Rising energy prices pressure global stocks—Bitcoin bucks the trend

And the cycle continues. High energy and commodity prices—in this case, oil, coal, natural gas, aluminum, etc. —are all weighing on equities. From Hong Kong to Paris, global stocks are faltering, as are U.S. futures. In an ominous twist, even energy stocks are falling.

Bitcoin, meanwhile, continues its impressive rally. That’s as Jamie Dimon gave us his call on crypto yesterday. “I personally think that Bitcoin is worthless,” the JPMorgan Chase CEO said at an investing conference. Bitcoin bulls were paying no attention. It’s up nearly 2% in the past 24 hours.

Sticking with currencies—crypto and otherwise… in today’s essay, I look at the effects of a strong dollar on your portfolio. It’s another headwind as we head into earnings season.

But first, let’s spin the globe and see what’s moving markets.

Markets update

Asia

• The Asian markets are lower with the Hang Seng, Monday’s big winner, down 1.4% in afternoon trading.
• Investors are on edge about the latest regulatory rumblings out of Beijing. This time the oversight will be aimed at the regulators who are deemed to be too cozy with the industries they’re overseeing. Every time I read one of these watching-the-watchers stories that Elvis Costello song pops into my head.

Europe

• The European bourses were a blur of red, with the Stoxx Europe 600 down nearly 0.3% two hours into the trading session. All sectors were lower to start the day.
• The pound sterling has had a topsy turvy month. Now FX traders are shorting the pound as they bet the Bank of England will raise rates too soon, sinking growth prospects.
• Airbus sold just un avion—yes, one plane—last month, the company reported this morning. Shares were down 1.3% in early trading.

U.S.

• U.S. futures point to a weak open. That’s after all three major averages started the week in negative territory.
• WTI, the U.S. crude benchmark, closed above 80 bucks a barrel yesterday for the first time since 2014. That’s putting pressure on motorists as gasoline prices have more than tripled in the past 18 months and are expected to climb higher. Energy stocks slipped yesterday, but the sector is the big out-performer over the past week.
• Shares in Southwest Airlines fell 4.2% yesterday (they’re up a tad in pre-market) after the airline had to cancel more than 3,000 flights over the past four days. Here’s what happened.

Elsewhere

• Gold rebounded amid the equities slump yesterday. It now trades around $1,760/ounce.
• The dollar is down.
• Crude is quiet this morning with Brent trading above $83/barrel.
• Crypto is steady, too. Bitcoin trades above $57,000. It’s up 30% in October, and bulls are saying it will return to its all-time highs before long.

***

Dollar daze

I’m a man of my word. A few weeks ago, a Bull Sheet reader asked if I could dedicate some essay space to the surging dollar and its impact on stocks. Since that request, the dollar has climbed even further against a basket of currencies. And so, as we near the start of the Q3 earnings season, the strong dollar will once again be in the spotlight.

A reminder: a strong dollar can be a drag on the earnings of multinationals. It’s not a surprise to hear the CFO on an earnings call mention the “FX effect” or “currency effect” of a robust dollar on its overseas profits. That makes sense. Whether it’s selling cars or cola to an overseas markets, that American exporter will have to price the goods in the local currency. And because the local currency has gone down in value verses the dollar, the dollar-denominated return on these sales abroad is typically lower. It works both ways, mind you. When the dollar is weaker, the overseas business is often more profitable.

When it comes to FX and profits, the formula might look something like this: Weak dollar = tailwind (good). Strong dollar = headwind (bad).

Ok, those are the very general dynamics of FX impact on the bottom line.

This quarter the issue of dollar-strength is even more acute. That’s because the surprising dollar rally (FX strategists at the start of the year were predicting the opposite: a weaker dollar) comes amid all kinds of other negative factors facing companies. They include—let’s recite them together—higher energy and other input costs, supply chain bottlenecks, inflation, weaker economic growth, imminent corporate tax hikes and central bank tightening. You add a revitalized greenback to that, and you can see why so many analysts are predicting reduced corporate earnings this quarter.

According to Refinitiv, Q3 corporate earnings is expected to grow 33% on annual basis. That’s not bad—until you look at what we just experienced. Last quarter we saw knockout earnings growth of 96%!

With that in mind, I asked the versatile Adrian Croft to look into the dollar effect on stocks. He fanned out and spoke to many of the top analysts. Their take: the strong dollar is a phenomenon that won’t fade any time soon. And, the longer it persists the more problematic it will be on for Corporate America’s bottom line, and, ultimately, your portfolio.

For example, Jane Foley, head of FX strategy at Rabobank, told Fortune that she would expect most companies, up until now, have been able to contain (through hedging) the impact of a strong dollar. Looking a bit further out, things could get tricky for CFOs.

There’s a lot of discussion about the dollar effect. Not all analysts see it as the No. 1 bogeyman facing stocks. But, it adds to the challenges companies face in these volatile times.

If, like me, you’re a bit of an FX nut, check out the rest of Adrian’s story on king dollar.

***

Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com

As always, you can write to bullsheet@fortune.com or reply to this email with suggestions and feedback.

Today's reads

Investor, beware: King dollar is back, and it could slam Q3 earnings—Fortune

Where Zillow says home prices are headed in 2022—Fortune

Could a three-day workweek be the answer to the U.K.’s energy torment?—Fortune

Jobs Forecasters Got Schooled—Here’s Why—Wall Street Journal

Market candy

Quiz time

Had you invested $100,000 in the closely watched FANG+ Index (NYSE) your holding would be a bit north of $125,000 today. Alas, not all components of the heavyweight-tech index are producing knockout returns. Which of the FANG names is down over the past year?

• A. Facebook
• B. Amazon
• C. Netflix
• D. Alphabet's Google

As any Amazon shareholder will grumble, it's B. The king of e-commerce is down 5.7% over the past year, and is down slightly YTD. The others are in the green over the same periods.