European markets opened marginally lower this morning, with the German DAX down 0.02% and the FTSE 100 down 0.31% following a very positive week for financial markets. Following the meeting held last Thursday here in Malta by the European Central Bank Governor Mario Draghi, markets rallied significantly as the governor signalled that the ECB is prepared to expand the scope of QE in order to meet its monetary policy targets. This was also coupled with the Chinese rate cut on Friday creating an ultra-dovish environment which sent markets soaring.

Over the course of the week, the Euro Stoxx 600, an index of the 600 companies across 18 countries of the European region, rallied almost 4%. The German DAX Index rallied 6.83% while the French CAC 40 Index was up 4.70% for the week.

In the bond markets, both investment grade and high yield bonds were impacted positively by the mid- week events. The benchmark German 10-year bond rallied from a yield of 0.55% to a yield of 0.51% while the Italian and Spanish equivalents, which are more closely related to Malta’s credit profile, rallied from a yield of 1.60% and 1.77% to 1.50% and 1.63% respectively. The Maltese Government bonds follow suit, with the 3.3% 2024 bond rallying from a cash price of 116.22 to 117.37 and the longer dated equivalents, such as the popular 3% 2040 bond rallying from a cash price of 108.52 to 110 over the week.

This week there are further opportunities for monetary policy magic as the Fed meets on Wednesday and the Bank of Japan on Friday. There is also the very important Chinese Plenum (Monday-Thursday) which will have major implications to how much stimulus China needs to apply depending on the aggressiveness of their growth target over the next 5 years.

Along with this week’s central bank meetings, earnings season is at the forefront with 167 constituents of the S&P 500 companies due to report (30% of market cap). Furthermore 93 Stoxx 600 companies are due to release their latest results. After a number of high profile reports on Thursday, just 10 S&P 500 companies were out with earnings on Friday.

The end of week highlight was Procter & Gamble, who reported mixed results. Despite a beat in earnings, sales trailed analyst estimates after the stronger USD was said to reduce sales by 9% during the quarter. Overall, the earnings reports announced on Friday were fairly soft.

Overall our view continues to be that while inflation remains low at a global level, central banks will maintain their dovish and accommodative attitude which will result in elevated asset prices for the foreseeable future and continue to keep the gap wide between technicals and fundamentals in many countries. Caution must be employed however, as financial markets could take a big leg lower if there comes a time when central banks are unable or unwilling to act. This could happen first when inflation looks more likely to consistently test the 2% level.