About six weeks ago, the European Central Bank (ECB) confirmed that it was unwinding its quantitative easing programme, based on the fact that it was seeing a recovery in eurozone economy - a move which markets were expecting given the yet benevolent data.

However, market participants are more than conversant with the fact that within financial markets things move very fast and an investment decision taken a week ago can easily be reversed by an unforeseen event.

In fact, in the last weeks of 2018, we were faced by huge concerns in terms of global growth as a swath of data was posing risks to the downside in terms of sustained economic growth. This data, amongst other factors, has pushed the once hawkish Federal Reserve (Fed), towards a more dovish tone in terms of interest rate hikes. The Fed signaled fewer hikes in 2019.

Given the increasing risks what would be the ECB’s stance?

Undoubtedly, it is undebatable that recent data risks have skewed to the downside. In my view, the ECB needs to acknowledge the fact that risks did increase and a hawkish tone will definitely not be digested positively by markets, even on the back of the recent comments put forward by the Fed. We are not expecting that the ECB will re-start a wave of QE but, as market participants and given the recent momentum, we would expect a tone that calms market fears, a tone which re-assures that the ECB will be there to intervene if risks will put further pressure on economic growth.

Undoubtedly, the past years have helped the cause with eurozone unemployment just below 8 per cent to date from the highs of just over 12 per cent in 2013.

Indeed as expected, in Thursday's press conference Mario Draghi, reaffirmed the central’s bank stance to keep interest rates at the current levels and longer if necessary.

Following a dovish tone by the Fed and ECB how should credit markets react?
Following the comments by the Fed, as expected we experienced a tighter US Treasury curve, a weaker dollar, which translated in higher bond prices. Given the weaker dollar we experienced a good retracement in emerging market bonds, which were the prime beneficiaries following a harsh 2018. Likewise, we have seen US investment grade bonds trade tighter following a tighter US curve, while European high yield was also a prime beneficiary following the widening in spreads registered in the second half of 2018.

Going forward, we believe that given that monetary policy-makers will maintain a relatively supportive tone, and we should continue to see credit markets improve following a catastrophic 2018. Once again, on the basis that the dollar trades within a narrow range, we should see emerging market debt recover strongly in 2019 as has been the case in the first three weeks of the year so far.

Undoubtedly, other factors will also be pivotal, primarily the trade-war saga which was the prime echo in 2018, and which has dampened the path of economic growth. A word of advice: being selective and diligent will fulfil your return expectations.

Disclaimer:

This article was issued by Jordan Portelli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view 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.