The Big Five: themes for the week ahead

June 8, 2009

Five things to think about this week:

– World stocks’ near-50 percent gain since early March may be levelling off — investors have factored in much of the output recovery that is in the pipeline and fresh impetus could be needed from further improvements in economic indicators or the corporate outlook. With many fund managers yet to wade in with the cash piles on which they have been sitting, a bout of volatility looks more likely than a dramatic pullback.

– Talk of green shoots of economic recovery has removed some of the threat of global economic meltdown and therefore reduced the pressure to come up with coordinated international policy response. The Lecce finance ministers’ meeting will test G8 nations’ commitment to putting up extra money for the IMF and an SDR allocation increase. The risk is that cracks appear on these and other issues (eg QE, fiscal stimulus, etc). Given expanded IMF resourcing was one of the planks on which the equity market/emerging market rebound was built, any signs of pullback could fuel volatility and throw up risks for the assets which have benefited most from that rally.

– Asian reserve managers’ reassurance on Treasuries holdings came in the same week as rumblings of discomfort from some emerging market countries (eg South Africa, Israel) on the dollar’s slide and its fallout. Soothing noises from Asia about their dollar-denominated holdings and its FX impact risk being cancelled out by the chatter about international reserve currencies building in the run-up to the first BRIC summit later in June.

– How much international help Latvia gets to fend off devaluation pressures will determine fate of assets well beyond its own borders. CEEU assets as well as Nordics are affected by fallout and the ripple effects have been seen in euro zone countries with biggest exposure to Baltics and its banking sector.

– Strong demand for long-dated German and UK debt helped reverse part of the recent yield curve steepening. Fed, ECB and market watchers are having a hard time disentangling how much of that steepening was down to economic activity pick up expectations and how much should be attributed to issuance, longer-term price pressure concerns. The market’s appetite to absorb more long-dated paper (from U.S. and Japan this week) will shed more light on how soon central banks might have to fret about longer-term borrowing costs backing up.

(Reuters photo: Lucy Nicholson)

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