Five world markets themes in the coming week: From market meltdown to European risk
Following are five themes likely to dominate the thinking of investors and traders in the coming week and the Reuters stories related to them.
1. MARKET MAYHEM ... OR MELTDOWN?
Stock markets are wobbling. From the economic slowdown and wild market swings in China to escalating global "currency wars", there's no shortage of reasons for investors to be worried. And worried they are. China's bourses fell 11 percent this week, Asian stocks hit a 2-year low and the weakness is spilling over into developed markets - Germany's DAX is on track for its worst month since 2011 and the S&P 500 is now negative for the year. Will this correction turn into a rout, or will the bargain-hunters step in? It's August and volume is light. Fasten your seatbelts.
* INVESTMENT FOCUS: "QExhaustion" hits stocks as growth fears trump stimulus
* Equity outflow hits 15-week high as investors seek bond safety (Reuters)
2. CURRENCY WARS INTENSIFY
China's surprise devaluation earlier this month lit a fuse in the so-called global "currency wars", prompting two competitive devaluations this week as a direct consequence: Vietnam devalued the dong and, more spectacularly, the Kazakh tenge plunged around 25 percent after it was allowed to float freely. Many other emerging market currencies, including Brazil's real and Turkey's lira, are sinking to historic lows on an almost daily basis. Where is the pressure most intense - Saudi's riyal peg? Nigeria's naira? Watch this space.
* Kazakhstan floats tenge, currency tumbles
* ANALYSIS-China's devaluation may be bad news for FX industry (Reuters)
3. REFLATING DEFLATION FEARS
Just when investors and policymakers thought they had dodged the deflation bullet, it's back. Oil and copper prices have plunged to 6-year lows and China's currency devaluation has prompted another wave of emerging market FX weakness. The downward pressure on inflation pushed 10-year U.S. TIPS breakeven rates to the lowest since January, and may even be strong enough to keep the Fed from raising rates next month. In the euro zone, 1-year inflation swap rates turned negative for the first time since February. Preliminary German inflation data for August next week will be closely watched. Could the ECB ultimately be forced to extend its 1 trillion euro QE programme beyond September 2016?
* U.S. TIPS breakeven rates fall on oil, CPI data
* ANALYSIS - Get used to cheaper oil, derivatives markets say (Reuters)
4. IN A (JACKSON) HOLE
The Fed's annual Jackson Hole economic conference, which gathers the great and the good from the world of global monetary policymaking, takes place next week. Although Janet Yellen won't be attending, markets will hang on every word of those Fed officials present. Especially bonds and FX markets. Minutes of the Fed's July meeting (pre-China devaluation) cooled expectations of a September "liftoff" on rates. The dollar could lose more ground against the euro and major currencies if these expectations are softened further. The latest Bank of America Merrill Lynch investor poll shows that "long" dollar is by far the most crowded position in all financial markets.
* Fed's tightening cycle scenario involves risky bet on inflation
* Foreign buys of U.S. Treasuries in June rise to highest since February 2014
* Strong jobs, weak inflation data muddy Fed rate debate - minutes (Reuters)
5. EUROPEAN POLITICAL RISK
Greece avoided crashing out of the euro zone and agreed a 3-year bailout package with its international creditors. Crisis over, right? Wrong. The snap election called for Sept. 20 brings volatile Greek politics - and the risk Athens fails to implement the reforms it has signed up to in return for 86 billion euros of aid - back into focus. The political risk isn't confined to Greece. Turkey, whose currency is in free fall, has called a snap election for Sept. 1; some investors fear Catalonia's regional elections on Sept. 27 could pave the way for independence from Spain, which is due to hold a general election before the end of the year; and Portugal holds elections on Oct. 4. Watch those bond spreads.
* Tsipras resigns, paving way for snap Greek election
* FACTBOX-How Greek elections work
* Greece's Syriza party splits, rebels form anti-bailout front
* Catalan separatists scare off bond investors as election nears
* Turkey to hold snap election on Nov. 1 - Erdogan (Reuters)
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