(Bloomberg) -- Months of wild currency swings are hitting company profits, threatening stock markets that are priced for perfection.
Foreign-exchange volatility has gathered pace as the timing of interest-rate policy changes around the world became less easy to predict. A JPMorgan Chase & Co. index measuring volatility in the most heavily traded currencies has soared to levels last seen in the first half of 2023.
Analysts are starting to raise concerns about foreign-exchange effects and what it would mean for equities that are trading near all-time highs. More uncertainty stemming from next month’s US elections and the path of interest rates implies that the volatility is unlikely to stop anytime soon.
Currency swings “could potentially be the difference between a positive earnings season and a negative earnings season,” said Michael Field, European strategist at Morningstar.
LVMH flagged the strength of the Japanese yen as one of the key reasons why it suffered lower sales last quarter, sending the luxury firm’s shares plunging.
The swings in currency markets are illustrated by the yen’s 11% rally against the dollar during the third quarter, only for the Japanese currency to give up almost half the gains since the beginning of October. Japan’s Topix benchmark has seen similar gyrations over the period, reaching an all-time high before plunging as much as 24%.
Companies are likely to remain wary of yen appreciation and may also lower earnings guidance, said JPMorgan strategists including Rie Nishihara.
For Asian companies that rely on foreign revenue, especially from the US, the current earnings season will be more challenging, said Danny Khoo, head of sales trading at Saxo Capital Markets in Singapore. “Firms that rely more on domestic revenue sources will be more insulated,” he said.
In dollar markets, the likelihood that next month’s US presidential election could upend currency markets is leading finance executives to bolster their companies’ foreign-exchange hedges. The greenback has fluctuated since the beginning of the year as traders kept on adjusting their bets for the timing and pace of Federal Reserve interest-rate cuts.
Wall Street economists expect that a win for Donald Trump in next month’s US election would support the dollar, as his trade policies would potentially drive up inflation and interest rates. A prolonged trade war would also weigh on global risk sentiment, further supporting haven demand for the currency.
“The clearest impact of a Trump victory is dollar strength,” said Hani Redha, portfolio manager for global multi-asset at PineBridge Investments. This may serve as “a drag on earnings for S&P 500 companies.”
During the first quarter, a period when the dollar was gaining strength, US corporates took an estimated $8.4 billion hit from currency swings, according to Kyriba Corp. A survey by MillTechFX earlier this year found that 93% of firms said a stronger dollar had an impact on their bottom lines.
In Europe, several corporates have already raised currency-related losses at the start of the earning season, including warnings from British American Tobacco Plc and rival Imperial Brands Plc.
Swedish retailer Hennes & Mauritz AB, which reports in kronor, last month partly blamed foreign-exchange headwinds for a hit to operating profit, sending shares nearly 5% lower on the day. Meanwhile, London-listed JD Sports Fashion Plc tumbled 6% after reporting an expected forex hit for the second half of the year.
High stock valuations mean that investors won’t allow much room for error if revenue growth and profitability doesn’t match their expectations, said Morningstar’s Field.
“We’re at a point in the cycle where markets are very high,” he said. “If there’s a negative currency swing for companies and that maybe causes them to miss headline numbers, that’s not great.”
--With assistance from Alice Atkins, Carter Johnson, Meg Short, Alice French and Michael Msika.
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