Five world markets themes in the coming week

With the US shutdown expected to continue for an extended period of time, following are five major themes likely to dominate thinking of investors and traders in the coming week:

Coming closer

The rumpus over the US budget and the debt ceiling is certain to dominate financial markets in the coming week. As the mid-October deadline for lifting the borrowing cap approaches, tensions already apparent in US short-term bills and credit default swaps may ratchet higher. If a deal is reached to end the government shutdown, and a debt deal looks more likely, that may be a green light for US stocks, which have lagged Europe recently, to rally. Investor focus may then switch back to when the Federal Reserve might begin to wind down its monetary stimulus.

Political risk

Italian 10-year government bond yields seem to have hit the buffers around 4.3% and are still trading above Spanish equivalents, reflecting lingering market apprehension about how strong a hand Prime Minister Enrico Letta has been dealt by the ructions in Silvio Berlusconi's party. Market focus in the coming week will be on how speedily Letta moves to take advantage of a weakened Berlusconi to push through electoral reforms that could signal a more decisive push for fiscal changes. The extent to which sentiment has turned could be reflected in Italian bond auctions next Friday. Recent auctions have seen slack demand and higher funding costs.

How much stronger?

One immediate consequence of the partial shutdown of the US government is pressure on the dollar that has helped push the euro to a two-year high on a trade-weighted basis. This is causing headaches for euro zone exporters who face the dilemma of whether to buy at current elevated levels or risk waiting for the euro to lose steam. The fact European Central Bank chief Mario Draghi pointedly declined to take the currency down after the bank's latest policy meeting has made some in financial markets think the euro is bound for $1.40 (RM4.45).

Earnings challenge

The US third-quarter earnings season kicks off with aluminium producer Alcoa first out of the traps. Earnings estimates for companies on both sides of the Atlantic have been cut, with those for European firms downgraded the most. In Europe, where the results season begins in a couple of weeks, many investors had been banking on good third-quarter numbers after a lacklustre first half so sub-par earnings could knock a whole in the region's so far healthy stock market gains.

Health check

The International Monetary Fund's annual meetings, which begin in Washington, are a chance to take the temperature of the global economy. In many areas, growth is still modest but at least showing signs of recovery. Accelerated expansion in the Chinese services sector indicates the world's second-largest economy is picking up. A similar survey in Europe showed growth spreading to some of the previously lagging countries. The IMF has already warned that failure to lift the US debt ceiling could harm the world economy. - Reuters, October 5, 2013.


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