Global markets were rattled during the month of August, with the volatility index reaching levels not seen since the summer of 2011, an intra-day high of 53 on August 24, 2014, as fears of a slowdown in China sent shivers down investors’ spines.

Risk-off mode was pretty much the order of the day but this tone was further exacerbated towards the end of the month as equities tumbled and credit spreads widened over a four-day period, only to recover strongly towards the latter trading sessions of the month.

Sovereign bonds were much in favour and benefitted from the risk-off and flight-to-safety trade. Despite its fair share of spread widening, credit has proven once again to be one of the most attractive classes from a risk/reward perspective, clearly showing its defensive characteristics particularly in comparison to moves witnessed in equity markets.

Till a marked and most importantly economic recovery is witnessed in the Eurozone, investors will want that capital protection buffer. It is only after a strong recovery is in full force that companies begin to increase their leverage ratios and turn on the risk-on button that Investment Grade credit will begin to lose its shine, but in my opinion, we still have a way to go for that.

Chinese fears continue to drive sentiment and what drove markets stability towards the end of last week was the 50bp rate cut by the People’ Bank of China as well as a stronger than expected US consumer confidence and GDP growth rate.

The market’s focus will be on inflationary figures in the eurozone which were released yesterday and were broadly in line with expectations as well as key unemployment data in both the US and Europe.

Markets will be eager to see in particular if any progress has been made in Europe on inflation, most notably following expectations of a slowdown in China and overall decline in commodity prices, most notably oil, whilst the recent strength of the euro as well as currency moves in China are also expected to take their toll.

In fact, in the eurozone, there have been heightened concerns about the impact of the recent moves in China as the euro has recovered (strengthened) by 10 per cent since its April lows, which could be viewed as somewhat problematic since many forecasts are basing eurozone growth in 2016 on the premise that a weaker currency will fuel export growth and support in domestic consumption.

It is for this very reason why I would not get over-excited about the recent bounce back in equity markets as the recovery is still rather fragile and the impact on investment through lower exports and higher uncertainty can be significant.

The fact that the PBOC has intervened to try and stabilise is positive for the sustainability of the growth recovery story in Europe but key economic data releases will portray the clearest picture on the state of the recovery.

After turning the page on August, on what can be characterised as one of the most tumultuous summers months in recent history, I look forward to September which is normally laden of market activity as many traders and investors re-enter the markets following their summer break.

In the absence of any surprise, and hence if volatility is kept at bay, I expect bond market issuance to gather pace once again, both in Europe and the US, with bond issuers taking cue from sentiment following the release of the expected key economic data made reference to above, apart from the usual PMI and ISM figures in both regions.

Market’s attention will immediately shift to the ECB meeting and the accompanying statement on inflation and current drop in commodity prices. No tweaks to the QE are expected for the time being, but credit markets will be eagerly reading between the lines to digest any possible hints of further action in the months ahead.

Disclaimer:

This article was issued by Mark Vella, Investment Manager 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 & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.