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. Bear hugs

After swallowing markets from Germany to China, the bears reached US shores in December.

Markets there are fighting back but the outlook is not great. For one, growing numbers of global indices have notched up the 20 per cent peak-to-trough drop denoting a bear market.

US stocks, which seemed invincible until mid-year, have posted the worst December performance since the Great Depression. Second, the world economic outlook is steadily darkening and upcoming PMI data should confirm that.

Sure, the US economy is still expanding nicely. But when highgrowth, investor- darling tech stocks fall prey, it shows optimism about growth is fizzling. And segments such as the Russell 2000 small-cap benchmark are stuck deep in the bears’ lair. Small firms often carry higher debt loads than larger peers so falling share prices highlight credit risks.

In Europe, Germany’s DAX fell to the bears in early December and the euro zone bank and auto sectors are down a whopping 40 per cent and 36 per cent respectively from this year’s peaks. This week, the leading pan-European equity index confirmed it too had entered bear territory, following Wall Street’s Christmas Eve shakeout. A yen for safety

As 2018 fades, Japanese policymakers’ hearts must be sinking.

The yen has zoomed to eightmonth highs versus the dollar, stocks sank into bear territory and 10-year bond yields sank below zero for the first time since September 2017.

All the data, from price growth to industrial output and retail sales, shows disinflationary clouds gathering — yet again. By all accounts, Japanese funds are retreating from US equity and bond investments, driven out by prohibitive hedging costs. That, along with an inflow of safetyseeking foreign cash, could lift the yen further. So any dreams the BoJ might harbour of ending stimulus are receding further into the future.

Here’s a thought though. Could the yen’s safe-haven status come into question? After all, Japan’s exportfocused economy is vulnerable to a trade war, and an upcoming sales tax hike rekindles memories of 2014, when a similar measure hurt the economy. And notwithstanding dovish BoJ signals, officials privately acknowledge the demerits of prolonged easing, notably the hit to financial institutions from negative interest rates. Dollar darling

Asbearsmaulequities,wheredoes one hide? The answer seemingly is: the dollar. Bank of America Merrill Lynch’s monthly investor survey showed the greenback regaining the “most crowded trade” crown, snatching it back from the FAANG/ BAT tech stocks group.

The dollar dash is unsurprising — it’s liquid, US yields are high and the US economy is growing faster than other developed countries.

A word of caution though. Investors following the “most crowded trade” bandwagon have fallen flat on their faces in recent years. They went into 2017 loaded up with dollars but the greenback fell relentlessly after that, ending the year with a near-10 per cent loss.

In December 2017, the most crowded trade, according to the BAML survey, was Bitcoin — a 70 per cent rout ensued in 2018. We can rule out a fall of that kind for the dollar.

But the US yield curve suggests an economic slowdown is ahead, if not recession. So notwithstanding the robust labour market, the Fed may struggle to raise interest rates much more. An investor exodus from US stocks and bonds would not be good news for the dollar. — Reuters