Speculation was rife last month in the run up to the FOMC meeting that Federal Reserve officials were poised to raise rates for the first time in over 9 years. Surveys and polls showed mixed views and expectations with those interviewed having indicated a 50/50 chance of a rate hike.

In the aftermath of the announcement by Fed Chair Yellen to keep rates on hold, citing external market conditions, particularly in China and the energy sector, as one of the key reasons behind this further delay, an Emerging Markets recovery ensued.

The Federal Reserve’s decision not to hike rates last month coupled with weak data in the US and overall less negative than expected economic data in China have spurred an increase, albeit benign, in demand for Emerging Markets assets.

Emerging Markets, which have had a tumultuous Q3, are now poised to face a fifth consecutive year of declining growth. Recent economic data releases indicated that aggregate growth rates across EM could fall below the 4% level.

The sharp deterioration in emerging market growth has been one of the leading market themes in 2015 and continues to have repercussions not only on global growth, but also on the US Federal Reserve’s timing of its first interest rate hike in over 9 years. It can be argued that recent weak US economic data could propel the Fed to further delay its rate hike and thereby provide some temporary relief for EM assets, however there seem to be no imminent indications that EM growth is picking up .

China’s economic slowdown coupled with a sharp fall in commodity prices and the divergence of growth between G7 and EM has caused a major shock across EM, irking investors along the way. While countries like India, which is not as dependent on China, cope well with lower commodity prices and weaker global trade, major commodity exporters which are heavily reliant on capital inflows face the most downside risks. This has in fact resulted in a marked re-pricing (depreciation) of their domestic currencies, particularly in Brazil and Russia.

Meanwhile, however, the market was buoyed yesterday as China’s GDP print came in marginally ahead of consensus, indicating that the world’s second largest economy slowed down less than expected. However there were still a number of leading monthly indicators which hinted at a deteriorating and persistent weakness in the economy, such as the decline in Industrial Production as well as decline in fixed asset investment, seen as a crucial driver of China’s economy.

The market’s focus this week will be the ECB MPC meeting due to take place on 22 October in Malta, with expectations building up for yet another dovish speech by president Draghi.

We have, on several occasions, stated that we expect an extension/expansion of the existing QE program as early as December of this year, and reiterate this stance, as we expect Draghi to indicate its concerns about stubbornly low inflation and growth which has failed to pick up substantially, despite the €60bn/month program in its eighth month now. Further dovishness and indications of additional asset purchases could also push the euro lower against the dollar.

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.