INSUBCONTINENT EXCLUSIVE:
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/HELTER SKELTERThe past week’s stock market slide has wiped $2.6 trillion off the value of global equity
The selloff in itself surprised no one; more interesting was the suddenness and the apparent lack of triggers.
It was a milestone week
The SP 500 lost more than 5 percent in two days, the Nasdaq’s fall on Wednesday was its biggest since 2011, China’s slide took its
stocks 30 percent off January peaks, and Taiwan’s stock futures suffered their worst day since 2000.
The warning signs are long-standing:
a tightening Fed, rising dollar, escalating trade war, slowing China and fragile emerging markets
Add in renewed doubts over Italy’s debt and Donald Trump’s attacks on the “loco” Fed, and you can see why some of the market froth
came off.
The million (or trillion) dollar question now is: is this the major correction many people have been flagging for months, if not
years Or not The coming week may show.
2/UN-FAIRThousands of Chinese exporters descend on the Canton Trade Fair in the coming week to strike
deals, sell their wares and, this year, whine about the heavy tariffs the Trump administration has imposed on their U.S
sales.
At April’s fair, exporters didn’t seem unduly concerned about trade wars
Latest data also showed healthy exports that pushed China’s trade surplus with the United States to another record high
Yuan weakness probably helped – the currency is down 10 percent since March when the first Sino-U.S
salvos were fired.
What lies ahead is the U.S
Treasury’s semi-annual report on currency manipulators
China has for years dodged being labeled one and media reports suggest it’s not been labeled this time either, even if the yuan is
approaching the 7-per-dollar mark.
Calling out Beijing as a currency manipulator may give Washington more firepower in its trade dispute
But there is also the issue of the $1.17 trillion in U.S
Treasury bonds held by China
Selling those holdings might mean short-term losses for China but could bring a fresh jump in bond yields and an even higher dollar
That would in turn put U.S
exports at a further disadvantage against Chinese, and more generally, global goods and services.
3/NO QUARTER GIVEN Investors have punished
bank shares this year, with the SP500 banking index down 5 percent year-to-date versus a 2 percent gain for the broader market
So sector giants JPMorgan, Bank of America, Bank of New York Mellon, Goldman Sachs, and Morgan Stanley will need some pretty strong Q3
earnings if they have any hope of changing that negative view.
They are indeed expected to deliver 26 percent earnings growth, outstripping
the 21.4 percent predicted for the SP500 according to I/B/E/S Refinitiv
But that may not be enough.
U.S
longer-dated bond yields have finally started rising — a positive for banks
But as the Fed raises interest rates, banks will be pressured to pass on those higher rates to depositors
And loan growth remains sluggish, seemingly impervious to big recent tax cuts, and a worry if the economy indeed slows down next year as
many expect.
Share performance may boil down to valuation
For the next 12 months, Goldman Sachs appears the cheapest, with investors paying $8.90 for every dollar in expected earnings while they pay
$11.90 for Bank of New York Mellon
The latter, unsurprisingly, is the worst performing stock over the last two years in this group of U.S
banks.
4/A PLUMMET AFTER THE SUMMITSterling has strengthened 2 percent versus the dollar over the last fortnight, supported by expectations
that an EU leaders summit in Brussels on Oct
18 will yield a deal on Brexit for British Prime Minister Theresa May
If the outcome is positive, investors could unwind more of their short sterling bets, setting the currency firmly on the road to
recovery.
But with less than six months to go before Britain leaves the bloc, fears about the Irish border issue will still hound the pound
Northern Ireland’s DUP, the party May depends on for her parliamentary majority, has threatened to withdraw backing for next year’s UK
budget should any deal split Northern Ireland from the British mainland
That would effectively be a vote on May’s administration.
Reuters polls forecast sterling at $1.37 six months after Brexit, up from $1.32
But the DUP could well scupper that rally if it triggers new elections
For now, though, currency markets appear priced for a deal being finalised next week
A setback could inflict a lot of pain.
5/SUBMISSION TIMEItaly’s budget standoff with Brussels will come to a head on Monday when it
submits its 2019 spending plans.
Already, Italy’s combative budget plan — which proposes running budget deficits far higher than
previously agreed with the EU — has driven government bond yields to their highest in four years.
The extent to which the
anti-establishment government in Rome tests EU authorities’ patience will further affect bond spreads, particularly with ratings reviews
from Moody’s and SP Global due later this month.
Both agencies rate Italy two notches above junk so any downgrade will puts the euro
zone’s third largest economy at greater risk of losing investment grade status and the billions of euros of fund flows that go with
it.
Not that the saga ends on Monday
The EU then has a week to identify any “serious non-compliance” and two weeks to decide if it will reject the budget altogether.
But the
first step is a significant one, and likely to give investors an idea of whether Italy and the EU can work together to come up with a
