LONDON, Feb 12 (Reuters) - Following are five big themes likely to dominate the thinking of investors and traders in the coming week and the Reuters stories related to them.
Where does this all end? In the past week, banks have been dragged into the market turmoil stirred up by worries about a Chinese economic slowdown and tumbling oil prices. The lenders have been hit by negative official interest rates, a growing universe of government debt with negative yields and flattening yield curves, which make it difficult for them to turn a profit. Traders say one issue of concern has been the risk that sovereign wealth funds - especially those such as Norway and Saudi Arabia, which have been hit by weak oil prices - have been liquidating some of their equities portfolio to raise cash. On the macro level, some countries’ yield curves are already flashing warning signs of impending recession, although indicators of market stress are still below levels seen in either the 2008-09 global financial crisis or the 2011-12 euro zone debt crisis.
* Market turbulence raises worries of third crisis wave
* G20 plays by the book as unnerved markets crave succor
* Sovereign funds’ selling could hit $700 bln of European stocks
2/ NEGATIVITY DON‘T PULL YOU THROUGH
Like many central bank policies currently in play, negative interest rates were unthinkable before the Great Financial Crisis but are now being used by increasingly desperate policymakers to meet their inflation targets and prevent economies from tipping into recession. The ECB and most recently the Bank of Japan charge banks for parking cash at the central bank. Could the Fed follow? Janet Yellen played down the idea during Congressional testimony this week, but given how quickly and dramatically the economic and market outlook has darkened, nothing can be ruled out. Japan’s 10-year bond yield went negative and Sweden’s central bank cut rates further below zero this week, and the Fed itself said recently bank stress tests would include a “severely adverse scenario” where short-term Treasury yields go negative. Negative yields and interest rates are crushing the profitability - and share price - of banks, sending markets into a spin.
* Chilled by sub-zero rates, investors urge central bank rethink
* Central banks can cut rates well below zero, says JP Morgan
* GRAPHIC-Negative bond yields: the world’s $6 trillion (and growing) problem
* COLUMN-Desperately seeking alternatives to negative rates
A key question for the coming week is how Chinese markets will react as they re-open after a week’s holiday. Investors are already worried that mainland China could take a tumble after Hong Kong shares fell to 3 1/2-year lows in the past week. Traders will also be alert for any sign the Beijing authorities will allow the yuan to weaken to support Chinese exporters. Trade data, due on Tuesday, will be closely watched.
* China next in line of fire as Hong Kong stocks sink to 3 1/2-year low
* China likely saw $113 bln outflows in January -IIF
* Chinese data calendar
One similarity to earlier crises in recent days was the sight of markets picking a weak link within the euro zone. Portuguese bond yields almost doubled in February, jumping above 4 percent. At this rate, it is just a matter of weeks before they hit the same level at which Portugal lost market access during the euro zone debt crisis. Of course, this time it’s different. The European Central Bank is buying Portuguese bonds as part of its stimulus programme and also has a safety net which it could activate if needed. That is somewhat reassuring, except that the securities markets programme - a previous bond-purchase scheme - did not have lasting results.
* Ratings agency DBRS worried by Portugal’s bond rout
* Portuguese bonds set for worst week since euro zone debt crisis
* Portuguese PM to prepare new budget steps, but says they are not needed
British Prime Minister David Cameron will meet EU leaders at the end of the coming week to try to agree on a reform package to keep Britain in the European Union. If Cameron can claim some kind of victory from the summit, markets reckon he will set a date for a referendum on the issue, which they think will be June. If so, sterling could be set for some big price moves in the coming months - a rise in implied volatility over the coming months shows that is already expected. Most economists reckon a Brexit would cause the British economy, the pound, and bank shares to suffer, but short-term gilt holders might benefit - weaker growth is usually a tonic for British government bonds, as it pushes down inflation and keeps interest rates low.
* TAKE-A-LOOK of stories related to Brexit
* POLL-Britain’s economy will be worse off if it leaves the EU
* Brexit might not be all bad for $2.1 trillion gilts market
* European summit at which Brexit will be discussed Feb. 18-19
Compiled by Nigel Stephenson, editing by Larry King