May 26, 2017 / 4:10 PM / in 2 months

TAKE A LOOK-Five world markets themes in the coming week

6 Min Read

LONDON, May 26 (Reuters) - Following are five big themes likely to dominate thinking of investors and traders in the coming week and the Reuters stories related to them.

1/ Inflation Inflection

The ECB meets on June 8 amid a growing clamour to begin "normalising" monetary policy. Economic growth is solid and the threat of deflation seems to have been overcome, yet deposit rates are negative and the ECB is pumping hundreds of billions of QE stimulus into markets. A major determinant of the policy path Mario Draghi outlines that day will be next week's euro zone inflation figures. And if inflation is the ECB's guiding star (and it is), then the outlook is far from clear. Inflation is expected to fall to 1.5 percent in May from 1.9 pct in April, moving further away from the ECB's target of "below, but close to" 2 pct. Core inflation is also expected to fall, to 1 pct. The voices within the ECB calling for the bank's easing bias to be dropped are getting louder, and an announcement to that effect could well come in June. But should inflation remain stubbornly low, the debate on policy normalisation could be more fraught than otherwise expected. ECB must not change course as inflation weak despite growth - policymakers ANALYSIS-Foreign selling of German debt drying up, creating headache for ECB ECB's Coeure says no need to change negative rates guidance

2/ Pounded

Suddenly British Prime Minister Theresa May's electoral landslide is looking anything but nailed-on and some even doubt she will win the June 8 snap vote. That has given the pound its worst weekly hammering since last November but arguably the writing was already on the wall. Having first breached $1.30 on May 18, the pound's inability to make any more progress spoke volumes for the scale of underlying (Brexit) nerves. If the Conservatives' lead over Labour stays in single figures or tightens further, market participants may start to wonder what would be the impact if May emerged with only a thin majority or even if Labour took power. If the Conservatives' lead widens, however, a pound rebound may follow. Sterling hits one-month low, FTSE gains as Conservative lead slumps UK PM May's lead falls to new low of five points ahead of June 8 election BREAKINGVIEWS-UK Labour Party's soft Brexit would still be hard

3/ Taking Stock

The last time U.S. stocks suffered a fall of 5 percent was in the swoon at the start of 2016. A wobble in the previous week, flagging economic momentum and general unease about politics in Washington have raised fears about how much longer the richly valued S&P 500 can keep notching up record highs. Globally, earnings season has given investors enough reason to stay invested in stocks. Yet, U.S. retail sales and capital goods data have both signaled that expectations of strong Q2 economic growth need to be tempered. In Europe, things are decidedly upbeat. Yet, any shakeout in the U.S. stock market, now worth more than $20 trillion and about the same size of Europe and Asia combined, is unlikely to leave others unscathed. Over the past three decades, there is not a single month in which a 5 percent or more drop in the U.S. was not accompanied by a similar, or worse, move lower in Europe. INVESTMENT FOCUS-European stocks wouldn't escape fallout from a Wall Street retreat

4/ Rock Steady

For now, though, stocks continue to rack up record highs on wall Street and multi-month peaks in Europe, all the while with financial market volatility at rock-bottom. The VIX "fear gauge" of implied volatility on the S&P 500 was back below 10 on Friday, having briefly spiked in mid-May as a probe into possible collusion between Donald Trump's campaign and Russia intensified doubts over the president's ability to implement his campaign pledges of tax cuts. Volatility in U.S. Treasuries is at its lowest for three years after Federal Reserve policymakers signaled there would be no precipitate falls in the central bank's balance sheet. Why is volatility so low? The best explanation seems to be that economics is trumping politics, the world is growing strongly again, global GDP volatility is very low, interest rates remain low-to-zero and corporate earnings are buoyant. What can possibly go wrong? Fed's Brainard says global economy "brighter", less risk to Fed outlook COLUMN-Trump political risk to be muted until Fed joins in Economic reversal, not politics will reignite market volatility

5/ Lured North

With more than 100 days of the Trump presidency already gone, sanctions on Russia show no signs of ending. But Russia's economy, recovering after two years of recession, is a powerful enough bait to lure global businessmen and politicians to the June 1-3 St Petersburg forum, the annual jamboree held in President Vladimir Putin's hometown. Attendees include oil market A-listers - Saudi energy minister Khalid Al-Falih and OPEC Secretary General Mohammad Barkindo will attend, just days after Russia joined with the cartel in extending supply cuts to support crude prices. Oil firms eyeing future production deals, are also in the fray, represented by the chief executives of Total, OMV, ENGIE, Wintershall and BP. But U.S. business is less well represented, and with sanctions still around, actual deals and big-ticket investments are likely to remain elusive. Russia state fund to sign deals worth 100 bln roubles at June forum Putin offers transcript to prove trump did not pass Russia secrets

Reporting by Jamie McGeever, Patrick Graham, Vikram Subhedar, Mike Dolan, Nigel Stephenson and Sujata Rao; Compiled by Nigel Stephenson; Editing by Tom Heneghan

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