LONDON (Reuters) - Following are five big themes likely to dominate thinking of investors and traders in the coming week and the Reuters stories related to them.
Investors are strapping themselves in tight and bracing for another ride on the Russian rollercoaster next week after turbulent trading in the wake of new U.S. sanctions and a spike in tensions over Syria.
The rouble plunged to levels not seen since 2016 before regaining some ground later in the week, while Russian sovereign dollar bond yield spreads leapt almost 50 basis points mid-week, before coming off the boil.
But Russian lawmakers are drafting a list of U.S. imports that could be banned in retaliation for the sanctions and Moscow has warned the West against attacking Syrian President Bashar al-Assad. So emerging market investors who have Russia as one of their most popular overweights are fearful the situation will deteriorate, leading to another leg down in markets.
Meanwhile currency options markets suggest more pain is ahead for the rouble.
(GRAPHIC: Rouble Vol jumps reut.rs/2qtwIgt)
Whether China is reducing its vast holdings of U.S. Treasury bonds is a persistent question in global markets, and the recent escalation in trade tensions between the world’s two largest economies means the question is increasingly on investors’ minds. The U.S. Treasury’s latest report on international capital flows on Monday will provide an answer, albeit an imperfect one given the data’s two-month lag.
China has indeed been trimming its cache of Treasuries. In January, the latest reading, it held nearly $1.17 trillion worth of U.S. debt – the largest of any foreign creditor – down from around $1.2 trillion in August.
A more current dataset suggests worries about China cutting Treasury holdings may be misplaced. The Fed’s weekly “custody holdings” data, which measures dollar assets of foreign central banks on deposit at the Fed, shot to a record high in mid-March, and latest figures, released on Thursday, were only fractionally below that.
Since China began its big buildup of Treasuries about a decade ago, the trend in custody holding levels has been highly correlated with changes in China’s balance of Treasury holdings.
(GRAPHIC: Is China cutting its Treasuries stake? reut.rs/2qrUkTD)
The IMF and World Bank Spring meetings kick off next week against a backdrop of concern that a U.S.-China trade spat will hurt a world economy already losing momentum after a strong 2017.
Financial markets have been roiled in recent weeks by threats of tit-for-tat trade tariffs worth tens of billions of dollars between the Trump administration and China. If implemented, these will very likely damage world growth and raise consumer prices.
IMF chief Christine Lagarde said in February the global economy was showing broad-based growth, but warned the landscape was shifting, with heightened risks of trade disputes, monetary policy normalization and technological change.
In addition, economic growth in major economies appears to be stuttering. China’s March exports unexpectedly fell 2.7 percent from a year earlier, the first drop since February 2017 and factory gate inflation there has cooled to a 17-month low. German exports too plunged unexpectedly in February and Citigroup’s economic surprise index .CESIG10 for G10 economies is at its lowest level since mid-2017 - not the brightest of settings for a gathering of world central bank and finance chiefs.
(GRAPHIC: Citi Economic Surprises Index - G10 reut.rs/2qw6Dxh)
4/Damned if you intervene?
The Hong Kong Monetary Authority finally intervened this week to defend its pegged currency. The Hong Kong dollar hit 7.85, the weakest end of its trading band against the U.S. dollar, after six months of steady decline and several weeks threatening to breach the band.
The HKMA is obliged to intervene as part of its currency undertaking and yet, it is trying to strike a delicate balancing act between defending its currency and ensuring its stretched mortgage markets and open economy do not suffer unnecessary monetary tightening. U.S. interest rates have widened a fair bit away from Hong Kong’s HIBOR.
Next week will show how far HIBOR rises in response to intervention. HIBOR has to be high enough to deter capital outflows and short-selling of the currency but low enough to cushion the economy against a backdrop of a slower China and rising global trade protectionism.
(GRAPHIC: Hong Kong interbank rate reut.rs/2GYWcNN)
S&P 500 companies’ Q1 earnings are tipped for an 18.5 percent increase according to Thomson Reuters I/B/E/S data — the highest in seven years — but there is nowhere near that level of excitement for Europe where the likes of Nestle, Unilever and Novartis will gets the results season going next week.
European earnings are seen growing only 3.2 percent this quarter versus the same period in 2017, a rise of 1.7 percent excluding the energy sector.
The difference is that U.S. companies are enjoying tailwinds from a robust economy and swingeing tax cuts agreed last year. European firms, meanwhile, have had to contend with a stronger euro which on a trade-weighted basis, has risen for four quarters in a row =EUR.
The other factor is that economic indicators are coming off. PMIs have been slipping off multi-year highs and markets are starting to wonder whether Europe’s peak has been reached.
Either way, investors are taking note: this week they pulled $5.2 billion from European equity funds, the largest outflows since July 2016.
(GRAPHIC: Earnings growth Europe versus U.S. reut.rs/2Hme58C)
Reporting by Dan Burns in New York, Vidya Ranganathan in Singapore, Claire Milhench, Dhara Ranasinghe and Kit Rees in London; Compiled by Sujata Rao; Editing by Raissa Kasolowsky