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. Inflation dog to bark?

Stubbornly low inflation has been described as the dog that didn’t bark. Indeed, inflation has stayed weak even as global stocks have rallied hard in the past decade. But is the dog about to start barking?

It’s a question markets are sensitive to, and Friday’s consumer inflation data will be most closelywatched US data point.

Year-on-year core CPI, which measures prices that consumers pay for frequently purchased items, has been inching up. June’s core CPI was 2.3 per cent and is seen holding steady in July.

But on a monthly basis, prices are expected to rise 0.2 per cent versus a 0.1 per cent increase in June, Reuters forecasts show.

June’s near- flat reading was driven by moderate gasoline price gains and falls in apparel and hotel costs. The US Federal Reserve’s preferred inflation measure, the PCE price index, has also this year hit the two per cent target for the first time in six years. Back to Japan

The Bank of Japan’s plan to give banks some relief from years of near-zero rates proved to be a minor policy tweak that lifted the upper bound of its 10-year yield target to 0.2 per cent.

Yet for a market resigned to seeing ultra- long bond yields trending steadily down to zero, even this small step was significant.

Thirty- year bonds, popular with Japanese pension funds and insurers, saw yields spike 17 basis points to 0.85 per cent in less than two weeks.

That took yields close to the one per cent level at which insurers’ returns match the payout promises they made to policyholders.

If yields keep rising, government bond returns will compensate local investors for the narrow spreads they currently make on fully- hedged purchases of US Treasuries or German Bunds. Japanese investors have already started selling Treasury holdings.

Their total foreign debt investments amounted to US$2.1 trillion at the end of 2017 — data on Thursday will show if these holdings are being pared back. Yuan trade

Washington has imposed duties on US$34 billion of imports from China, and threatened more. Beijing has announced levies on US$60 billion of US goods. And as the trade war gets going, Chinawatchers will keep eyes trained on July trade figures to gauge the initial damage from the spat.

They will also watch the yuan. Having hit 14-month lows, it rallied after authorities raised forward forex reserve ratio requirements.

It is unclear whether a weak currency is part of China’s stimulus toolkit or a means of retaliation against tariffs.

Historically, there is no correlation between the exchange rate and the bilateral trade between the two countries. But a weaker currency will doubtless make life easier for exporters.

The week may show if the currency has indeed hit a trough, or if the central bank move was just a warning to speculators who have started seeing yuan weakness as a one-way bet. Italian bonds and banks

As more Italian banks report second-quarter earnings, numbers from UniCredit, the country’s biggest lender by assets, and smaller peers will be scanned for signs of damage from sovereign stress. BPER Banca, Credito Valtellinese and Popolare di Sondrio are among lenders due to report results.

A bond market rout in May around the formation of an anti- establishment coalition government is likely to have inflicted painful cuts to the value of banks’ holdings of government bonds.

Italy’s worsening outlook has already driven 10 consecutive weeks of earnings downgrades. — Reuters