As expected, ECB rates remained unchanged, with Mario Draghi sustaining a dovish stance on interest rates by signaling that the ECB was willing and ready to extend QE in December.

What next?

With equities expected to be the front runners to benefit from further ECB stimulus, little is reassuring investors that a recovery on fundamental levels is on the horizon.

If deflationary pressures persist, lower oil prices and lower inflation expectations can propel consumers to keep away from the much needed spending spree in the short term, as they hope lower prices will further boost their real income. The result?

The ECB would have no choice but to further stimulate the economy with all it has, in the hope of boosting GDP growth and inflation. With nominal interest rates already hovering at zero per cent, however, it could well be too late to prevent a major recession as the resulting deflation could trigger employment lay-offs and company defaults.

A major correction on the European equity markets could subsequently follow as investors come to terms with the fact that company fundamentals are weak and market prices inflated. This scenario may not be too far-fetched, and is a reason why I believe the ECB will take the ‘better safe than sorry approach’ by stimulating further this December.

Furthermore, youth and structural unemployment as well as weaker external demand, mainly from the weakening emerging market economy are also factors which, collectively with the above arguments, are roots as to why GDP has failed to lift off in the Eurozone.

Alternative?

Global bond markets seem attractive and have rebounded in the past few weeks as mounting rumors of increased interest rates by the FED towards the end of this this year have faded further into Q1 of 2016. Indications of further ECB stimulus has also had a positive impact on bond markets as European peripheral debt performed best post ECB meeting by rallying to higher closes. The Emerging Market slowdown (led by China) and the recent interest rate cut by the People’s Bank of China will have a significant impact on both policy stances to be undertaken by the FED and ECB respectively in the coming quarter.

High yield debt securities have also been more active, as investment allocations to the asset class increased over the past few weeks. The low current average default rates on High yielding debt securities together with the FED and ECB stances are reigniting investor desires for higher returns.

December 2015 will now be the focus point where Investors will eagerly await increased monetary policy measures by the ECB.

Disclaimer: This article was issued by Mathieu Ganado, Junior 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.

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