The Big Five: themes for the week ahead

June 1, 2009

Five things to think about this week:

– ┬áInvestors will be on the lookout for any further signals on quantitative easing when the European Central Bank and the Bank of England announce their decisions on Thursday. Analysts see the ECB leaving rates on hold but pushing ahead with and possibly extending a plan to buy up to 60 billion euros in covered bonds. The focus will also be on growth forecasts for the next year and the message they send about the pace of any recovery.

– Oil prices are nearly double their four-year low set in December and the Baltic Dry Index, which tracks rates to ship dry commodities, has risen more than 300 percent since the start of the year. Coupled with a weakening dollar, investors might be bracing for the return of the supercycle in commodities. The resultant inflationary pressures could push investors away from government bonds and into the arms of equities.

– High-yielding emerging market currencies remain weak, weighed down by poor domestic growth prospects even as emerging equities rise along with their developed market peers, buoyed by hopes of a global economic recovery. The disconnect is likely to persist with governments, particularly in emerging Europe, looking likely to lower interest rates further.

– Green shoots have been popping up at an encouraging rate, with consumer confidence and home sales data in the United States, and improved Euro zone economic sentiment being the latest signs that a downturn may not be as steep as many originally feared. The week provides more key tests for this hypothesis: U.S. non-farm payrolls, core personal consumption expenditure, factory orders and ISM data.

– A sharp rise in Treasury yields driven by worries over a record U.S. budget deficit has pushed the yield curve to its steepest on record, and Treasuries yielded more than euro zone government bonds for the first time in seven months. While surging yields could threaten the equities rally as businesses and consumers fret about increased borrowing costs, auctions attracted strong buying from foreign central banks, putting a floor under the dollar.

(Reuters photo: Laszlo Balogh)

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