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Have markets had enough of central banks?

I think the markets have had enough of central banks, for the time being.

Undoubtedly, the world’s leading central banks have taken the limelight this month and have driven both sentiment and dictated market direction in the run up to each respective meeting, particularly of the ECB, US Federal Reserve and Bank of Japan.

Now with the hype slowly fading and the dust settling down following the aftermath of these meetings, investors haven inevitably digested the tones and implication of each central bank meeting, and are positioning themselves into either protecting year-to-date performance and/or trying to squeeze out any performance from what can be characterised as a highly challenging year, particularly in the Eurozone.

With the markets having become highly accustomed to ultra-accommodative stances by central banks, it came as no surprise that markets sold off as the ECB disappointed. Last week saw a turnaround as the US Federal Reserve confirmed market expectations of no hikes in the September meeting, with markets rallying thereafter as a shift in risk aversion ensued.

Now with the central bank meetings out of the way, asset managers and investors will now be focusing on a number of potentially market moving events over the coming weeks, till the December central bank meetings take centre stage once again.

Its US election year in six week’ time as the US electorate will head to the polls. Last night, there was the first debate between the two presidential candidates, Clinton and Trump, and the markets will be closely monitoring developments, particularly indications and updates from polls.

With Q3 almost done and dusted, earnings season is just round the corner. Market players will be not only focusing on the earnings announcement but this time round closely scrutinising how leverage metrics of US and European companies have increased, and to what extent, given the historically low funding costs. Furthermore, investors will be looking at the more credit related issues, with Free Cash Flow being one of the key measures of assessing a company’s financial health.

Despite the default rate remaining relatively low so far, we must highlight the fact that they have been creeping upwards in the US to above five per cent, whereas in the Eurozone it remains anchored below three per cent.

Moody’s has in fact recently indicated that it expects the European rate to remain below 2.5 per cent by the end of 2017 whilst it expects defaults rates in the US to drop to below five per cent and rise to above six per cent in a year’s time as US corporates are spending more money than they seem to be generating via share buybacks, distribution of dividends as well as in the form of capital expenditure.

Companies in the Eurozone seem to be faring better than their US counterparts, aided in part by the low borrowing costs as leverage is rising at a slower pace than in the US. However, we would not exclude a potential uptick in the rate of rating downgrades in the single currency region, particularly if we witness some credit deterioration in the US.

To conclude, we also have key economic data releases to watch out for. We’ve heard central bank leaders opine on several occasions that their decisions will be based on incoming data points, and the next fresh wave of economic numbers could prove to be pivotal. This week we have the inflationary data for September as well as unemployment numbers coupled with some key confidence data points in the US and Eurozone. However, the focus is set to be the release of Q2 GDP figures in the US which could also hint/dictate the Fed’s possible next move in its December rate setting meeting.

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 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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