Following are the five big themes likely to dominate the thinking of traders and investors in the coming week and the Reuters stories related to them.
1. HUBBLE BUBBLE, ROUBLE IN TROUBLE: Russia’s currency, the rouble, is collapsing. It has depreciated for nine consecutive weeks, and fell 8 percent this week alone in increasingly volatile trade. The central bank on Friday tried to counter that volatility and speculation, saying it could intervene within minutes and without giving prior warning. But it alluded to the seriousness of the crisis, saying the currency’s weaknes is starting to worry the population. What is now a 30 percent drop this year is almost certain to send the dominoes toppling again in the neighbouring “rouble zone” of ex-Soviet states. There could be devaluations in store for the Kazakh tenge, the Belarus rouble and the Ukraine Hryvnia, because of those countries’ massive trade links with Russia. But if oil prices do stabilise, the Russian central bank might feel it is worthwhile inflicting a little bit of pain through intervention for those speculating against the rouble.
2. POLICY EASING: It’s not just in emerging markets that exchange rate movements have started to dominate the economic and financial agenda. The Japanese yen has fallen 12 percent in three months to a seven-year low, and the euro is its weakest in over two years. The common thread is extraordinary policy easing — realized, in the case of the Bank of Japan, and expected, in the case of the European Central Bank. Weaker exchange rates may be good news for the BOJ and ECB, but a potential headache for the U.S. Federal Reserve and Treasury should the dollar continue to strengthen. And the dollar is the big global winner, not only against currencies weakened by their own central banks, but also against those hit by the collapse in oil and other commodity prices such as the Norwegian crown, Canadian dollar and South African rand. Competitive devaluations may not be on the official agenda at next week’s G20 summit in Brisbane, Australia. But they will no doubt be discussed on the sidelines.
3. POST-AQR BLUES: The bank pain trade is getting … even more painful. Investors had bet on the European bank stress tests (Asset Quality Review) to draw a line in the sand for Europe’s banking sector and unleash a pick-up in loan demand, capital return and even M&A. Now investors are taking fright because of the one thing the stress tests did not take into account: the real possibility of deflation in the euro zone. With Italian banks like Monte Paschi forced to look for tie-ups or share sales to raise capital in the midst of a surge in market volatility, investors are being forced to yet again reassess their bets on the financial sector. Euro zone financials have fallen around 6 percent in the two weeks since the tests.
4. GDP WATCH: There seems little chance that euro zone growth data next Friday will do much to reduce pressure on European Central Bank president Mario Draghi to expand asset purchases to government bonds. Quarterly growth is seen at just 0.1 percent, the year-on-year figure little better at 0.7 percent. Euro zone bond yields are therefore set to remain subdued, with the only fly in the ointment Sunday’s “citizens’ consultation” vote in Spain’s wealthiest region Catalonia, where secessionists are seeking independence from Madrid. While fears about political fallout from the vote have eased somewhat as the poll will have no legal standing, a big turnout could fuel political tensions in Spain and push yields further above those for German benchmark Bunds and narrow the gap with the Italian equivalents.
5. STERLING WORK: The past couple of months may have seen a sea-change in markets’ expectations for UK interest rates but on the face of it there may still be plenty of room for another pushback. Next week’s quarterly inflation report from the Bank of England, allied to currently all-important monthly numbers on jobs and wages, might be the ideal time. There are two competing views of what is really happening in Europe’s second biggest economy.
Either Britain is still steadily recovering and, in the normal course of things, it is only a matter of time before that starts showing up in employees’ pockets and thereafter inflation. Or we are still in a situation where things are far from normal, no one is really feeling quite as confident as the government would hope going into an election year, and the euro zone’s malaise will keep a lid on prices for the foreseeable future. PMI surveys in the past week, while in places still positive, hinted at the latter. If wages and the BoE’s rhetoric continue in the recent vein, the August or September rate rise pointed to by money markets may look very precarious by midday on Wednesday.