Markets remain upbeat after ECB meeting

And yet another month bites the dust, and the rally in credit shows no signs of abating.

Spreads had been more volatile than in previous months, and this was to be expected. The ECB October meeting was probably the highlight of the month for both bond and equity investors, apart from the usual flurry of Q3 releases as is customary for this time of the year. The FOMC and BOE meeting in the first week of November also weighed on investor sentiment and market direction, but it was the ECB meeting in the last week of the month which stole the show.

Heading into the October ECB MPC meeting, markets were extremely edgy, and rightly so. This meeting was viewed as the hurdle which had the largest potential of derailing the rally in credit markets in 2017. The expected abrupt withdrawal, or rather, reduction in the QE asset purchase programme resulted in a marked shift in risk aversion in the trading session prior to the meeting. However, markets were soon bolstered, credit and equity, were swift to react to the announcement that QE would be halved in size in terms of monthly bond purchases with the programme expected to be prolonged even further. The ECB left the door open for additional tweaks to the programme whilst also stated that additional corporate bonds purchases would be added to the fray.

It was the announcement/statement we all hoped for and was music to everyone's ears. Equity investors rejoiced at the signal that the recovery in Europe is robust whilst bond investors were just as satisfied at the thought that the lid on QE would not be closed as sharply as had been previously expected, or rather feared.

Bar any major surprises, credit markets are expected to continue their grind tighter whilst equities should also benefit from the positive string of Q3 earnings announcements momentum released thus far. All smiles then…but this is where the hardest part of 2017 comes in. Do investors cash in on their healthy gains and risk losing out on the expected year end positive performance? Or should they hang in there and ride the wave? Tough call to make. What is certain is that portfolio managers worldwide would be positioning their assets for the start of 2018. And with activity and liquidity slightly more lacklustre than in other months, we could witness exacerbated moves in November, in either direction.