Daily Dispatches
International Monetary Fund Managing Director Christine Lagarde.
Associated Press/Photo by Susan Walsh
International Monetary Fund Managing Director Christine Lagarde.

Dollars and Sense: Europe spooks U.S. markets … again

Money

European slowdown. Before we talk about earnings season getting underway here in the United States, I can’t help observing that Europe is back in the financial news. European markets started getting jittery Tuesday. On July 6, the head of the International Monetary Fund (IMF), Christine Lagarde, said the global economy will improve over the next 18 months but warned growth might not be as fast as previously expected. A lot of people thought her comments were a prelude to new forecast numbers the IMF will release later this month. In April, it predicted global growth of 3.6 percent this year and 3.9 percent in 2015, up from 3 percent last year. European markets fell sharply after her comments: London’s FTSE index was down 1 percent and Germany’s DAX dropped 1.1 percent on Tuesday.

More Euro-Bank problems. Then came news that a bank in Portugal was having liquidity problems. Back in 2012 we were talking about banks in Greece and Italy. Portugal was having problems then, but it was in the background. This time it’s moved into the limelight. Accounting irregularities were found at a major Portuguese bank in May, but the markets shrugged them off until last week, when the bank was late making interest payments on short-term debt securities. That added to the concern about a European slowdown, spreading anxiety to the United States. The Dow dropped as much as 180 points on Thursday. It recovered a bit by the end of the day, and rose modestly on Friday.

Better here. The U.S. markets rebounded after the disruptive European news because things are much better here. The S&P 500 has had 25 record-setting days this year. Agribusiness giant Archer Daniels Midland announced this week it would buy the Swiss company Wild Flavors for $3.1 billion. That’s another sign capital markets are limbering up. Alcoa kicked off earnings season with a much better than expected report. It will still be a few days before we have enough earnings reports to say how this quarter is going, but analysts polled by Thomson Reuters forecast profit growth of 6.2 percent for the S&P 500, up from last quarter and from last year.

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The week ahead. About a half-dozen of the Dow Jones Industrial Average’s 30 companies will issue earnings reports this week. Retail sales figures come out tomorrow, industrial production data on Wednesday, and housing starts on Thursday. There’s been some talk that retail sales are down at major retailers such as Walmart, but others note we might just be witnessing a shift to online retailing. Overall consumer confidence seems to be climbing. This week should help tell the tale. If we don’t get any surprises from the eurozone, and earnings come in even close to where analysts predict, we will see good earnings support not only for current stock prices, but possibly even for a continuation of this bull market we’ve been in for the past few years.

Warren Cole Smith
Warren Cole Smith

Warren, who lives in Charlotte, N.C., is vice president of WORLD News Group and the host of the radio program Listening In. Follow Warren on Twitter @WarrenColeSmith.

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