Investor and market sentiment during the first few weeks of October was more buoyant than what we had become accustomed to during September when credit spreads had reached their widest levels in recent months. In view of this, the market increase in risk-on appetite spurred demand for both credit and equity markets, gaining much of what was lost last month, most notably equity markets.

Credit markets had their fair share of recovery, not as much as equity however, with the ‘slowly grinding tighter of credit spreads’ coming back into the fray.

Markets have quite a lot to focus on; earnings season is in full swing, economic data remains the focal point of investor sentiment, and (monetary) policy maker’s decisions become increasingly important. Central Banks have flooded the markets with liquidity in an attempt to shore up their economy. It has worked pretty well in the US and the UK, but the ECB has so far failed in spurring economic growth in the single currency region and propping up inflationary pressures to more reasonable levels.

With a markedly stronger dollar throughout Q2 and Q3 and the likelihood of an increase in leverage levels by US corporates, earnings season becomes even more meaningful than ever before. With the perception that the slowdown in China is losing steam, confirmed this week by a weaker GDP print, unemployment data in the US at close to full capacity and the increase in share buyback and M&A clear to the markets, not to mention the delay by the FOMC to raise interest rates for the first time in over 9 years, we would expect market sentiment to continue to be dictated by the outcome of earnings season.

The biggest event this week is clearly this afternoon’s ECB meeting, being held incidentally on our lovely island, as the market will be closely scrutinising incoming economic data and speculate on how they could impact the central bank’s current QE program. Inflation has remained stubbornly low, unemployment very high and GDP growth is picking up very slowly. On the flipside, the markets were surprised by the increase in consumer lending, with Investment Grade bonds (notably High Grade sovereign bonds) and equites selling off on the announcement, on expectations that the ECB could delay announcing an increase or expansion in its QE program.

It might be too premature to expect something concrete this afternoon, albeit we would not exclude it, and would expect economic data releases from now until the December meeting to give Draghi and his team the necessary time to ponder the tweaking of the current asset purchase program.

With growth levels subdued and the medium-term inflationary pressures far off the ECB’s 2% comfort zone, we would expect this to be a foregone conclusion. We think that the upcoming PMIs, Germany’s ZEW, inflation, business climate and consumer confidence will be amongst the key data prints to watch out for over the coming days.

The ECB will be undoubtedly also assessing the state of the overall global economy in its analysis; with China and Emerging Markets still not yet out of the doldrums, imports having contracted sharply, and global growth forecasts continuing to be revised lower, we would expect sovereign yields in the Eurozone to continue to drop, slowly but surely, rendering credit an attractive and defensive asset class on a risk-adjusted basis.

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.