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. A Trump, trade and dollar collision?

The US dollar has risen almost seven per cent from three-plus year lows hit in February and is up about two per cent for the year. But the rally looks awkwardly timed, with the US trade deficit near its biggest in a decade and President Donald Trump risking a trade war, with import tariffs on some of his country’s closest allies.

That should put markets’ focus squarely on Wednesday’s report on April’s international trade balance. If the deficit widens to the expected US$51.3 billion, it would be close to February’s US$57.7 billion - the biggest gap since October 2008.

Much of the dollar’s recent move came after May 3 data showing the March trade deficit had shrunk 15 per cent to US$49 billion.

On the surface a rally seems intuitive. But these are unusual times, with the President going after steel, aluminium and even auto exports from Canada, Mexico and the EU, not to mention China. If the dollar recovery continues it could make US exports costlier.

Canada and Mexico hit back Friday with levies on US goods, from orange juice to pork, while the EU was set to tax bourbon whiskey and Harley Davison motorcycles.

It might not be too big a leap from tit-for-tat protectionism to competitive, or market-influenced currency depreciation against the dollar - perhaps an unintended consequence of the White House shouting ‘unfair’ at its partners and kicking off the negative spiral. Join the club, India

India could join the growing club of emerging market central banks that are tightening monetary policy - on Wednesday it may deliver its first interest rate hike in nearly 4-1/2 years.

A rate rise on June 6 is far from a given. While inflation is above central bank targets and the rupee is this year’s worst Asian performer against the dollar, analysts predicted that worries about economic growth and the impact of US$80-a-barrel oil on consumers would keep the Reserve Bank of India on hold.

But on Thursday, India surprised markets with a GDP print that was its strongest in two years.

Now, against the backdrop of a growth rate faster than China’s and risks of a fresh flare-up in global trade tensions, Indian policymakers may join their peers in Indonesia in putting a floor under their currencies. Banking on the eurozone

Europe’s bank shares, hard hit by Italy’s bond selloff and euro break-up fears, enjoyed a rally as Rome averted snap elections. But the turbulent times have revealed some cracks.

If Italy’s new government proceeds with big spending or plans for mini-BOTs, effectively a parallel currency, its debt rout may resume, alongside selling of shares and bonds of banks with Italian exposure. French lenders stand out here: BNP Paribas’s exposure to the Italian sovereign is a quarter of its core capital buffer while Credit Agricole’s is 14.3 per cent.

Second, money markets are hinting at signs of funding stress; 3month Euribor — the rate at which eurozone banks lend to each other — has risen to nearly six-month highs. But French banks may be driving Euribor rises too, a Bank of America Merrill Lynch report said, noting that French lenders, which raise a lot of US dollar funding, may have been driven into euro markets by the recent rises in LIBOR-OIS spreads.

Meanwhile, credit default swaps for European banks have soared, with Credit Agricole and BNP Paribas trading at one-year highs.

Finally, there are concerns about Deutsche Bank.

The lender’s shares have slumped and bonds and CDS have jumped after reports the Fed considers the bank’s US operations as ‘troubled’. — Reuters