February 23, 2018 / 4:59 PM / 7 months ago

Take Five - World markets themes for the week ahead

LONDON (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/POWELL PUT

Jerome Powell had quite a welcome when he took over the reins of the U.S. Federal Reserve on Saturday Feb. 3.

It was the day after a 2 percent equity tumble triggered by jobs data that stoked inflation fears and pushed up bond yields. The following Monday, Powell’s first weekday in the job, the S&P500 dropped 4 percent as volatility spiralled, entering so-called correction territory with a 10 percent-plus tumble before starting to recover.

The question for investors is whether there will be a Powell ‘put’ for stocks in case things get ugly again, the assumption under previous Fed bosses being that the central bank would always be there to prop up markets.

So far, he has only pledged to “remain alert to any developing risks to financial stability”, and investors hope his debut testimony to Congress next week will offer clues. Most reckon, however, that he is most likely to reinforce the message from this week’s Fed meeting minutes that inflation and interest rates will continue to rise.

  Markets fret over Fed's approach under Powell

  Dow sees worst day in two years as bond yields jump

  Fed policymakers show rising confidence on inflation, economic outlook - minutes

 Fed nominee Powell, once hawkish, now champions Yellen focus on jobs

2/ STAR OF THE SHOW

For months, markets have happily ignored the approach of Italy’s March 4 election. Now investors are starting to sit up.

Their creeping nervousness has pushed Italy’s 10-year bond yield spread over German peers to the widest since January, while the cost of insuring exposure to Italian sovereign debt is at its highest in more than five weeks.

Some see pre-election volatility as an opportunity to snap up Italian debt. Others caution against complacency - the election in the euro zone’s third-biggest economy, is expected to produce a hung parliament. And if parties cannot agree on a coalition, fresh elections cannot be ruled out.

Polls point to a strong result for the anti-establishment 5-Star Movement, while Silvio Berlusconi’s centre-right bloc could also deliver a surprise. But success for the League, which calls the euro a “failed currency,” will revive euro break-up fears and further widen the gap between Italian and German yields.

Tuscan rivals in Italy vote spar over centre-right currency plan

Poker-faced Italian president to hold all the cards after election

"Thousand lira" man: Italy's Berlusconi baffles as vote nears

To view a graphic of Pre-election jitters in Italy, click: reut.rs/2CDMyJC

3/ WHERE EURO BULLS FEAR TO TREAD

The euro bulls rampaged for most of 2017 and January this year, recently taking the currency to three-year highs above $1.25. But markets have become cautious: There is next weekend's potential double whammy from Italian elections and the German vote on forming a coalition government, while the dollar is finally gaining traction from rising Treasury yields. That has put the euro on course for its second weekly loss in four months. EUR=EBS

Currency derivative markets are implying there could be more weakness: two-week implied volatility EUR2WO=FN, a gauge for expected swings in the value of the euro, has risen to levels not seen since the French elections last year. The preference for buying euro puts EUR2WRR=FN, or options to sell at a set price, has also grown. Traders reported strong demand for strikes - the price at which they can exercise the option - around $1.21.

Euro set for second-biggest weekly drop in 4 months

German SPD sees no Plan B to Merkel coalition

Italian bonds set for worst week of year as election looms

To view a graphic on Euro bulls, click: reut.rs/2EO0fM4

4/KOREAN CONUNDRUM

To hike or not to hike is the South Korean central bank’s dilemma. At its Feb. 27 meeting, it is expected to hold its main interest rate at 1.5 percent but could follow up on November’s rate rise - its first in six years - later in 2018.

On the one hand, South Korean households’ record $1.3 trillion debt (90 percent of GDP) means the bank must do something to discourage further lending.

But raising rates might further boost the won which is near three-year highs KRW=. That is a problem for exporters, the backbone of the economy, who are also grappling with U.S. protectionism; anti-dumping duties have been slapped on Korean steel and transformers, while tariffs have been imposed on solar panels and washing machines.

Inflation meanwhile remains below the central bank’s target.

S.Korea c.bank chief says ready for rapid Fed rate hikes

To view a graphic on Korean conundrum, click: reut.rs/2EIvVCe

5/EURO ZONE BANKS: A BET ON RATES

Buying shares in European banks to benefit from “monetary normalisation” became a hot trade in early 2017 but withered somewhat as central banks stayed in the slow lane.

But the U.S. Federal Reserve is now expected to raise interest rates three times in 2018 and the Bank of England possibly twice, while the European Central Bank is set to end quantitative easing by the end of the year. So “go long on European banks” is back as a consensus bet among equity strategists.

As longer-dated bond yields rise, banks which borrow short-term money and lend it on longer-term tend to benefit. February’s equity sell-off meant bank shares missed out on the recent rise in yields on 10-year German bonds.

After the UK’s HSBC, Lloyds, RBS Barclays revealed results, it is the turn of several euro zone banks, with the Bank of Ireland (BIRG.L), Allied Irish Banks ALBK.I, Bankia (BKIA.MC), Erste Group Bank (ERST.VI) and ABN AMRO (ABNd.AS) all reporting earnings next week.

Their figures should help analysts assess what kind of shape the sector is in, and to pick the stocks likely to benefit most from rising bond yields.

After all, euro zone banks should benefit from equity portfolios rotating towards cyclical shares to capture the so-called “euro boom”. Economic recovery has also buoyed banks’ retail activity and helped reduce bad loans.

To view a graphic on Bund banks, click: reut.rs/2ELT7Qa

Reporting by Megan Davies and Trevor Hunnicutt in New York, Marius Zaharia in Hong Kong, Dhara Ranasinghe, Julien Ponthus and Saikat Chatterjee in London; Compiled by Sujata Rao; Editing by Hugh Lawson

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