Stocks on a summer rally – but dollar decline dents gains
Strong earnings reports have rekindled optimism in the stock markets, which also seem to be handling Trump's shifting tariff announcements with greater calm than in the spring. However, a weaker dollar is reducing returns for Danish investors – and the ongoing conflict between Trump and Powell continues to keep markets on edge.
The stock markets have entered the summer with renewed optimism, and the leading US stock index, the S&P 500, has reached a new record high. The progress has been driven in large part by a strong start to the earnings season in the US, where several major companies have so far delivered positive surprises. At the same time, sentiment has become more balanced regarding the political risks that previously unsettled investors.
"Investors are taking Trump's shifting tariff announcements much more calmly than before. We've seen that the threats are often withdrawn or watered down before they become reality. This has provided a significant boost to the stock markets, which have also benefited from a strong start to the US earnings season. As a result, the focus at the moment is more on what is going well rather than what could go wrong, including the trade policy risks that dominated the markets in the spring," says PFA's Chief Strategist, Tine Choi Danielsen.
Trump vs Powell – the battle over interest rates
She points out that despite the more subdued reactions, the markets remain sensitive to the president's shifting moods. This became evident last week when a rumour about a potential dismissal of Federal Reserve Chairman Jerome Powell briefly caused investors to send stocks sharply lower.
"The S&P 500 plunged significantly within a few hours when it was rumoured that Trump intended to fire Powell, but stocks rebounded when Trump himself denied the rumour. Although the markets have become more resilient, this shows how highly investors value the independence of the central bank," says Tine Choi Danielsen.
Trump's criticism of Powell stems from the fact that the Federal Reserve has not yet cut interest rates, which, according to Trump, is hindering efforts to further stimulate the US economy. On the other side of the aisle, it is argued that rates cannot be lowered as long as trade policy and its long-term economic consequences remain so uncertain, and inflation in the US continues to sit above the desired 2% level.
Dollar decline dents returns
Although the US S&P 500 stock index has risen by about 8% since the start of the year, gains have been limited for Danish investors. During the same period, the US dollar has fallen by nearly the same percentage against the Danish krone, eroding returns when converted into Danish currency.
"The dollar is at its lowest level against the Danish krone in the past three years. So, even with impressive stock returns in the US, the gains have been more modest for Danish investors. At PFA, we have continuously protected our customers against the risk of a weaker dollar, and this has contributed positively to returns, which, for a typical PFA customer, stand at just under 5% as of early August," says Tine Choi Danielsen.
She is generally more optimistic about market developments than she was in the spring. However, she emphasises that due to the ongoing uncertainty surrounding tariffs, inflation, interest rates, and currency fluctuations, PFA is working with a broad range of potential outcomes for this year's returns, which are expected to fall between 0 and 10%.