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Today in the Market (7/18/2022)

Good Evening. U.S. stocks plunged precipitously during the final hour of trading on Monday after it was revealed that Apple (AAPL) would cut expenditure and halt hiring in 2022 to get ready for a potential recession.

The Dow Jones lost 0.69%, while the S&P 500 and Nasdaq also experienced declines of 0.80%. All three major indices reached session highs of at least 1.00% prior to the report.

CUTTING COST

Apple Inc. is the most recent Big Tech corporation to cut costs, and its stock is declining as a result.

According to a Bloomberg article that cited people with knowledge of the situation, the iPhone manufacturer AAPL planned to reduce recruiting and investment for some teams next year in anticipation of an economic slump. A week before the corporation is supposed to release its quarterly results, word of the intended cost-cutting order broke. Despite the cuts, Apple still plans to launch a full lineup of products in 2023, including a mixed-reality headset.

“Apple’s move reflects a broader slowdown in investing in new things, new companies and new products,” said Kim Forrest, chief investment officer at Bokeh Capital Partners in Pittsburgh. “It signifies that inflation is an issue for these companies.”

It is not only Apple … Some of the biggest names in computing are scrambling to cut costs as companies get ready to report quarterly results due to an perfect storm of inflation, the Ukrainian conflict, supply-chain slowdowns, and a potential recession.

PROS AND CONS OF US DOLLAR HITTING PARITY

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The most significant currency in the world, which pre-pandemic accounted for $6 trillion in daily economic activity, is at its highest level in 20 years. Last week, for the first time since 2002, the USD and the euro reached 1:1 parity. However, as the strong dollar has a tremendous impact on the world economy, different people are feeling its effects differently. For some, it is a major benefit; for others, it’s a burden.

Why is this happening though? The Federal Reserve is largely responsible for the dollar’s increase. The Fed has raised interest rates more aggressively, swiftly, and forcefully than other central banks throughout the world in an effort to combat inflation. The US is more appealing to investors seeking a return when interest rates are higher, and as a result, the dollar has increased in value (covered interest rate arbitrage anyone?).

The Winners

Businesses that serve the tourists: This summer’s influx of Americans into European cities like Paris is great news for retailers of upscale products. One British company, Burberry, estimated that currency fluctuations will increase revenue by more than $200 million this year.

Americans who go overseas benefit financially when the US dollar appreciates in value relative to other currencies.

The Fed: A stronger dollar results in reduced import costs into the US, which is essential to achieving the central bank’s objective of reducing inflation. According to WaPo, import costs made over half of the increase in consumer prices over the previous year (excluding fuel). However, they decreased for the second consecutive month in June.

 

 

The Losers

While a strong dollar may help control inflation in the US, it has the opposite impact in Europe and other debt-ridden nations, where weaker currencies are raising the price of imports, particularly oil, which is priced in dollars. Because of the sharp decline in the value of their currencies against the dollar, nations carrying significant amounts of debt in that currency will likewise find it difficult to repay their debts.

American multinationals: A rising dollar is bad for US businesses with large operations abroad. As a result of increasing the cost of their products abroad (and losing some of their competitiveness), they become less profitable. Several US businesses, including Microsoft, Salesforce, and Costco, issued warnings about the impact of the strengthening dollar on revenues last month. According to Credit Suisse, an increase in the dollar of 8% to 10% generally results in a 1% decline in US firm profits.

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