The Big Five: themes for the week ahead
Five things to think about this week:
– The global equity market rally has stalled in June and is threatening to go into reverse. With this week effectively the last full week of the second quarter, the temptation for many funds to book profits on such a lucrative quarter will be high. Any knock on boost to volatility would pose more risks for some of the trades that looked the most attractive in a lower volatility environment, such as cyclical versus defensives plays, emerging markets, and foreign exchange carry trades.
POLICY, SUPPLY RISKS FOR BONDS
– How the U.S. Federal Reserve will respond to the interest rate market gyrations of the past month has been a key market talking point. Questions centre on whether it will expand the size of buybacks, whether there will be any change in the length of time the buyback programme lasts, whether the central bank makes any effort to unwind the rise in bond yields seen in the past months, and whether there will be any talk of an exit strategy. Another risk to the front end will be the Treasury refinancing, which resumes after a week of no supply and will be concentrating on the shorter end.
WHAT COLOUR ARE THE SHOOTS
– This week’s data will show both whether the inventory rebuilding that was priced in over recent months is actually materialising and whether there are any other drivers of economic activity out there. The flash PMI in Europe and sentiment indicators will be particularly relevant in deciding on the latter issue, with consumer and income data out from both sides of the Atlantic providing an additional window on how domestic demand is shaping up.
CENTRAL BANK CASH
– There is potential for significant take up at the ECB’s first one-year tender this week and some are speculating that the injection of large amounts of money into the market could drive down short end rates sharply. Most recent anecdotal evidence suggests firms are still facing tight credit conditions but confidence in financial stabilisation is a pre-requisite if banks are to lend on. This is leading to speculation of where else the money might be parked in the interest rate or fixed income universe. There are also question marks over whether any of the money might leak outside the euro zone — and what, if any, are the potential FX implications of such seepage.
EMERGING MARKET RISKS
– Higher volatility spells underperformance in the emerging market universe and has raised questions over the risks in individual countries — e.g. Turkey’s IMF deal; Latvia’s political difficulties in winning acceptance for budget cuts; the possibility of the Iranian domestic upheaval gaining market attention; and ructions within the Saudi banking sector. The shifting sentiment suggests potential hurdles for heavy third quarter corporate and government refinancing needs, especially in central and eastern Europe, not least given that the heavy issuance plans of better-rated developed market sovereigns pose crowding out risks.