World markets themes for the week ahead

FOLLOWING are big themes likely to dominate thinking of investors and traders in the coming week and the Reuters stories related to them. Take it easy

With the US Federal Reserve well and truly doubling down on its dovish guidance this month, the global rate hiking cycle is at an end.

There are exceptions of course but the big central banks of the developed world — the Fed, the European Central Bank and Bank of Japan — have all reacted decisively to the steady drumbeat of depressing economic data by pushing any policy tightening plans to the backburner.

But instead of deriving any comfort from the pivot, some in the market are interpreting the moves as desperate measures to ward off impending recession.

That fear is certainly evident on bond markets where the gap between three-month and 10-year US treasury yields — one of the gauges the Fed uses to assess inflation risks — has inverted.

European yield curves too have flattened and German 10- year government borrowing costs have slid back below zero per cent for the first time since 2016. There are outliers. Norway has hiked rates while Hungary and Czech rates may also rise this coming week.

One could argue Norway’s economy has been lifted by oil this year, while emerging European economies have been recovering nicely.

But the question is: with the world’s biggest economy starting to hurt, Fed rate cuts bring priced for 2020 and G4 bond yields plunging, can any market avoid being sucked in? On Wednesday, New Zealand’s central bank could become the latest to flag downside risks to growth and interest rates. Deadlines, red lines

March 29 is when Britain was supposed to leave the European Union, 2-1/2-years after a slender majority voted to leave the bloc.

EU leaders have now granted Prime Minister Theresa May a two-week reprieve, during which she must persuade lawmakers to accept the divorce deal she has negotiated.

Not easy, given they have resoundingly defeated it twice already.

She is expected to make another attempt and if the deal still fails, several possibilities open up, from a no-deal Brexit to Brextension and even exit from Brexit.

The question is whether May will be flexible on any of the “red lines” she outlined in 2016, ruling out a customs union with the EU, UK’s membership of the single market and any role for the European court of justice.

Seen by many as an extreme interpretation of the referendum, it has stymied efforts to find a solution to the Northern Ireland border issue.

With all this in play, many warn that markets are still assigning too low a probability to a no-deal Brexit — banks such as Goldman Sachs and Deutsche reckon that risk at just 15 to 20 per cent.

But though this is rising, most analysts warn.

Sterling has tumbled this month after strengthening for two months straight and jitters are bubbling up on derivative markets.

Here one- month pound risk reversalsshowanelevatedpremium for sterling puts — options that confer the right to sell at a certain price.

Implied sterling volatility — a gauge of expected daily swings — has slipped off highs but remain above some typically volatile emerging currencies such as Brazil’s real or the Turkish lira. — Reuters