Market and Report Updates - September 29, 2022

Barkha Rani Sep 30, 2022
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Catch Us Online at the Canadian Financial Summit!

Members can register for FREE through the link in the image below and watch individuals from the 5i Research team, including Peter Hodson, discuss stocks, markets, and investment strategies. This event runs from October 12 to 15.  

Report Updates

We have posted report updates on Absolute Software (ABST) and Knight Therapeutics (GUD). ABST is a cloud-based software company that focuses on the distributed workforces of today and GUD is a specialty pharmaceutical company that acquires innovative products for Canada and Latin America. One company has seen the pandemic pull forward the sales of its products, while the other has been testing investors' patience and is currently sitting on a substantial amount of cash. One offers a small dividend and has shown improvement through an acquisition and the other trades at a cheap valuation. We feel that these reports offer important developments in the world of SaaS and healthcare. 

Read the latest updates by logging in here!

Investor Sentiment Survey

Following the initial launch of our investor sentiment survey and after posting the results from the first survey in the last market update, we are now releasing the second survey with a few additional questions and some revisions to the original questions.

We have created a brief investor sentiment survey that we hope to build on over the coming months that we also think our members will find value in. We will be starting out by sending this survey on a monthly basis and reporting back to members on the results! The survey shouldn't take more than 5 minutes and no personal details are required.

Let us know how you are feeling about markets and the economy by following the link below! We will let you know the results in our next market update.

Investor Sentiment Survey Link!

Market Update

The markets have been on a sharp retracement over the past couple of weeks as bond yields have been steadily rising. The Federal Reserve announced a 75 basis point rate hike and plans for another 1.0%+ before the end of the year, causing yields to spike and markets to drop. The Bank of England (BoE) recently announced it will restart QE by purchasing long-dated government bonds to stabilize the market, as cracks started to form with the sudden rise in bond yields. Canada's GDP came in slightly higher than expectations for the month of July, with an increase of 0.1% as opposed to an expected decline of (0.1%). Further rate hikes for the remainder of 2022 are expected across the North American markets and right now the indices are testing their lows. Higher yields in the US have supported a higher dollar, and this has put pressure on traditional asset classes. 
What is the US Dollar Index (DXY)?
There has been a lot of news and headlines this year around the strength of the US dollar and its negative impacts on risk assets. The value of a currency can only be measured relative to the value of some other currency or asset, and the forces behind that typically depend on the strength of the economy backing it and that nations interest rate. For example, the USD/CAD exchange rate measures the strength of the US dollar against the Canadian dollar, and if this exchange rate increases it means that the US dollar is strengthening relative to the Canadian dollar. The reasons behind this strength can depend on the robustness of each economy and the interest rates that they have to offer foreign investors.
The US Dollar Index (DXY) measures the value of the US dollar against a basket of six foreign currencies. Those foreign currencies include the Euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and the Swedish krona. The euro is the largest component in the basket of currencies, representing just over half of the basket. The index started in 1973 with a base of 100, and the values since then represent the US dollars’ strength/weakness compared to this base.
A strong US dollar creates headwinds and downwards pressure for risk assets, as investors flee risk assets in search of safe haven, traditionally the US dollar. This year, the US dollar index has risen close to 20%, and this has been aided by the Federal Reserve’s strong commitment to raising interest rates and macroeconomic uncertainty causing both domestic and foreign investors’ flight to safety in the US dollar.

Correlation between the US Dollar and the Markets
Earlier, we emphasized the downwards pressure that a strong US dollar has on risk assets, and in the correlation table below, we aim to demonstrate this negative relationship. We can see below that the most consistently inverse relationship (as the US dollar increases, assets decrease) is between the US dollar and all risk assets (column labeled 'Dollar' and row labeled 'Dollar Index' - red denotes a negative correlation). To note a few of the strongest inverse relationships with the dollar, the real estate market has a -0.43 correlation to the US dollar, S&P 500 -0.34, STOXX Europe -0.37, and MSCI Developed markets -0.46.


Source: Eikon

Clearly, when the dollar is rising, traditional asset classes are going to witness headwinds and strain. This strain on traditional assets is quite evident with the S&P 500 down (~25%) and the US dollar up ~20% this year.

Historical Changes in the US Dollar and What to Expect Going Forward
The US dollar index has been screaming higher this year amid rising interest rates and global economic uncertainty. Although, this is not the first instance that the DXY has risen ~20% in any given year, and in fact, previous instances that have seen this type of increase have been associated with major global economic events. Below we have outlined the year-over-year change in the DXY and global events that were associated with ~20% increases.


In 2015 the DXY rose 20%, led by a global economic slowdown and China devaluing its currency. In 2001 and 2008 the DXY rose close to 20% as the dot com bubble and the Global Financial Crisis took place. In the early 1990s the US faced a recession that was accompanied by rising energy prices and the DXY saw a significant change year-over-year. This past year we have seen a 20% increase in the DXY, supported by rising interest rates, high energy prices, and global inflationary pressures. All of these forces have helped the DXY increase substantially, and this has put pressure on risk assets such as the S&P 500 and the Canadian markets.
We anticipate that the strength in the US dollar will eventually come to an end, as macroeconomic concerns subside, and the Federal Reserve nears its terminal interest rate. If the US dollar continues its surge higher, we expect the markets to continue to face headwinds as investors flee to safety in cash or money market funds. Alternatively, if we begin to see weakness in the US dollar relative to foreign currencies as a result of the Federal Reserve signaling it is near pausing rate hikes or the resolution in macroeconomic events, then we expect the markets to gain some support. The rapid rate of increase in the DXY that we have witnessed this year has no doubt placed a lot of strain on financial markets, and for now, all eyes are on either a near-term continuation of US dollar strength, or a reversal in the trend.


Best wishes for your investing!