Market commentary: Tough year continues as confidence falters

2016 has been a challenging year in most markets, as investor anxieties over a number of key risks has all but wiped out confidence in financial markets.

Economic data doesn’t reflect such a poor performance in equity markets, where the Euro Stoxx 50 is down over 11% year-to-date. One of the best performing asset classes have been investment grade bonds, as the stagnant economy has led to market expectations of further stimulus measures.

Investors in financial assets should be aware of developments on the following key fronts.

The actions of the Federal Reserve – Following the initial rate hike last December, eyes have been keenly focus on the stance that the Fed will take as to the frequency of future hikes. The performance of the US economy is undoubtedly the shining light in the world economy as problems elsewhere remain making headlines. Given this, Fed chair Yellen is expected to retain a dovish stance in order to retain the positive momentum.

China – China is slowing. Let’s face it, growth rates of 8% had to end some time, and this situation is appearing to unfold despite the Chinese policy makers doing their best to keep the momentum going. Market participants are having a hard time dealing with this reality, resulting in significant swings in asset prices in the region.

The unrest emanating from this volatility and slowdown has set the scene for the negative start to the year. Future policy changes can be a game changer on both for both long and the short term, and given that China is now the largest world economy, any developments are bound to have an impact of financial markets.

Developments in Europe – Europeans have not made it easy for themselves in the last couple of months with several key risks at the moment which have placed growth rates steeply behind the US. The key themes at the moment are the BREXIT and the migration crisis, particularly in Greece, and the potential measures to stimulate a stagnant economy by the ECB.

Concerns are strive over the future of Britain in the EU, despite the deal reached by David Cameron earlier in the month. At this point it appears the markets are not pricing in the UK leaving the EU, however should the situation change expect a backlash in financial markets.

This morning in the financial markets, Asian markets set the scene for a weaker open following a drop of over 1% in most equity markets, the Chinese Shanghai Index being the worst performer, down 2.86%. European markets followed down around 1% across all markets as news of only vague commitments to spur growth at a Shanghai meeting of the Group of 20 finance chiefs.

Crude oil has continued to retreat, and European sovereign bonds are trading slightly wider in the periphery and tighter in the main economies of Germany and France, with the former 10-year yield now down to 0.114% which is highly significant. The interpretation of sovereign’s yields is one of an expectation of economic stagnation to remain for a significant period of time in the Euro area.

High yield bonds are trading wider, with the iTraxx Crossover Index almost 11 points higher indicating a drop in prices of European high yield bonds. This afternoon in the US keep a lookout for the February PMI numbers and manufacturing activity indices, as well as pending home sales.

This article was issued by Simon Psaila, Treasury Officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are 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 Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.