We were aware that, heading into the new year, markets would be faced with headwinds due to the fragile state not only of capital markets in general but also commodities, emerging markets and the pace of the global economic recovery.

However, few would have imagined that magnitude and ferociousness at which markets reacted in the first two weeks of 2016. Equities markedly lower, high yield spreads wider, oil per barrel falling below the $30 level and high grade investment grade well in demand; the move we’ve witnessed in markets so far this year would, under normal circumstances, take at least a couple of months to materialise.

But are we experiencing normal market conditions? With interest rates at historically low levels, the price of oil at 12-year lows, emerging market currencies seeming in freefall territory and the volatility index creeping higher by the day, not to mention the liquidity issues being faced within the bond market, one can easily conclude that we are currently in anything but normal market conditions. And these bearish market conditions could persist further.

The last couple of months also indicate that economic data and conditions in the US and in Europe deteriorated. US consumers consumed less than forecast in December, with producer prices registering a decline.

This has dealt a blow not only to inflationary expectations but also raises questions as to the trajectory of interest rates. Following the 16 December 2015 Fed rate hike, markets were pricing in an additional four rate hikes in 2016.

With the recent flurry on below-expectations data, four rate hikes seem highly improbable, as evidenced by the sharp moves in US Treasuries, with the benchmark 10-Year Treasury back to levels last witnessed in October.

The focus this week in the Eurozone will be on the key inflationary data releases and the ECB MPC meeting on Thursday. At this stage, we think it would be too premature to expect the ECB’s tone to deviate much from the December 3 meeting as we are of the opinion that Draghi will wait for at least another couple of months to evaluate the success of the recently announced measures and QE as a whole.

Within this context, the inflationary data due today will be key in evaluating the effects on pricing pressures post oil price drops, whereas PMIs in the Eurozone would also be key this week in gauging whether the single currency region’s growth prospects have been hampered by external development, most notably in China and emerging markets.

Only just into the third trading week of 2016, we can safely say that the first half of this year is expected to be characterised by capital preservation and flight to safety strategies. Having said that, we expect value and opportunities to emerge as investors will seek to cut their losses short and try to sell at all costs.

“Cash is king” could not make more sense than it does now; it not only serves as a cushion to preserve against market losses but also acts as ammunition to take of beaten down prices following a harsh drubbing.

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.