Market Perspective for January 23, 2015

True to expectations, the currency markets were the center of attention this week with the European Central Bank (ECB) announcing its quantitative easing (QE) program. The central bank will buy 60 billion euros a month worth of assets through September 2016. Of that total, 50 billion will go towards sovereign bonds purchased in the secondary market by their own national central banks. This is a concession to the Germans, who do not want to buy low quality assets from southern Europe. Greece has also been left out of the QE program for now, until a review of its bailout program is finished.

The ECB’s announcement sent the euro tumbling in currency markets, with the euro falling to levels last seen in 2003. From the view of technical analysis, there’s nothing standing between the euro and parity with the U.S. dollar now, and a decline below parity is possible if the euro tests the lows set in the early 2000s. From a fundamental perspective, QE is also likely to have little effect on the European economy in the short-run. Asset prices will rise, but the U.S. dollar will continue to strengthen thanks to a stronger economy, higher interest rates and tighter monetary policy.

The rapid slide in the euro has unnerved currency markets around the globe, with even the offshore Chinese yuan sinking 3 percent in Hong Kong. Gold is up 18 percent in three weeks versus the euro, and even though the U.S. dollar has appreciated sharply this month, gold is also up in U.S. dollars, most likely due to foreigners buying it as a hedge against currency volatility.

A reversal of the strong dollar and weak euro is likely at some point, but it could be a few more days or weeks away depending on how the Greek vote turns out. On Sunday, the Greeks head to the polls to elect a new government. The most recent polls show the anti-austerity Syriza party in the lead. A victory by them could potentially raise a new set of questions for the euro, but it depends on whether or not the party follows through with calls to renegotiate its bailout.

Oil prices firmed over the past week. Prices briefly spiked Thursday night on news of the Saudi King’s death, but then once again declined. Oil policy is unlikely to change with a new government, but instability in the region could lift prices. The government of Yemen, on Saudi Arabia’s southern border, fell to Iranian supported rebels Thursday.

Earnings season has been generally strong in the United States. Although there have been a few reports with disappointing results or guidance, such as from Intel (INTC) and International Business Machines (IBM), most firms have beaten sales and earnings estimates. On Friday, General Electric (GE) beat its earnings estimates by a penny despite some weakness in its oil services division.

The important earnings report this week was Johnson & Johnson (JNJ). The healthcare giant delivered a solid report, but also detailed how a strong dollar could weigh on earnings going forward. The firm said 2015 earnings could be down 42 cents per share from earlier projections based on exchange rates. Analysts had already adjusted their forecasts for currency changes, so the announcement wasn’t a surprise, nor did it impact the stock, but it highlighted for investors how the strong dollar could impact earnings going forward. Only three months ago, JNJ expected currency to cost it 20 cents a share. If the U.S. dollar rally doesn’t reverse in 2015, analysts will adjust their forecasts lower for multinationals.

For domestic industries such as finance, utilities and telecom, as well as technology firms that export crucial technology, the strong dollar isn’t as much of a problem. Healthcare companies with domestic sales, such as health providers, are benefiting from increased premiums under the Affordable Care Act. UnitedHealth Group (UNH) hit a new 52-week high after the firm announced strong fourth quarter earnings.

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