Five world markets themes next 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. MOUNTING PRESSURE

Greece’s fiscal problems have caused a sharp widening in intra-euro zone spreads and surges in some CDS prices, with the scale and scope of the fallout in the euro zone prompting some to draw parallels with the 1992-1993 ERM crises. A key difference this time around is that speculative players who are reported to have been gunning for peripheral euro zone sovereign debt have less clearcut lines in the sand to test than was the case during the days of +/-2.25 percent ERM bands. Nevertheless, few in the market see any reason for a let up in the pressure anytime soon unless the EU extends a helping hand. All eyes are therefore on rumblings from EU capitals before an informal EU leaders’ meeting on Feb 11 and the European Commission’s opinion on Greece’s budget plans that will be published before then.

2. MONETARY POLICY

If Greece-related jitters have been generating sharp market swings, the other factor which has made markets nervy is the prospect of monetary policy becoming less accommodative. Asset prices’ reaction to China’s efforts to contain loan growth or to the one dissenting voice on the FOMC suggest that week’s central bank meetings will steal some of the attention from sovereign credit risk. While the Reserve Bank of Australia is expected to raise rates, it is likely to be the Bank of England meeting/statement and the ECB press conference which will have the most scope to cause waves — the BOE for whether it signals a pause or an end to its QE program and the ECB for signs that others share Weber’s view that extraordinary liquidity measures may be rolled back as soon as the first-half of the year.

3. FX TENSIONS

The yen’s gains (racked up despite negative news about Japan’s credit outlook, reports on rising issuance, etc) are inflicting pain on those who have used it as the funding currency for carry trades, not least as it has been relatively sustained — for example, euro/yen is on track for its biggest monthly drop in a year. Pushing tolerance limits might not be to everyone’s tastes at this juncture given G7 finance officials meet in Canada at the end of next week. Still, the risks remain tilted toward a sharper lurch up in the yen, with the options markets showing risk reversals’ skew toward yen calls recently became more extreme, especially on the crosses. Any such sharp moves would risk distracting attention from the discussion about China that had been brewing in the run up to that G7 meeting.

4. CREATING JOBS VS CUTTING DEFICITS

U.S. President Obama’s State of the Union address put jobs right at the top of his agenda but markets will be watching exactly how this sits with another big White House policy announcement of recent days — plans for a three-year domestic spending freeze in the 2011 budget, to be unveiled on February 1. The uncomfortable spot in which Obama finds himself highlights the difficulties governments and central banks face as they seek the right policy mix to nurture still-fragile growth and to curb big budget deficits, which are spooking markets, especially in Europe. This is made more acute as central banks begin to withdraw their quantitative easing measures. The renewed focus on jobs, and the delicate health of the stock market, will make U.S. non-farm payrolls data (February 5) even more closely watched.

5. EARNINGS CONUNDRUM

Many corporates have been beating earnings forecasts but investors are proving reluctant to chase stock markets higher, as the latest Reuters asset allocation poll highlights. The fallout from Greece and concern about the outlook for monetary policy have played their part. Matters have also not been helped by firms tending to shy away from giving concrete guidance for 2010 and as revenues slip. Among those reporting results next week are companies such as BP, Aviva, Standard Life, Royal Dutch Shell, and BG, which tend to pay high dividends. Whether these companies maintain payout levels will be a focus for investors, since any cut in dividend may change their inclination toward defensive sectors.

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(Compiled by Swaha Pattanaik; editing by Ron Askew)

Five world markets themes next week