Market commentary: Bruising heals following end of year bumpy ride

Just as you think you are heading into the quietest period of the year, volatility levels gathered pace through most of last week, albeit subsiding somewhat during yesterday’s trading session.

This uncharacteristic event of elevated levels of volatility in mid-December really gets us thinking if it is merely low liquidity during the Christmas period, or merely a signs of things to come in 2015. Who knows, but it could well be both - turbulence at this time of the year has a tendency of being exaggerated somewhat but the first few months of 2015 are not expected to be a stroll in the park.

The US Federal Reserve’s monetary policy and the way it develops throughout the year will be crucial, not only for markets and expectations but also for the global economy and economic sentiment. Last week’s FOMC statement was in line with expectations, with the key change in the text being that the Fed said it could “be patient in beginning to normalize the stance of monetary policy” as even more FOMC members now seem to have come together on a common front in terms of the Fed’s monetary policy stance for 2015.

The question is now “when” and not “if” the Fed will hike rates, with broad rate hike expectations ranging between June and September of 2015. On the data front, November’s US CPI inflation report came in below expectations mainly on the back of lower core prices while the impact of a lower oil price could keep inflation at bay.

In the euro area, sovereign bond QE is almost a foregone conclusion now, with such bond purchases expected to keep volatility at a minimum, for the short term at least. However, with over a month to go, it is difficult to say what market conditions will be like till the ECB adjourns next on 22 January 2015.

Q1 QE is almost a certainty, as an ECB board member was last week stating that it has now become a matter of how to undertake QE and not whether to go ahead with it or not, saying that the ECB has both a moral and legal responsibility to deliver on its mandate. Incoming economic data have not really helped the ECB’s case for prolonging QE any further, with recent eurozone sentiment surveys indicating a bottoming of economic conditions with the possibility of recovering in 2015.

One of the key themes to look out for in 2015, will therefore be domestic politics, and the political willingness of the debt-laden eurozone countries to come up with the much needed measures to get their finances back on track, and complement any ECB action in the form of QE.

Looking back at 2014, 2014 what a somewhat disappoint year for the eurozone economy as a whole, with growth rates expected to fall significantly short of analysts’ expectations.

Without a doubt, all fingers point to the Ukraine-Russia crisis, which dampened corporate confidence in Germany, Europe’s economic powerhouse. This coupled with subdued economic and investor sentiment in Italy and France further exacerbate the overall slowdown in economic activity, and more importantly, kept inflation anchored at low levels.

Add the sharp decline in the price of oil and the forthcoming Greek elections to the concoction and you have got quite a bumpy road ahead for the ECB to bring the economy up and running once again.

All in all, the ECB has made good progress in attempting to repair the European banking system, however, the key to a strong recovery will be credit growth, and this will only begin to pick up when economic numbers are back on a positive trajectory.

Quite a handful of events to keep us on our toes in 2015. In the meantime, although trading activity will be thing for most of the say, economic numbers are in abundance, with French consumer spending and Italian retail sales in the Eurozone, final GDP prints in the UK and US, as well as durable goods orders, consumer sentiment, new home sales and personal spending/income in the US taking centre stage.

This article was issued by Mr. Mark Vella, 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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