Five world markets themes in the coming week

LONDON (BestGrowthStock) – Following are five big themes likely to dominate thinking of investors and traders in the coming week and the Reuters stories related to them.

1. EARNINGS DIVERSION

After weeks (and months) of fretting about euro zone sovereign credit and the H2 economic outlook, U.S. corporate results will offer investors a diversion, with the likes of Alcoa, JPMorgan, Intel, and Google reporting in the coming week. Analysts are expecting earnings growth of 27 percent for the S&P 500 for the second quarter which means firms might have a harder time surprising on the upside than they did in recent quarters. And for the crucial banking sector, StarMine data is suggesting that Q2 earnings might be as much as 6 percent below the average forecasts for some U.S. banks.

2. DETAILS, DETAILS, DETAILS

Financial markets want lots more details about what Europe’s bank stress tests are assessing (in particular on the sovereign risk shocks) and how any bank recapitalization would work and some of this information might come to light when euro zone and EU finance ministers’ meet on July 12-13. But no matter what is revealed, there is a fundamental difference when compared with the U.S. stress tests that are credited with helping to reassure financial markets – the ultimate backstop for U.S. banks was the U.S. government and its creditworthiness was not at issue. That may not be the case in Europe. If banks cannot access capital in markets they will have to turn to national governments, potentially putting some cash-strapped countries under more pressure. The next port of call would be an EU/IMF safety net but accessing it could take some time.

3. TESTS BEFORE SUMMER HIATUS

Greece’s treasury bill auction on July 13 is seen as less of a hurdle given recent auctions show that other euro zone peripheral countries are able to raise cash from the market, albeit at higher prices, and since Greek domestic banks rather than foreign investors are the main target buyers. A successful Greek auction will signal a hiatus in the sovereign debt crisis as the northern summer gets into full swing but the real test that the worst is over could come in the autumn when trading volumes pick up and banks repay the next tranche of cheap one-year emergency loans. Sentiment toward euro zone peripherals has more chance of improving if the yield on the Spanish 10-year bond stays below the level at which it was syndicated.

4. FLATTENING CURVES

With shorter-dated government bond yields pinned down by expectations that official borrowing costs will stay low until next year, yield curves in the United States, Germany, and Japan have been flattening given growing double-dip speculation. Data and the granular evidence that U.S. earnings will offer on how the economy is faring will determine whether that trend accelerates and whether the compression in the yield spread between U.S. 10-year T-notes and German Bunds is sustained.

5. LINKS

The negative correlation between the dollar and stocks has broken down (again), prompting some to re-examine whether the link between the dollar’s performance and growth/interest rate differentials is growing stronger again. This might be the case as long as the pace of the economic slowdown is measured. However, signs of a sharper-than-expected downturn or any nasty rout in stock markets might be all it takes to trigger a stampede that re-establishes the negative link between the U.S. currency and equities.

(Compiled by Swaha Pattanaik; Editing by Toby Chopra)

Five world markets themes in the coming week