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Here’s How a Rising Dollar Impacts Stocks

Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Storm Tracker: More than 860,000 customers still in dark in Michael's wake

Factbox: Utilities, Oil Producers Brace for Hurricane Michael Along U.S. Gulf


Here’s How a Rising Dollar Impacts Stocks

The U.S. dollar hit a 4 month high last week from concern over potentially faster interest rate hikes to control inflation as oil exceeded $70 per barrel and the lowest unemployment since 2000 was reported. If the U.S. dollar continues to strengthen, it may be useful to know how U.S. equities moved historically in times when the dollar rose. Given each size, style and sector has different exposures to the U.S. dollar, there have been differences in the performance of each.

Naturally the largest companies do most international business so have a greater portion of revenues coming from outside of the U.S. Notice in the table below from S&P Dow Jones Indices research that the S&P 500 has 70.9% of revenue from the U.S. That is less than the 73.3% of U.S. revenue in the S&P MidCap 400 but is much less than the 78.8% of U.S. revenue generated in the S&P SmallCap 600.

Also, in a recent S&P Dow Jones Indices research paper, an analysis showed the percentage of revenues from the U.S. by sector. For illustrative purposes, two methods were used to measure the percentage of U.S. revenues, and the results were relatively in line for each method. Energy showed the most difference between the methods since the three biggest companies in that sector contributed heavily to the overall revenues. Notice the real estate, telecom and utilities sectors have the highest percentage of revenues domestically.

Therefore these sectors underperformed in the period measured in the aforementioned paper that was from Nov. 8, 2016 – Dec. 29, 2017, when the U.S. dollar fell roughly 7%. Likewise, during this period, the technology and materials sectors that have the greatest percentage of revenues coming from overseas, outperformed significantly.

While the percentage of revenues breakdown by the U.S. and international matters for performance as the dollar fluctuates, in some cases, the companies hedge or partially hedge currency moves, so the currency impact is muted. Further, there are other factors that may drive outperformance more than the dollar moves. For example, the energy sector underperformed with a falling dollar and rising oil prices, despite having relatively low revenues from the U.S., since many companies hedge against oil price moves to reduce volatility of revenues.

An interesting finding when comparing the impact on U.S. equities from a falling dollar versus a rising dollar is that the sensitivity to the falling dollar is much greater, though the U.S. equities rise on average in either case. This is much in-line with findings that U.S. equities have historically risen more with interest rate cuts than with hikes, but that with growth, equities can still rise with rates.

On average, the S&P 500 rises 3.7 times more from a falling dollar than a rising one, perhaps since a falling dollar helps the international business, and companies can hedge portions of their international revenues if the dollar rises. The S&P MidCap 400 is 3.9 times more sensitive to a falling dollar than rising one since a falling dollar gives the mid-size companies a chance to grow international business when the dollar falls. The mid caps also performed best with the falling dollar. The S&P SmallCap 600 is 3.1 times more sensitive to the falling dollar than a rising one but does better than large- or mid-size companies when the dollar rises.

On a sector level, materials, financials and energy are all driven more by a falling dollar than a rising one, though energy and materials actually fall with a rising dollar. This is since the underlying commodities are priced in dollars so the dollar is a powerful driver of these sectors; however, the downside capture ratio when the dollar falls is much greater than the (small negative) upside capture when the dollar rises, so the companies may be skillful at hedging their downside from falling prices of raw materials. Also, the falling dollar helps the mid-size tech companies significantly more than a rising dollar. This is since technology has a relatively large portion of revenues coming from outside the U.S. and the mid-size companies have extra room to expand before they mature.

Overall, the S&P SmallCap 600 benefits most from a rising dollar from its heavier U.S. revenue concentration. On average, historically in the past ten years, for every 1% the dollar rose, small caps gained 95 basis points, mid-caps gained 82 basis points and large caps 71 basis points. Small-caps in financials have outperformed their bigger counterparts with rising rates. The financial large-caps have about 20% of their revenues internationally whereas the smaller banks are likely more local so do better (though aren’t that sensitive, rising just 26 basis points per 1% dollar increase) with a rising dollar and with rising rates, but when rates don’t rise, utilities have fared better. The bottom line is that a rising dollar is not harmful for most stocks, especially small-caps; however, all else equal – energy is too sensitive to the downward pressure on oil with a strengthening dollar.



Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Communications providers are working to restore services in areas impacted by Hurricane Michael, but storm debris, power outages and significant fiber damage are hindering progress in those counties most devastated by the storm.

As of Oct. 14, a number of counties along the Florida Panhandle had more than half of their cell sites down, including Bay County — home of Panama City and Mexico Beach, described as "ground zero" of the storm by U.S. Federal Emergency Management Agency administrator Brock Long — where 66.1% of cell sites were down. Similarly, neighboring Gulf County had 69.6% of cell sites down, according to data from the U.S. Federal Communications Commission.

Based on the amount of damage in the area and ongoing power outages, it could be weeks before services are restored. Long said Oct. 12 that after search and rescue, restoring communications in impacted counties is among FEMA's top priorities.

"You have to be able to communicate to appropriately respond and we are trying to do everything we can to get the private sector vendors, the Verizon [Communications Inc.]'s of the world, to get in to try to get their systems back up and running," he said.

Long added, however, that the process is not easy. "There was a tremendous amount of debris. When you look at the damage in Mexico Beach, that is where the ocean rose potentially 14 feet … and shoved buildings out of the way. When you have that type of damage, it takes time to get in and go through," he said.

Hurricane Michael made landfall Oct. 10 near Mexico Beach as a Category 4 hurricane with 155-mile-per-hour winds.

For its part, Verizon said the "vast majority" of Florida and Georgia service has been restored, with 99% of the company's network in Georgia in service and 97% of its network in Florida. But the company noted there are pockets, particularly near Panama City, where the damage is severe.

"The storm caused unprecedented damage to our fiber, which is essential for our network — including many of our temporary portable assets — to work. Our fiber crews are working around the clock to make repairs, and while they are making good progress, we still have work to do to get the fiber completely repaired," the company said Oct. 14.

Fiber is the connecting component of a network that carries data from point to point. It is necessary for Verizon's permanent and temporary cell sites to be operational. The company noted that while it has multiple fiber paths to carry data, "The severity and intensity of the storm caused damage to all duplicate routes in the Panama City and Panama City Beach area."

In terms of wireline services, the FCC said 291,300 subscribers remain out of service as of Oct. 14, including 205,643 subscribers in Florida. The figures were down from a day earlier, when a total of 337,223 subscribers were without service, including 233,843 in Florida.

The top residential video and broadband provider in Bay County is Comcast Corp., according to MediaCensus data from Kagan, a research group within S&P Global Market Intelligence. Comcast, the largest cable operator in the U.S., said in an Oct. 12 statement that it is working to get Xfinity services back online.

"As power returns … and it becomes safe for our technicians and restoration crews, we will work to repair any damages affecting our network," the company said.

As of Oct. 15, more than 162,000 customers in Florida remained without power, including all 27,275 customers served by Gulf Coast Electric Cooperative. The cooperative said in an Oct. 12 Facebook Inc. post that its distribution system "suffered catastrophic damage"

In Gulf County, the top residential video provider is AT&T Inc.'s satellite video service DIRECTV, according to MediaCensus data, while the top residential broadband provider is Mediacom Communications Corp., the fifth-largest cable operator in the U.S.

Mediacom said Oct. 14 that its recovery efforts are underway but its network in Florida has 14 miles of severely damaged fiber near Walton County, as well as 25 miles of damaged fiber east of Panama City that is obstructing video transmission from Gulf County to Walton County.

"Our current priority remains focusing on repairing damage to our high-speed data transport network and main transmission facilities and repairing downed lines where we have access to the area. We have outages from widespread loss of commercial power along with downed lines, and structural damage throughout our systems," the cable operator said.



Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Houston, Oct. 11 2018 — Hurricane Michael made landfall at the Florida panhandle as a Category 4 hurricane Wednesday with 155 mph winds, quickly destroying demand for power, natural gas and refined oil products. Shut-in oil production rose modestly from Tuesday to over 700,000 b/d, but the storm has stayed east of much of the region's production, which means supply should be back online quickly.

Meanwhile, the severity of the storm has surprised to the upside, which could a mean longer lasting and more severe impact on demand for power, natural gas, refined products and ultimately crude oil.

"We expect the impact on refined products demand to be below that of previous hurricanes in the Gulf Coast such as Harvey in 2017, as the region impacted by Michael has lower population density than Houston ... Nevertheless, the impacts are favoring the high side of our estimates given the sheer severity of the storm," said Claudio Giamberti, Head of Demand and Refining at S&P Global Platts Analytics.

As of 7 pm EDT, the eye of Michael was moving over southwestern Georgia with maximum sustained winds still at 100 mph, according to the National Hurricane Center. The storm is expected to move northeast across the Carolinas before heading back out to sea Friday morning.



Storm Tracker: More than 860,000 customers still in dark in Michael's wake

Highlights

Florida, Georgia, Carolinas hardest hit

Peakloads down about 20% on week

Houston, Oct. 11 2018 — As the remnants of Hurricane Michael churned through the South Thursday, it cut power to more than 870,000 customers, shaving large chunks off daily peakloads and, while more than 30,000 technicians began working to restore service.

The center of Tropical storm Michael was about 25 miles south of Greensboro, North Carolina, as of 2 pm EDT Thursday, the National Hurricane Center said. It still had maximum sustained winds of 50 mph, moving northeast at 23 mph with an expected move offshore from southeastern Virginia Thursday night.

Since it made landfall near Mexico Beach on the Florida Panhandle between 1 pm and 2 pm EDT Wednesday, the storm left more than 860,000 people without power, but some of those services have been restored.



Factbox: Utilities, Oil Producers Brace for Hurricane Michael Along U.S. Gulf

Houston, Oct. 09 2018 — With Hurricane Michael expected to make landfall on the Florida Panhandle as a Category 3 storm Wednesday, offshore oil and gas producers were busy evacuating crews and shutting in production Monday. By mid-day, nearly 20% of Gulf of Mexico oil production had been taken offline. That number will likely have risen when reported Tuesday as operators continued to shut down platforms Monday afternoon.

Meanwhile, just 24 days after Hurricane Florence made landfall, electric utilities were gearing up for Hurricane Michael restoration efforts by staging crews and supplies in the storm's path. Lost power demand is likely to have a knock-on effect on natural gas demand and prices.

After it brings over 100 mph winds to the western-most portion of Florida, Hurricane Michael is expected to turn northeast, bringing wind and rain to Alabama, Georgia and the Carolinas before heading back out to sea. Thiis article covers the key takeaways across commodities.