JPMorgan strategists are urging investors to take a measured view on foreign-exchange pressures, arguing that the recent softness in the U.S. dollar is more likely to support global equities than to inflict lasting damage on European earnings.
The team pointed to a roughly 3% decline in the DXY dollar index during the second half of January as a trigger for investor questions about the implications for risk assets and company profits in Europe. Despite that pullback in the greenback, JPMorgan retains a constructive stance on equity markets and expects any further dollar weakening to reinforce its bullish outlook.
“Equities generally liked the backdrop of USD depreciation,” the strategists said, adding that additional dollar weakness “should aid our constructive call on stocks.” The comments come as the bank’s strategists, led by Mislav Matejka, reviewed historical relationships between currency moves and equity returns.
On a broader scale, the strategists noted a pronounced inverse relationship between global equities and the dollar, with emerging-market equities being particularly sensitive to moves in the greenback. They observed that emerging-market equities have shown a clear inverse correlation with the U.S. dollar and have underperformed during much of the past 15 years when the DXY strengthened. By contrast, when emerging-market FX has firmed, it has typically supported EM equities.
JPMorgan reiterated its view that the dollar will trade on the soft side, a stance that underpins the bank’s bullish call for emerging-market equities for a second consecutive year.
For Europe, the strategists acknowledged that currency moves create mechanical translation effects. They flagged that roughly one quarter of STOXX 600 revenues come from North America, and that the average correlation between FX and earnings is negative at about -40%. Several European companies have publicly noted currency-related headwinds in recent communications.
However, JPMorgan’s team cautioned that the FX-to-earnings relationship is not immutable. While the average correlation is negative, there have been notable stretches when it flipped to positive, including the current period, indicating that strong earnings can coexist with a firmer EUR/USD.
The strategists also highlighted a tendency for the euro and Eurozone PMIs to move in the same direction, implying that periods of euro strength have often coincided with stronger economic activity. That stronger activity can offset the negative translation impact on corporate earnings.
Turning to market performance, JPMorgan observed that the correlation between the euro and the Euro Stoxx 50 has more often been positive than negative, and that this positive relationship has strengthened recently. Similarly, cyclical sectors in Europe have historically tended to show a positive correlation with EUR/USD.
The strategists concluded that if the euro were to appreciate further, it would not necessarily present a major obstacle for European equities or for cyclical sectors within the market, given the potential offset from stronger local activity and the historical patterns they documented.
Note: The observations and past correlations cited are those presented by JPMorgan strategists and reflect their analysis of historical relationships and recent market moves.