How is the strengthening dollar affecting international markets?
When the dollar strengthens, export-oriented international companies become more competitive compared to their U.S. counterparts. For instance, a strengthening dollar versus the euro would give a European company more euros upon conversion, increasing its potential revenue and earnings derived from the U.S.
How might global stocks react to lower central bank support?
As long as the pace and magnitude of rate hikes are gradual and relatively insignificant, global stocks should continue to outperform bonds. We are exiting a period of unchartered territory so it’s natural to expect higher volatility such as has been playing out. In general, higher rates are negative for equities as they usually lead to higher discount rates and lower growth. However, the Fed and ECB have both communicated that the exit from QE will be taken in measured steps. And, even at 3%, the yield on the 10-year U.S. Treasury remains historically low. While the economy is showing some late cycle signs, underlying trends remain robust. Given all this, we think rates will rise gradually, global growth will remain in an expansionary mode, and global equities will grind higher.
Views as of 5- 23-2018 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Past performance is no guarantee of future results. Federated Global Investment Management Corp. 18-74753 (6/18)