Take Five: World markets themes for the week ahead
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/PRICE OF PEACE
U.S. President Donald Trump and North Korea’s Kim Jong Un are due to meet for a historic summit in Singapore on June 12. In an ideal scenario, Kim would agree to abandon all of the North’s nuclear capabilities in return for Trump easing sanctions on his economy.
But things are rarely ideal, and they are unlikely to be simple, either. Complete, verifiable and irreversible dismantlement – or CVID as it is known in nuclear circles – almost certainly isn’t what Kim has in mind, so whether Trump shows any flexibility will be crucial.
Financial markets barely reacted when the two were trading bombastic barbs last year but investors still aren’t sure how to trade Trump’s new softer side or Kim’s readiness to trade his nuclear arsenal for recognition and aid.
There is a whole multitude of options, and assigning probabilities to scenarios as extreme as nuclear Armageddon or lasting peace on the Korean peninsula is no easy task.
Markets will also be having to digest the outcome of the likely arguments over trade and security between Trump and leaders of the other G7 nations at a weekend summit in Canada.
For graphic on markets vs North Korea’s provocations click https://reut.rs/2M7IVBC
2/FED UP… AGAIN
The world’s most influential central bank, the Federal Reserve, looks all set to raise U.S. interest rates on Wednesday for a second time this year and the seventh since December 2015.
Strong jobs data last week and signs that inflation is nearing the 2 percent sweetspot mean Fed chairman Jerome Powell and his Open Market Committee are in a good position to lift rates again despite the angst over Trump’s global trade tariffs.
Markets are fully priced for the move so what could the effects be? According to a recent poll by Reuters, the average 30-year mortgage rate will rise to 4.60 percent by year-end and then touch 5.0 percent by end-2019. That will mean loan affordability is getting steadily worse.
Emerging markets who borrow heavily in dollars won’t enjoy it much either if it pushes up the greenback again. A number of key countries in the EM complex are already under intense pressure and higher U.S. rates won’t help at all.
For graphic on Federal Reserve meets Tuesday & Wednesday click https://reut.rs/2Jyay8o
3/BYE BYE BOND BUYING
European Central Bank rate-setters have put the cat among the pigeons by suggesting they will look past Italy’s political problems when they meet on Thursday and push on with discussions to close their 2.55 trillion euro bond-buying scheme.
It has made it one of the most keenly anticipated meetings for a long time. If the bond buying ends, rate hikes can’t be far behind. Investors are starting to price in the summer of 2019 for a possible first move, with some even suggesting the bank’s -0.4 percent deposit rate could be back up to zero by the end of next year.
Italian politicians have also ramped up their war of words, accusing the ECB of showing “bias” against Italy by favoring Germany in its bond-buying program.
While Mario Draghi and co are unlikely to take the bait, investors are speculating that they may decide it is not worth the hassle to continue with the program and get embroiled in further political squabbles.
For graphic on brewers outperform in World Cup year click https://reut.rs/2JtQL6W
4/WORLD CUP BINGE
The biggest sporting event on the planet – the soccer World Cup – starts in Russia on June 14. And as much as bookmakers agree that either Germany and Brazil will lift the famous trophy, financial analysts are equally unified on another matter: large amounts of beer will be consumed.
Morgan Stanley (NYSE:MS) found that 2-3 percent more beer gets drunk in a host country during a World Cup year when they looked at the four previous hosts – France, Germany, South Africa and Brazil.
ABInBev has also estimated that its sales in soccer hotbeds Brazil and Argentina will go up by 0.5 to 1 percentage points and though it’s difficult to attribute it to football fever with certainty, both Heineken and ABInBev outperformed other brewers during the last World Cup in 2014.
For graphic on ECB’s Balance Sheet click https://reut.rs/2LycvPI
After months of building up immunity to the slow-moving Brexit saga, investors may be hit by a dose of sterling volatility next week as the process enters a potentially critical phase. Britain’s parliament votes on June 12 on amendments to the government’s EU withdrawal bill, ahead of a critical summit of EU leaders later in the month.
Time is running out for Prime Minister Theresa May, and her cabinet appears more divided than ever. May’s future is again being called into question, and speculation is even growing again that there could be a general election later in the year.
While sterling and gilts look relatively calm on the surface, traders are beginning to take cover via the options market. 1-month sterling/dollar implied volatility this week rose nearly 1 pct, a relatively small move in nominal terms, but the biggest weekly rise in four months.