The turbulence has passed

The storm gives way to calm in global markets. After the financial instability of January and a large part of February, the investment climate has now become more favourable. Equity and corporate bond prices have stabilised and financial assets have become appreciably less volatile within a short period of time. Several elements lie behind this situation. Firstly, fears of recession in the US have eased, being confirmed as exaggerated. The strength shown by several activity and labour market indicators in the US have been vital in calming the nerves of investors. The absence of unpleasant surprises from China has also been a great help. Secondly, the price of crude oil has recovered by almost 50% since the minimum reached in January. Lastly, the support provided by central banks and in particular the Federal Reserve (Fed) and ECB, still exercising considerable influence over the price formation of financial assets. Nonetheless it would be overconfident to assume the period of instability that started in the summer of 2015 is over; the astonishing speed at which asset prices have recovered their levels prior to the sell-off and the low volatility must not make us lower our guard.

Unfortunately the risks for the international financial scenario are still downwards. China continues to be a source of risk in spite of remaining very much in the background over the last few weeks. However, the Asian giant's recent economic policy actions are in the right direction to provide the economy with «more market-oriented» structures. The opening up of its domestic bond market to foreign investors is a case in point. Another potentially disruptive event is the referendum on the UK's membership of the EU, to be held in June. British betting firms set the probability of a no vote winning at around 30%, a significant figure. Lastly, the continuation of an environment of rock bottom and even negative interest rates, for example in the euro area, might accentuate vulnerabilities in areas such as banking.

Given this situation, the Fed has once again made it clear that it prefers to err on the side of caution in terms of the speed of its actions. At the Federal Open Market Committee meeting on 16 March, the Fed maintained the benchmark interest rate at 0.25%-0.50%, as was expected. However, the markedly accommodative stance of its official communication surprised a large number of the investor community. The monetary authority once again referred to global risks and the slowdown in external growth at the same time as slightly lowering its growth and inflation forecasts. In the area of interest rates, Fed members are now only forecasting two hikes in the fed funds rate compared with the four projected last December. The forecast for the terminal or long-term level for the benchmark interest rate also fell from 3.5% to 3.25%. In a context of relative strength in which investors expected the Fed to toughen up its discourse, the institution's warnings and messages have grabbed the attention. Nevertheless, the Fed's dovish tone and the convergence of its interest rate forecasts with those of the market were warmly welcomed in international markets.

The Fed's greater tolerance of a period of higher inflation may turn out to be counterproductive, however. In the last few months several inflation indicators in the US have shown notable acceleration and the inflation expectations expressed in indexed bonds also show considerable gains. Although it might be premature to talk of inflationary pressures in the US, these factors do introduce considerable risks and a timid response by the Fed to such pressure may harm its credibility. If participants in the bond market perceive that the central bank is behind the curve, this could lead to sharp upswings in long-term interest rates and tougher financial conditions. The Fed would then be forced to speed up its rate of benchmark interest rate hikes with the risks this would entail for the US economy.

Meanwhile the ECB announces a further package of monetary stimuli, particularly the purchase of corporate bonds. Risks from the external environment and deflationary dynamics led the ECB's Governing Council to announce far-reaching measures at its last meeting. In addition to cutting the Refi and deposit rates to 0.00% and –0.40%, respectively, Draghi also announced an enlargement of the ECB's asset purchase programme (QE) by 20 billion euros a month. The second new addition is the ECB extending the assets eligible for QE and also buying corporate bonds. This last measure is especially aimed at relieving any lack of public debt that may have been caused after monthly purchases are expanded up to 80 billion euros. The Council also approved a second round of four new TLTRO, all with maturities of four years. One key difference to previous TLTROs is the cost entailed for banks, which could be negative if the number of loans they grant exceeds a specific threshold set by the ECB. In any case the cost of the funds requested will be –0.40% (the yield earned by the deposit facility). The ECB believes these new incentives will encourage banks to take part in this kind of auction. So far the results of the seven TLTROs have been imperceptible, with a total amount requested of 426 billion euros.

Europe's corporate bond market celebrates the inclusion of this kind of asset in the ECB's QE. The European monetary authority will buy investment grade euro-denominated bonds of non-banking enterprises located in the euro area; positive news for this market after the difficult months it has been through. Although more details have yet to be published, the universe of eligible assets totals 500-600 billion euros and total purchases could cover between 15% and 25% of the target market. The emergence of such a large-scale buyer should boost the performance not only of investment grade debt but also the high yield segment and risk premia have seen significant drops in both cases.

After the ECB's announcements investors turn their attention back to Draghi's words. Particularly important were the ECB President's comments regarding the fact that further cuts in the official interest rates were unlikely. This point caused some concern in the markets and interbank and monetary rates reacted with moderate upswings. On the foreign exchange market the euro appreciated by almost 2% against the dollar, reaching around 1.12 dollars. Draghi's comments were probably aimed at curbing expectations of further cuts in the deposit rate, limiting a source of vulnerability in the banking sector. Along these lines, several monetary market instruments did not anticipate further cuts in the deposit rate given the expectation that this would be –0.50% before the ECB's last meeting.

Stock markets move away from the sharp losses of winter and are livening up again. Since the peak of tension reached mid-February, international stock markets have reported solid gains of between 10% and 15% while the implied volatility index of the S&P 500 has fallen sharply and is now at levels similar to those observed before the episode of instability last summer. Both circumstances suggest that the stock market losses in January and February were the result of investors overreacting. Moreover the sectors of energy and banking, sources of volatility in the US and Europe respectively, have led the gains in their respective stock markets. In the short term the macroeconomic figures should continue to help consolidate this upward trend, especially in the developed bloc, and put to rest the fears of recession in the US once and for all, although the rate of growth in the stock markets is likely to lose steam and adopt a more intermittent tone. Lastly, the 2016 Q1 earnings campaign in the US, which is about to begin, is expected to be important as it will serve as a thermometer for the state of corporate accounts in 2016.

A barrel of Brent crude oil consolidates in the 40 dollar zone. Changes in expectations of a sharp slowdown in global growth and the apparently greater coordination of oil-producing countries have pushed the price of oil up by almost 50% since its annual minimum level. The outcome of the extraordinary meeting held by OPEC on 17 April and, in particular, the agreements that may be reached to limit the supply of oil will set the course for its price over the coming months. At the same time other commodities closely linked to the economic cycle, such as metals and industrial materials, are also showing a similar trend, albeit with less intensity.