles Schwab and Delta Air Lines earnings

Friday: US retail sales and industrial production; Citigroup, JPMorgan Chase, PNC and Wells Fargo earnings

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