Curmi & Partners

Q1 Key Market Themes

by Matthias Busuttil

As the first quarter of the year comes to an end, we take a step back and get a bird’s eye view of the market trends taking shape this year. For the purpose of this article, the closing prices for Wednesday 29th March were used to calculate year-to-date performance.

The start of the year was characterised by the continuation of the positive momentum and 'risk on' sentiment seen towards the end of 2016. US equities were a main market mover so far. Major indices reached all-time highs on positive expectations of the newly inaugurated President Trump's policies on deregulation, tax reforms and infrastructural spending.

However, Trump's victory started to lose its lustre when his administration failed to rally the support needed in the House of Representatives in March to repeal the healthcare law introduced by the Obama administration. Not only did this outcome shake market confidence but it is also shedding doubt on Trump's ability and speed to deliver on the rest of his economic agenda. The S&P 500 index retreated from a strong 7.4% increase by the first of March down to a 6.0% gain so far this year.

European equities had a slower but steady rise with the Euro Stoxx index for large and mid-cap equities posting a gain of 6.2% for Q1. The differential in the performance of US and European equities displayed signs of a greater degree of caution in spite of an improving economic backdrop in Europe.

Economic data has been modestly positive, at least for most parts of Europe, while the ultra easy financing conditions are providing favourable undercurrents for corporate profitability. Nonetheless, the lack of harmonised fiscal initiatives remains the key risk to a strong recovery, not to mention the lingering uncertainty around Brexit negotiations and the testing political calendar.

UK equities, as represented by the FTSE 100 index, have experienced a relatively steady positive performance of 4.3%. The Sterling currency depreciation was attributed as the major tailwind for UK companies with international operations.

Emerging markets have outperformed developed markets with the MSCI Emerging Market Equity Index posting a 13.0% gain in USD terms and 10.9% in Euro terms.

Bond markets performance was mixed. The US Federal Open Market Committee delivered the widely expected rate hike in March. This drove an upward tilt in the short-end of the treasury yield curve with the 2-year yield rising from 1.19% to 1.27%. Yellen’s press conference in March was perceived to be less hawkish than anticipated suggesting a possible market overshoot in inflation expectations. The 10-year treasury yield moved from 2.44% to 2.38% year-to-date as long-end yields retreated lower following Yellen’s comments.

In contrast, German government bond yields sold off as the 2-year yield moved from -0.77% to -0.75% and the 10-year yield from 0.21% to 0.34%. Positive economic data, namely Eurozone inflation hitting 2% in February, and strong loan growth reported under the European Central Bank’s (ECB) Bank Lending Survey show signs of recouping economic activity and arguably the first fruits of the central bank’s accommodative efforts over the past few years.

The critical question is whether these developments provide sufficient scope for the ECB to scale back its quantitative easing (QE) programs further and possibly start guiding markets on normalisation of policy rates. Although Draghi reiterated the ECB’s intention to keep low interest rates beyond the termination of the bond-buying programs, some argue that raising rates first would provide a stronger springboard for credit generation while maintaining the support in government bond yields in a fragmented economic landscape.

Credit spreads contributed positively to global corporate bond performance and cushioned the sell-off in benchmark bond yields of selected regions. Global investment grade corporate bonds posted a 1.8% gain while global high yield bonds rose by 2.9% as indicated by the Bank of America Merrill Lynch Bond Indices. Euro-denominated investment grade corporate bonds were up by just 0.2% so far this year while high yield bonds gained 1.6%. US Dollar-denominated bonds performed 1.5% and 2.3% in the respective bond classes.

The riskier asset classes had the strongest performance so far. Market participants however are displaying signs of anxiety to further risk-driven momentum increasing the likelihood of deeper corrections in the case of disappointment. Key developments to eye in the following months include Brexit negotiations, showstoppers to Trump’s walk-the-talk, French and German elections and possible changes in the language and forward guidance of central banks.


The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business