GLOBAL MARKETS WEEKAHEAD-Investors eye FX wars and budget cuts

By Jeremy Gaunt, European Investment Correspondent

LONDON, Oct 15 (BestGrowthStock) – Political rows over currencies
and a harsh dose of fiscal austerity are set to test financial
markets in the coming week, just as investors appear to be
settling in for a solid end-of-year stock rally.

The G20 finance meeting in South Korea at the end of the
week is likely to be dominated by disagreements over foreign
exchange rates, with implications for global investment flows
well beyond currencies.

Japan’s unsuccessful struggle to date to keep its yen
competitive, for example, is one of the roots of its stock
market’s massive underperformance this year.

Britain’s spending review on Wednesday, meanwhile, is also
likely to be watched closely given its billing as one of the
most detailed expositions of fiscal austerity plans in a Group
of Seven country to date.

Both come as prospects of the U.S. Federal Reserve printing
more money as part of a new quantitative easing (QE) stimulus
programme have driven world equities to two-year highs.

In the past week, the MSCI all-country world index
(.MIWD00000PUS: ) hit a level last seen just after the collapse of
Lehman Brothers in September 2008.

It has been led by flows into emerging markets. Fund
trackers EPFR said global emerging market equity funds took in a
more than a net $2 billion in the week to October 13, while
Pacific equity funds had their best week on record.

By contrast, since markets started to plan for more QE from
the Fed the dollar has fallen some 9.5 percent against a basket
of major currencies.

FX TENSION

This effective devaluation of the dollar has triggered anger
in countries likely to see their currencies rise or, if pegged,
pressured to rise as a result.

Responses have ranged from straight intervention (Japan)
through witholding tax on investors (Thailand) to threats of new
limits on forwards (South Korea). Beijing and Washington have
remained at loggerheads with the latter pressuring for something
to be done about what it sees as an unreasonably weak yuan.
It is with that as a background that investors are gearing
for what could be a turbulent G20 finance summit.

“The body language doesn’t look good,” Piroska Nagy, senior
adviser to the chief economist at the European Bank for
Reconstruction and Development, told a Reuters briefing.

Failure to find agreement, which many view as likely, could
stir up financial markets in the short term — for example by
confirming the likelihood of QE and creating more pressure for
currency intervention.

That would keep current equity trends steady or even enhance
them — witness the initial gains on stock markets on Friday
after Fed Chairman Ben Bernanke confirmed the likelihood of more
easing.

But it could also stir up currency and fixed income markets,
and along with them commodities, which are mostly priced in
dollars. The broad commodities Reuters-Jefferies CRB index
(.CRB: ) has moved upwards in lockstep with the dollar’s downward
slide since August.

Investors have also begun expressing worries about the
threat of trade protectionism — viewed by free marketeers as a
dangerous threat to economic growth and, thus, investment.

“The fact that the Chinese are unlikely to give way (on
currencies) … is going to leave the Americans even angrier,”
said Charles Dumas, head of international services at investment
advisers Lombard Street Research.

“The anger level against China goes up (and) the chance of
(protectionism) has to be substantially increased.”

UK CUTS

The coming week also offers investors a more parochial but
nonetheless potentially significant event — Britain’s spending
review.

It includes details of plans to lop off more than 80 billion
pounds ($128 billion) from the government budget between now and
2015 to tackle an 11 percent deficit.

The overall plan has generally been priced into markets, but
the details could have some impact on bonds and sterling.

Big-name UK equities tend to be global in nature and so the
stock market impact, if there is any, should be limited to
smaller companies.

“There may be certain sectors that may be affected by it.
And it also has implications for jobs,” said Mike Lenhoff, chief
strategist at wealth manager Brewin Dolphin.

But the process of laying out what could be painful and
unpopular cuts will be a stark reminder to global investors of
the state of many developed market economies and the
difficulties they are likely to face in coming years.

(Additional reporting by Sumeet Desai; Editing by John
Stonestreet)

GLOBAL MARKETS WEEKAHEAD-Investors eye FX wars and budget cuts