Tuesday, October 7, 2014

Daily Bullets…..for October 7, 2014


·         IMF again reduces growth outlook…The International Monetary Fund today reduced its global growth outlook with most of the weakness centered in Europe, particularly Germany, Italy, and France. The announcement also had some rather alarming language pertaining to potential for a stall in the recovery, acceleration in deflationary trends, and risks of market plunge once the U.S. Federal Reserve starts raising interest rates.
What’s the point? We believe today’s announcement by the IMF is the primary factor contributing to today’s stock market weakness. As we have mentioned in previous posts, the European economy remains in a deep funk and the IMF report just confirms this. Deflation continues to be a major risk for the Eurozone economy. Japan went through a period of sustained deflation, so it can certainly happen. While Eurozone monetary policies might be highly accommodative, the mechanisms to transmit the policy to the economy (such as credit) are highly stunted to non-existent in Europe currently. A key concern for investors is renewed possibility of recession in Europe which could act as a drag on the entire global economy, and thereby slow corporate earnings growth, a key driver of stock prices. The good news is U.S. companies generally remain in excellent condition financially and are generating record levels of free cash flow. This should be an important factor in supporting U.S. stocks, along with the prospect of a strengthening U.S. dollar.

 

 

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