The rally in financial markets in the first quarter of the year has triggered conflicting views by analysts and commentators as to the reason behind this, and what future outlook it may portray. 

One possible factor behind this positive performance is that the market’s Q4 2018 concern about global instability eased. Some market stakeholders do in fact believe that the US – China trade war will not intensify further, and that the worst possible Brexit scenario had been priced in. These two events led to major central banks adopting more of a dovish stance, which in turn pushed quarter asset prices up.

This is not to say that all that glitters is gold, as growth worries continued to linger over the eurozone in the first four months of the year. These concerns were fuelled by a decline in the Purchasing Managers’ Index (PMI) which fell from 49.3 in February to 47.6 in March, up slightly to 47.8 in April, but still below the 50 target level. This level of uncertainty yielded a steady fall in core sovereign debt yields, as the heightened level of perceived uncertainty increased the demand for safe haven securities. 

Peripheral sovereign debt performance followed the same pattern. Although this is surely no phenomenon, some of this debt was also impacted by positive news. As a matter of fact, Greek bond yields held close to their lowest in nearly 14 years, as the benchmark 10-year government bond slipped to 3.27 per cent. This was primarily due to Greece’s intention to seek consent from the eurozone bailout fund to repay expensive loans, worth around €3.7 billion, owed to the International Monetary Fund (IMF), earlier than expected. Elsewhere, Portuguese Sovereign bond yields experienced a similar fate due to the recent credit rating upgrade. Moody’s rated Portuguese sovereign credit at Baa3, which means that it has moved back into investment grade territory for the first time since 2011.

One may view the current low inflationary environment, which has been consistently below the two per cent target level, coupled with the highly accommodative monetary stance adopted in the eurozone may suggest a pick-up in trade as exports remain relatively cheap. However, going forward investors must keep an eye on inflation expectations, as the reverse may happen and may start putting upward pressure on yields.

The current low yielding environment makes one question to what extent may yields go down further without bond investors pulling out of the market all together? Moreover, will the eurozone manage to overcome the downside risks to the global financial system brought about by countries like Spain and Italy? 

Amid political instability in Spain, the IMF has also slashed Italy’s growth prospects from 0.9 per cent this year to 0.1 per cent. Banks in Italy are still loaded up with non-performing loans and financial analysts believe that a deterioration of these factors could spell disaster in the euro area. The risk of contagion in the banking sector is held up high on the European Central Bank’s (ECB) agenda in light of what went on with Greece over 10 years ago.

The greater the diversification and the longer the investment time horizon, the likelier the probability of weathering stormy days

The 20th anniversary from the introduction of Europe’s single currency leaves little space for celebrations, as the ECB and governments alike are focused on taking measures to combat the next recession, when and if this happens. The fact that practically all monetary policy weapons have been used up by the ECB in the wake of the last financial crisis, with debatable success, makes one wonder what options are still available going forward. The most pertinent of all seems to be the reinforcing of targeted longer-term refinancing operations (TLROs). These euro system operations provide financing to credit institutions for periods of up to four years. 

They offer longer-term funding at attractive conditions to banks in order to further ease private sector credit conditions and stimulate bank lending to the real economy. These operations are in line with the ECB’s current accommodative monetary stance and strengthen the transmission of monetary policy by further incentivising bank lending to the real economy. If these work out well, the end result will be that of passing on costs from the banking sector onto other sectors of the economy.

On the other hand, governments such as France and Germany might have to resort to making use of their ‘fiscal space’ if the eurozone downturn worsens. As a matter of fact, according to the account of the ECB’s March meeting, officials invited jurisdictions that have fiscal space to stand ready to use it, if necessary. Fiscal space exists in some jurisdictions more than others, as this entails a government raising spending or lowering taxes to support the economy, without hindering market access or putting debt sustainability at risk.

Heightened ambiguity levels suggest that an uncertain market outlook lingers on – bringing with it more volatility in different asset classes and currencies alike. 

These initial four months have, however, confirmed that there are no fixed rules in financial markets and different asset classes such as bonds and equities can still move in the same direction, even though different in nature. 

The greater the diversification and the longer the investment time horizon, the likelier the probability of weathering stormy days.

This article was prepared by David Baldacchino, MSc Wealth Management (Edinburgh), B.Com (Hons) Banking and Finance (Melit.), DipFA, is Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email