Market commentary: Markets around the world rebound

Looking at the strong gains posted yesterday by the risky assets it goes without saying that the risk averse attitude that prevailed over the first part of the week was surpassed for the time being.

The European stocks closed the day higher after taking cue from the US markets a day earlier; the high yield markets also halted their spread widening and the US session was for another day positive as the optimism was supported by the balanced economic data and a halt in the oil’s fall.

The sharp reversal in sentiments appears to be due to a combination of factors among which the balanced tone of Federal Reserve’s Governor on Wednesday evening and a stabilization of the ruble which reduces the risk of contagion to other emerging markets and supports risk taking.

Whereas Putin’s speech was not too factual and did not serve to diminish geopolitical concerns it did say that the Central Bank will not waste its FX reserves for intervening in the market to directly support the currency; actually, the Russian president went a  step further by arguing that the decision of diminishing such interventions should have been taken sooner.

Whereas the statement seems somewhat contradictory, the reasoning is that an active Central bank can fall victim to speculators and can end up capitulating against a backdrop of rapidly shrinking reserves. 

As such, the Russian authorities over the last few days have tried to stabilize the currency through indirect measures – reducing the impact of the falling ruble on the banks’ capital requirements, drafting a bill that will allow the Central Bank to inject RUB1 trillion (USD17 billion) in systemically important banks or persuading the country’s exporters to decrease their foreign currency assets to the October levels.  We highlight that an exacerbated fall in ruble has the potential of dampening the demand for other emerging market assets and also increases the effects on European economies.

More specifically, the depreciation in ruble will negatively affect Russia’s demand for foreign goods (i.e. its imports), thereby leaving European sectors such as machinery and vehicles vulnerable to a lower demand; in a separate note to be published today we will detail this subject.  

Moving on to the second major market driven factor, the Federal Reserve’s meeting which concluded on Wednesday with the commitment to remain accommodative but gradually move to increase rates next year, we note that the message was a somewhat mixed bag for markets.

The sharp rebound in equities suggests that for them the catchphrase was “considerable time”; at the other end, the increase in the 10 year US yield to 2.2% and the advance of the 2 year yield to close to this year’s high is evidence of a market which is reassessing its interest rate forecasts.

Likewise, the renewed depreciation in EUR versus USD suggests as well that the Fed’s guidance served to back the view that the European and the US monetary policy will increasingly diverge. These trends can however be reconciled if one takes into account that the perpetuation of the deflation risks abroad and the fall in oil prices will limit the increase in US prices and thus the Fed’s action.

Meanwhile, the sustained flow of positive economic data supports the demand for equities and other risky assets. As the latest example, we note the weekly unemployment claims data which surprised on the upside.

On another note, notwithstanding the volatility in the oil markets, the energy stocks joined the rally with the energy component of the Eurostoxx50 gaining 2.56% and similar gains posted by the S&P energy names; thus, the stabilization of oil quotes is probably sufficient to support at least some of such names as valuations fell dramatically in many cases.

This should serve to stabilize the US high yield market which has fallen victim to fund outflows as the predominance of energy names increased investors’ uneasiness. Indeed, the outflows have been significant over the last few weeks, with USD3.1 billion outflows reported for the week ending Thursday 18th alone.  

We even noted some strengthening in Venezuela bonds although this might be short-lived given that oil prices is only part of the country’s problem. Relatedly, we highlight that Moody’s yesterday downgraded the country to CCC on the ground that it is too slow to address the risks relating to lower oil prices.

This article was issued by Ms. Raluca Filip Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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