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November rain... or shine?

As fears of one market factor recede, other fears arise. It is this jittery investor behaviour that complements the slowdown in global growth expectations.

Brexit woes may have receded over the past few weeks, yet US presidential elections and a constitutional reform vote in Italy still rank high as the material risk factors able to rock financial markets.

In October, the rally in credit markets persisted and more than recovered the losses registered during the previous month as the global search for yield remained the order of the day.

Sovereign bond markets on the other hand lost ground as market chatter that quantitative easing (QE) tapering could be on the cards, coupled with increased expectations that all is set for a December rate hike in the US favoured risky assets over the safer lowering yielding government bonds.

Uncertainty as to whether the European Central Bank's QE programme will be extended beyond March 2017 remained rife for most of the month.

Coupled with a string of positive economic data and, most importantly, an uptick, albeit slightly, in inflationary data (inflation still remains well below the ECB's target level of 2%) led investors to believe that the Eurozone is finally on the path to economic recovery and as such, additional monetary stimulus post March might be diminished.

Within this context, the BAML European High yield index returned 1.12% as performance was boosted through continued risk-on appetite by investors.

In the US, returns were bolstered by a positive earnings season to date and also benefitted from solid technicals in US high yield, given steady inflows into the asset class.

The banking sector in the US seems to be the positive outlier from earnings season, mainly on the back of a large reduction in costs coupled with improved trading activity.

During the month, the BAML High yield index returned 1.25% boosted by the rally in oil prices seen in October. Presidential elections are expected to add to volatility throughout the month of November, though the energy sector with its high weighting in the US high yield indices should continue to be the main driver of performance.

It will be interesting to follow the direction of investor monies in the next few weeks as the U.S presidential election approaches.

For what’s becoming an intense rivalry between both presidential candidates, a surprise election result should not be cast aside just yet. With continuous scandals affecting both parties, caution should still be the preferred option for the time being before considering any long term allocations, and being fully invested might not be the best strategy heading into the election.

Despite high yielding assets being popular in the current low interest rate environment, in search for yield, a surprise election result has the potential of causing panic sell-offs in the longer end of the high yield curve as well as affect the USD currency negatively against a number of peers.

This possibility comes on the back of the negatively perceived policy implementations and political relationships Trump would have on a global scale.

Though an economy should be judged on data figures, US data has been mixed over recent weeks, with business confidence improving, though overshadowed by flat inflation and mixed unemployment claims.

The Federal Reserve’s decision against an interest rate hike was not unanimous, as three members voted in favour of a hike on concerns of not overheating the US economy, following recent positive GDP data.

A hike is very possible in the near term. What investors will hope and central bank members alike is the avoidance of a fall back into recession or excess market volatility brought on by investor jitters, which have the capability of halting such an interest rate hike and economic growth, as new business projects, business confidence and investor money flows could very well take a step back as the result of a Trump presidency.

Hope should therefore lean more towards confidence on the right election outcome for continued economic stability rather than on impeachment proceedings being triggered by U.S congress in the outcome of a Trump presidency.

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 Investment Services 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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