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The month of July marks the start of another earnings season and of a couple of hectic weeks where we compare company forecasts with the truth. It is important to point out that at Calamatta Cuschieri we have our own analysts and we produce our independent forecasts. This means that we do not base our advice on what the large global brokers are recommending but each and every company we recommend has been researched in-house.
For the second quarter we are expecting a subdued earnings season in Europe as monthly data indicates weakness towards May. Despite this outlook we are not too much concerned as most of our recommendations have performed very well year-to-date. We have built a comfortable cushion on BMW that has gained 11%, Valeo 24%, Delta 40%, Apple 17%, Goodyear 17% etc. So, while we did have negative price movements in some of our recommendations, especially in the banking sector, a balanced portfolio made from our recommendations should provide adequate stability. Our intention is to use the coming period to continue building our fund and equity portfolios. We expect returns to accelerate in the second and third quarter of 2014, and therefore it is very important to set one’s portfolio base at this point of the investment cycle.
The US economic focus this week will include the FOMC minutes from the June meeting, consumer credit, the monthly budget statement and initial jobless claims. On July 9th, investors will review the FOMC minutes in an attempt to better forecast the timing of the first rate increase. Expectations are that the minutes will re-affirm the view that rates will remain at historical low levels for a prolonged period. Meanwhile, the US dollar continued to strengthen as speculation mounts that the Fed will raise rates sooner than anticipated. Goldman Sachs Group Inc. has brought forward its forecast for US interest rate increases to the 3rd quarter of 2015 following positive jobs data last week. Analysts at Goldman Sachs believe that the US is ‘beyond the crisis’. On the 10th of July, Initial Jobless Claims should continue to indicate a decline in the pace of firings by firms.
Asian stocks were subdued on Monday but continued trading near their three-year highs. The world’s share prices rallied strongly last week as US unemployment hit a six year low. Asian investors are shifting their attention to corporate earnings as markets head towards the earnings season. Analysts polled by Reuters expect earnings growth in the US of 6.2 percent for the second quarter of 2014, and a return to double-digits in the third and fourth quarter.
In Europe, Euro-area finance ministers begin a two-day meeting in Brussels as industrial production came out weaker than expected early this morning. Industrial output in Spain also lagged expectations. Seasonally adjusted production in Germany dropped 1.8 percent in May. Germany’s general economy continues to trend upwards, however, the growth rate appears to be slowing. Germany remains the driving force for the euro-area’s slow recovery. Tensions in Ukraine may be an important factor contributing to the decrease in business outlook. Policy makers left interest rates unchanged last week and unveiled details of a new lend program aimed at boosting credit supply.
Meanwhile, the IMF signaled a cut to its global growth forecast, saying investment is still weak. The IMF believes that US growth will accelerate in the coming months while Asia will avoid an economic hard landing. Europe remains subject to economic weakness. IMF Chief Christine Lagarde is concerned that Euro area inflation remains too low and cautioned governments on their plans to support the recovery. Public policy must be dictated by debt sustainability thus countries cannot undertake major infrastructure investments if their medium-term obligations are unsustainable.
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