Take Five: World markets themes for the week ahead
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[May 05, 2018]
LONDON (Reuters) - Following
are five big themes likely to dominate the thinking of investors and
traders in the coming week and the Reuters stories related to them.
WHAT'S THE PRICE
1/The Federal Reserve has acknowledged U.S. inflation has perked up,
adding to the conviction that interest rates will rise faster this year
than previously anticipated. Price data due next week might cement
investors' view.
While leaving the benchmark Fed funds rate unchanged at its last
meeting, the central bank included somewhat more hawkish language in its
statement, noting that "on a 12-month basis, both overall inflation and
inflation for items other than food and energy have moved close to 2
percent".
Latest data showed the U.S. economy added 164,000 jobs, less than
forecast, while wages barely rose. However, the Fed's preferred
inflation measure, the so-called core PCE, rose 1.9 percent in the 12
months through March, the biggest increase since February 2017.
Producer price and consumer price indexes are due next Wednesday and
Thursday, respectively, and investors fear that stock and bond markets
won't get much reprieve from the rate-hike concerns of recent weeks.

The Fed is currently signalling two more rate rises this year, but the
inflation figures, if strong enough, could just confirm expectations
that it will squeeze in a third.
( Inflationary Pressures Brewing: https://reut.rs/2JSyaBh )
2/STERLING SELLING
The big central banking event of next week is the Bank of England's May
10 meeting, with market expectations now overwhelmingly in favour of
interest rates being held at the current 0.5 percent rate.
Interest rate bets have swung around sharply from early-April when
investors priced a 90 percent chance of the BoE raising rates by 25
basis points.
But a spate of weak economic data is almost certain to stay the BoE's
hand. Banks have slashed rate rise forecasts, with some not expecting
one at all in 2018. That has taken sterling more than six percent lower
in two weeks, tipping it into the red for 2018.
Investors will monitor Governor Mark Carney's language for signals on
what the appetite is for hikes further out in 2018. More dovish remarks
from the BoE could send sterling even lower.
(Sterling versus the U.S. dollar: https://reut.rs/2Icwsxb)

3/GRUESOME TWOSOME
Almost exactly five years after the taper-tantrum selloff in emerging
markets, a resurgent dollar and rising global borrowing costs are
smashing through Argentina and Turkey's currencies like a wrecking ball.
With the peso and the lira hitting record lows, Argentina has had to
jack up interest rates to 40 percent in the third emergency hike in a
week. Turkey too raised rates recently by 75 basis points after keeping
it overly loose for years.
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A police officer keeps watch in front of the U.S. Federal Reserve
building in Washington, DC, U.S. on October 12, 2016. REUTERS/Kevin
Lamarque/File Photo

While most emerging markets are suffering to some degree, Turkey and Argentina
stand out for their rampant inflation and a dependence on foreign funding --
both have large current account deficits and double digit price growth, 25
percent in Argentina's case.
Higher interest rates should help. But with the dollar showing little sign of
wilting and U.S. yields staying close to four-year highs, the pain could last a
while longer.
4/EURO PAIN, EURO STOCKS' GAIN
The dollar's sudden surge has come as an unexpected spring gift for the euro
zone stock market after first-quarter results took a hit from the single
currency's strength. The euro's recent fall to four-month lows helped euro
stocks outperform Wall Street for the second month running in April. May is off
to a good start and a three-month streak of outperformance, if it materialises,
would be the longest since Jan-March 2015 when the euro hit 12-year lows to the
dollar.
Earnings growth for euro zone firms in the STOXX 600 index is seen accelerating
to 4.5 percent in the second quarter from the 1.4 percent expected for the
first. In the last two 2018 quarters, they are seen rising 18.7 percent and 13.7
percent respectively, according to Thomson Reuters data.
True, there are other variables too, in particular the speed at which the
European Central Bank will phase out stimulus. But a hawkish turn there looks a
distant prospect and in the meantime, euro equity investors should enjoy the
ride.
(Euro zone stocks vs Wall Street: https://reut.rs/2JU1uaD)

5/OUT OF STOCK?
For all the talk of Asia's resilience to shocks, foreigners took fright at the
first signs of a rise in U.S. yields and oil prices. Indonesia, India, Thailand,
South Korea and Malaysia have all seen outflows from bond and equity markets.
That's forcing central banks to intervene to limit currency depreciation, while
simultaneously taking steps to keep domestic markets as liquid as possible. They
are reluctant to raise rates. But that means delving into the hard currency
reserves they have rebuilt since past bouts of volatility -- and Indonesia has
already spent $6 billion of these reserves over February and March to stem the
rupiah's slide.
Both the Philippines and Indonesia release FX reserves data next week. We will
also get a tally of foreign flows into their bond markets during April. Those
data points should show how much further these economies can rely on
intervention alone to defend their markets as the dollar keeps rising.
(Reporting by Jennifer Ablan in New York, Vidya Ranganathan in Singapore, Tommy
Wilkes and Marc Jones in London, Danilo Masoni in Milan; compiled by Sujata Rao,
Editing by William Maclean)
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