Was last end of week rally a dead cat bounce? Are we in for more heartache or have we reached a bottom? Will markets range trade now that January’s lacklustre performance in risky assets to date has seen a number of investors bottom fishing, or would the tone set by the ECB in last week’s press conference pretty much set the scene for the no highly-anticipated March ECB meeting?

By definition from Investopedia, a Dead Cat Bounce is a “temporary recovery from a prolonged decline, followed by the continuation of the downtrend – frequently, downtrends are interrupted by brief periods of recoveries, where prices temporarily rise. A dead cat bounce is a price pattern that is usually identified in hindsight.”

Very difficult to say at this stage where markets are heading, what is sure is that following last week’s ECB meeting, markets have a new target date to work towards. Following last Thursday and Friday’s end of week recovery in prices, markets lost ground on Monday whilst Asian and European risky assets also posted losses early on this morning.

At these particular crossroads, investors need to remain aware and alert that there has been no significant change in fundamentals, neither expectations of such change in the imminent future. What is really required for a sustainable economic recovery is reform, and not additional easing which, as we all know, is a temporary fix on asset prices. On the flipside of things, should economic data releases surprise to downside, this could boost sentiment (and with it asset prices even further) in the hope that additional stimulus by the ECB could be forthcoming. This will undoubtedly also place additional pressure on the ECB to move as soon as March, as intended so during last week’s press conference.

This time round, investors would not be at fault to tread with an element of caution, as we all know how it ended up last December, once bitten twice shy. So the ‘potential’ rally leading towards the March ECB meeting might not be as sharp as the November 2015 equity rally. Whatever the outcome in March, the markets will soon begin to realise that more easing will only prolong the supporting of asset prices further and the need for reform, albeit a crude awakening, will be the only true solution for a truly sustainable economic recovery.

That will inevitably also result in potentially longer periods of low and slow growth, an uptick in unemployment and possibly additional austerity – if you hadn’t noticed, there’s a lot of politics involved in capital markets, and politicians are faced with a two-pronged decision on whether to rub the electorate the wrong way and go ahead with reforms, or remain in power and take advantage of lower interest rates.

The markets would like to put the first 3 weeks of 2016 behind them, and hope that the panic selling we’ve seen so far is over, or at least will abate from this point forth. The eventual recovery might be slower than previous recoveries as economic data on both sides of the Atlantic, remain weak and the negative signals coming from China and Emerging markets have not seem to have bottomed so far.

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.  

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