On the 31st December, we opened up a champagne bottle to celebrate a year which was acceptable for equity markets. It could have been much better had we not encountered a series of obstacles throughout the year. However, if you had to compare the performance of European equities to other asset classes, the performance was satisfactory.

I knew that the beginning of 2016 would not be a repeat of 2015 when the European markets were up 30% in just the first few months of the year. However, I didn’t expect the snowball effect on equity prices following a series of disappointing decisions which started at the end of 2015.

Dates to Forget

The first of a series of disappointments was announced on the 3rd December 2015 with the ECB’s inaction to ‘do whatever it takes’ to stimulate economic growth in Europe.

The second was taken by the Fed on the 16th of December when it decided to raise rates for the first time since 2006. This action by the Fed, increased risk aversion amongst equity investors. They started to fear that a potential series of rate hikes in an environment of slowing emerging market growth could send the US back into recession.

The third decision which hurt equity markets was taken on the 7th January when China devaluated the Yuan, extending losses in equity markets.

The fourth event happened on 19th January when sanctions on Iran were removed. The country plans to increase oil production by 500,000 barrels a day now that sanctions have been lifted under a nuclear deal with world powers sending crude below $27/bbl.

From the 3rd December 2015 to 20th January 2016 the Euro Stoxx 50 lost 20% and crude oil lost 35% of its value.

Dates to Remember

On 21st January, markets saw a ray of hope when the ECB President, Mario Draghi, surprised markets by putting the possibility of quantitative back on the table in its next ECB meeting which will be held on the 10th March.

Markets will also wait to see what the Fed has to say at its next conference on 28th January and how it plans it will manage expectations of future rate hikes following the negative repercussions of the previous decisions taken by international authorities of the global economy.

Going forward

Calling a bottom in these markets is dangerous because we are at the crossroads. We can see a strong move in either direction. My gut feeling tells me the markets are heading for a few days of respite though if we break the support level, we would go another leg down.

A turnaround will only happen when we start getting:

* Assurance from companies this earning season that the outlook is not as grim as the market is picturing it out to be

* Stability in the oil price. Moreover, the weakness in commodity prices is not a result of a weakness in demand but an increase in supply

* More accommodative policies from different regions

* An improvement in economic data across different regions

This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is 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. 

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