By Geoffrey Smith
August 3, 2017

Good morning,

The Dow closed above 22,000 points for the first time last night.

To a large degree, that’s because the dollar’s retreat from multi-year highs has done wonders for the multinational companies that generate much of their earnings abroad. Apple and Boeing, the two workhorses that pulled the index past its latest milestone, are two cases in point. McDonald’s is another.

It’s not just a case of translating foreign currency earnings back into dollars. As the Bank for International Settlements points out, a strong dollar creates financial stress in many global markets that quickly feeds into economic slowdowns locally. The BIS now reckons that the dollar is now a purer measure of global market stress than the once-vaunted VIX index. As such, the dollar index’s drop of over 4.5% in the second quarter did the whole world good.

But the dollar has weakened, not least, because confidence in the administration’s ability to deliver an immediate, positive growth shock through tax reform has weakened. The idea of a Border Adjustment Tax, which analysts feared would have upended international trade and the foreign exchange market, has now been dropped. All that has muted the Federal Reserve’s eagerness to raise interest rates. Exuberance, despite regulatory roll-back in finance and high-profile wins such as the Foxconn investment in Wisconsin, has stayed largely rational, so wage growth and inflation are both still, for now, in their post-crisis rut.

Catch-22k, if you like.

There are, as always, pockets of weakness, notably in the auto sector (Tesla notwithstanding – see below). Incidents such as the NotPetya virus show that vulnerability to cyber-attacks is a material risk to a company’s market value. The fast-moving consumer goods sector suffered most from NotPetya, but it was far from alone. As for external risks, China’s financial system remains a black box, with standard metrics such as unsustainable credit growth showing little, if any, sign of improvement. The European Central Bank, meanwhile, is only now having to learn the art of avoiding ‘taper tantrums’ as it prepares to wind down quantitative easing.

There are always some warning that it can’t last (Bank of America Merrill Lynch, for example, predicts a top to ‘risk assets’ in the fall). But sufficient to the day is the evil thereof. This current earnings season has had more to cheer than to fear, both at home and further afield.

News below.

Geoffrey Smith
@geoffreytsmith
geoffrey.smith@fortune.com

 

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