Take Five: World markets themes for the week ahead

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: 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: 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.

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.

(FX reserves in months of imports: India, Indonesia, Philippines: reut.rs/2JOWxzx)

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: 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.

(The gruesome twosome: reut.rs/2JRWcfu)