European credit rallied for pretty much all of the trading sessions following the October 22 ECB, up until last week’s US Federal Reserve statement, which was more hawkish than anticipated.

Despite witnessing some bouts of profit-taking, European credit is expected to remain in the fray up to the possible eventual announcement of further ECB QE expansion, which we expect to be formally announced during the December meeting.

September’s FOMC meeting was instrumental in dictating direction for Global credit markets in Q4, most notably October. The fact that the Fed did not hike and expressed concern over global growth, coupled with a flurry of a mixed data from both sides of the Atlantic was a clear sign that the Fed was willing to wait and see how the economic picture takes shape rather than taking a wrong step and catching the markets off guard.

With reports that the US government reached an agreement on a deal to extend the US debt ceiling, coupled with a more than expected dovish tone by the ECB, there is reason to be believe that markets could become accustomed to be gradually adding risk.

Following last week’s FOMC meeting, whereby the Fed indicated that they could possible remove the lid for a potential December rate lift-off, credit markets, most notably Investment Grade, lost ground.

However, credit investors remain aware that upcoming economic data would need to not only improve but beat analysts expectations in order to warrant a determined rate hike December. I do not expect any material improvement in the forthcoming round of incoming data and expect a March 2016 rate hike rather than a December 2015 rate hike as the most likely scenario.

Following a strong showing in October, we expect credit to extend gains into November and register a good showing in Q4 as the cautious investors who were short the market and missed out on the recent rally could propel themselves to put money to work now and not want to miss out on a possible year-end grind tighter in spreads.

I think that credit markets are in for a strong end of year performance with both IG and HY spreads tightening. The extent of this tightening however will pretty much depend on the behavioural trends witnessed by the German Bund, as volatility has remained the order of the day.

With the possible imminent announcement of QE by the ECB before the end of year, and speculation that more corporates could be included in the ECB’s list of eligible assets, we see the asset class well supported heading into the New Year.

Incoming economic data will continue to dictate market sentiment and direction and will be closely monitored to determine the timing and extent to which further easing might be announced by the ECB.

With eurozone CPI now out of the way and unemployment for the single currency region registering a 0.2 per cent decline from 11 per cent, markets will be keen to critically analyse PMI data releases throughout the week and retail sales on Thursday to be really able to gauge the current state and health of the Eurozone economy.

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.