LDN - Business

Take Five: World markets themes for the week ahead

[September 07, 2018] LONDON (Reuters) - 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/ WHO WANTS TO BE AN EM CENTRAL BANKER?

It's a tough job, but someone's got to do it. Markets' eyes are on a host of central banks to see if they can calm down currency markets, above all in Turkey. The central bank is expected to finally hike interest rates on Sept. 13 but with a full-blown currency crisis on and near-18 percent inflation, the move may come too late to avert a hard landing.

In Argentina, at least, draconian rate rises to 60 percent -- alongside heavy currency interventions -- have not prevented the peso from tumbling 50 percent this year. It's hard to see what else the central bank there can do when it meets on Tuesday.

Russia's position seems enviable in comparison - healthy currency reserves and a balance of payments surplus. But the possibility of growth-crimping Western sanctions being extended has put foreign investors to flight and driven the rouble to 2-1/2-year lows. Prime Minister Dmitry Medvedev is clearly trying to head off a rate rise at next Friday's central bank meeting but inflation-fighting governor Elvira Nabiullina has already signaled policy tightening. In any case, Russia's three-year long rate-cutting cycle looks to be at an end.

Graphic: Turkey CPI & Interest Rate - https://reut.rs/2oL9mlU

2/ STILL LEADER OF THE FREE WORLD

It's been hard to ignore how the United States has been pulling ahead of most of the rest of the world in terms of economic growth. Upcoming data is likely to reinforce that theme. Solid performances are expected for retail sales, consumer inflation and rental prices for August. Sept. 14 retail sales data should show strong, broad based, momentum, with online as well as brick-and-mortar retailers turning in good performances. Excluding the auto sector, retailers are expected to show sales growth of 0.5 percent versus 0.6 percent in July.

Core consumer inflation meanwhile, out Sept 13, should hold unchanged at last month's 0.2 percent increase. A key inflation component, non-farm rents, have stabilized following a decline within the last year. Strength in the U.S. labor sector and the tailwind benefits of personal income tax cuts are being cited by some economists for the current and sustained strength, as is an upswing of U.S. industrial activity.

Graphic: U.S. Retail Sales, CPI and rents - https://reut.rs/2wQvQqm

3/ ASIA'S DELICATE DUO

Contagion is unavoidable when you are a high interest-rate economy that runs a trade deficit and needs foreign capital to balance its books. That is what India and Indonesia, the two Asian members of the "fragile five" emerging markets, have rediscovered.

Both have been swept up in recent waves of emerging market selling, never mind their strong growth, appealing real yields, and sound policymaking. India's rupee is hitting record lows while Indonesia's rupiah is approaching levels last seen in the Asian financial crisis 20 years ago. But while Indian authorities seem content to merely smooth the rupee's fall, Indonesia has resorted to interventions, import restrictions and rate rises.

A crucial test now looms for these currencies, and to a lesser extent, for Asian peers -- if the Trump administration proceeds with a fresh set of tariffs on $200 billion of Chinese imports, eliciting retaliation from Beijing.

Graphic: Asian currencies YTD and yields - https://reut.rs/2oILzDu

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A man shows Argentine pesos outside a bank in Buenos Aires' financial district, Argentina August 30, 2018. REUTERS/Marcos Brindicci

4/ ECB AND BOE: WAITING GAMES

Thursday's meetings at the European Central Bank and Bank of England should be a lot less exciting than those in Turkey or Russia.

The ECB is likely to firm up its decision to halve monthly asset purchases come October, bringing into sight the end of its 2.6 trillion-euro stimulus program. But to allow itself some flexibility, the ECB will likely maintain that it expects to, rather than will, exit stimulus at the end of 2018.

Money markets indicate that expectations for the ECB's first rate hike have been pushed to late next year; trade tensions, emerging market turmoil and Italian budget uncertainties are causing investors to question how far authorities can get in dismantling crisis-era policies.

ECB chief Mario Draghi is likely to reiterate he remains on track to wind down QE, while keeping rates low well into next year -- comments no doubt that should cheer bond markets.

The BoE meanwhile has already indicated it could raise rates once a year following its 25 bps hike in August. So its views on Brexit talks and any comments from Governor Mark Carney on his tenure will be of more interest to gilt and sterling traders.

Graphic: The European Central Bank's QE Programme - https://reut.rs/2wOxrNg

5/ DOWN WITH THE CROWN

Sweden's crown has taken a kicking this year, hitting nine-year lows against the euro and falling more than any other developed-world currency in trade-weighted terms. The weekend election outcome may add to its woes.

The election looks to be deadlocked, heralding a period of uncertainty. The anti-immigrant Sweden Democrats may snatch up to a fifth of the vote, and while they have been ruled out as coalition partners by all other parties, their passive support may be needed by whoever forms the government. This means some of their demands for additional spending on child and elderly care will have to be accommodated.

Then there is central bank policy. Swedish interest rates are unchanged at minus 0.50 percent since February 2016, the lowest in the world after Switzerland. The crown weakened further after Riksbank this month closed the door on raising rates until December at least. Some reckon rates won't rise until end-2019.

Sweden boasts a current account surplus of 4 percent of GDP. But the global backdrop, with worsening trade tensions, is also against the crown, given the country's open economy and big exporting industries.

Graphic: Swedish crown and real interest rates - https://reut.rs/2wSis4R

(Reporting by Daniel Bases in New York, Vidya Ranganathan in Singapore, Karin Strohecker, Dhara Ranasinghe and Tom Finn in London; Compiled by Sujata Rao; Editing by Alison Williams)

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