World markets themes for the week ahead

LONDON: Following are big themes likely to dominate thinking of investors and traders in the coming week and the Reuters stories related to them. Ready, steady, PMI

The week ahead brings the first or ‘flash’ estimate of manufacturing activity in May from around the world, an early indication of how the global economy is faring after signs of momentum slowing down.

In the eurozone, economists polled by Reuters forecast IHS Markit’s Composite Purchasing Managers’ Index, seen as a good overall indicator of growth, to dip to 54.9 in May from 55.1 in April to mark a new multi-month low.

While business activity remains in expansion territory, any signs of softness could reinforce a view that an ECB rate hike remains some way off - keeping the gap between US and German two-year bond yields near their widest in three decades.

The coming week’s US data clues meanwhile will likely be scrutinised for signs of labour market tightening and price pressures building.

All of which of course sets the scene for a likely rate hike from the Federal Reserve in June. Deep fried Asia

Asia accounts for two thirds of the global growth, but its momentum is not usually strong enough in itself to push global inflation higher.

With oil prices at US$80 a barrel, however, that may be about to change.

Asia is by far the worst hit region as it consumes much more than it produces. Its oil bill is now in the region of US$1 trillion and countries such as Indonesia and India which already have trade deficits, are beginning to struggle.

Indonesia hiked rates on Thursday one month after the central bank said it saw no need to rush yet the rupiah languishes near 2-1/2 year lows.

The Indian rupee is approaching all- time lows and this week’s data showed inflation already accelerating in April.

Bond yields are also on the rise, with Indian 10-year yields approaching three-year highs this week and Indonesian yields near one-year highs

In many countries though the inflation pass- through is still limited, mostly due to sluggish domestic demand.

But price growth data next week from Singapore and Malaysia will be closely watched, with risks seen on the upside for once — a rare occurrence over the past decade. Euro cracks

Since hitting a three-year high of US$ 1.2550 back in February nothing has gone right for the euro. The latest blow is the concern over fiscal profligacy from Italy’s incoming coalition government.

With the euro set for its fifth week of losses in seven — it is languishing near 2018 lows around US$1.1763 — many investors are racing to protect against further downside risks, and signs are hedge funds have struck large options to protect against further losses — a US$1.8 billion option was expiring in the past week, followed by US$1.6 billion in the week ahead.

But if concerns over an Italian borrowing binge rise further that could pressure long euro positions which are still near record highs despite a recent surge in the dollar, according to US CFTC data.

As Italian bonds selloff, currency derivatives are flashing amber. Risk reversals on the euro — a currency market option market gauge for a ratio of calls to puts for a currency — in one-month and three-month tenors have fallen to their lowest levels since May 2017. That indicates markets are turning cautious if not outright bearish. Bank shock in Italy

Call them optimistic or complacent, until now investors were pretty unfussed about the talks to form Italy’s next government.

However, the past week, after 5-Star and the League agreed on a government platform, has been the worst in more than two months for Milan’s stock market, given the incoming coalition’s plans to spend more and tax less. — Reuters