World markets themes for the week ahead

THE following are big themes likely to dominate thinking of investors and traders in the coming week and the Reuters stories related to them.

Curve-balls

With major parts of the US economy visibly slowing, the Treasury market has reacted in a striking manner - the 10-year yield is close to falling below the two-year yield, which would mark the curve inversion that has preceded every recession in the last 40 years.

Signs of slowdown have persuaded markets to bet the Fed will slow the pace of rate increases next year.

But wait. Inflation is running at a nine- month high, annual wage growth a 9-1/2 year high and unemployment at a near-50 year low.

So November inflation, due on December 12, will play into how Fed chair Jerome Powell frames the path of future tightening.

So it remains to be seen where the curve goes from here. There are reasons to believe it can steepen and reasons to believe it will invert. Depending on how the incoming data looks - stagflation, anyone? - the Fed’s view on where neutral is and what its policy response should be in the coming months is far from clear.

Mayday! Mayday!

Buckle up for another wild week of Brexit may-hem on sterling and other UK-focused markets.

Britain’s parliament is - at the time of writing at least - set to vote on Prime Minister Theresa May’s Brexit transition deal on Tuesday, but the chances of it being approved don’t look good.

But there are multiple possibilities, all with very different implications.

A really heavy defeat would make it difficult for May to carry on. She has staggered through the last couple of years, taking direct hits from all angles but this could finally bring her down.

Could that then lead to a hard Brexiteer taking the reins and ripping up the deal? Perhaps and sterling won’t like that one bit. But it’s equally possible that whoever takes over would press pause on the whole process by withdrawing the so-called Article 50 notice.

That could even raise the chances of a second public Brexit vote and that could send sterling soaring.

Trade off

So much for the US-China trade truce. If financial markets are any guide, the detente between Washington and Beijing struck over a steak dinner at the G20 in Buenos Aires barely lasted 24 hours.

Fears of global trade war and economic slowdown are again driving investor sentiment.

On oil markets, that signals that a 30 per cent price slump since October has little hope of reversing.

Oil has also had to contend with OPEC, whose failure to agree an output cut accelerated the slump in prices, pushing Brent below US$60 per barrel and WTI futures close to breaking below US$50.

The possibility of small cuts by the likes of Russia and Kazakhstan are unlikely to save the day, given the magnitude of market oversupply.

Commodities overall are in some trouble. Copper is near three-week lows, having lost around 15 per cent so far in 2018, while most base metals are down a similar amount.

And the Australian dollar, a good proxy for commodities, Chinese demand and world trade, was the worst-performing major currency in the world all week.

Without good news on the trade front, respite is unlikely.

Beijing cocktail

The US has just reported its trade deficit hit a 10-year high in October, and its politically sensitive deficit with China surged to a record US$43 billion.

So markets will watch to see how China hawks in the Trump administration react to China’s trade data due for release on December 8. — Reuters