Take Five: When doves coo – World markets themes for the coming week

(Reuters) – Below are five key themes that may dominate investor and trader thinking over the coming week, as well as relevant Reuters articles.

WHEN DOVES COO

It has been just over a week since the US Federal Reserve officially suspended its rate hike campaign, but central banks around the world are collapsing to mimic Jerome Powell's dovish turnaround. Australian Philip Lowe, after reporting for a year that the next rate move was up, suddenly said rates could go both ways. The European Central Bank can hardly reduce its key interest rate by minus 0.40%, but a new series of measures to revive bank financing is now widely expected.

The rate cycle has also affected emerging markets: India lowered rates for the first time in 18 months; several others, including Brazil, alluded to reductions. And upcoming central bank meetings in New Zealand and Sweden are sure to highlight growth concerns.

The change is manifest in the foreign exchange markets. The dollar fell in December and January when the Fed's break was integrated. Now it's the turn of all the others: the Australian has lost more than 2% since Lowe's comments on February 6th; The euro recorded its biggest weekly decline in four months and the MSCI emerging market index fell after three months of gains. If everyone joins the Fed in the doves camp, the bank note, with the highest interest rates of the G10 group, could resume its rise. Analysts believe that has stagnated, but only time will tell.

(Graph: Reuters poll: the rally of the US dollar is down? – tmsnrt.rs/2t5ZKoh)

STERLING: BREXIT ÉCRAS?

Less than 50 days before Britain's departure date for the EU, markets' belief that an uncompromising Brexit would be avoided could begin to weaken. There is not much that Prime Minister Theresa May can tell British lawmakers about when she will be speaking on February 13th. A debate in Parliament will follow during which legislators may propose changes, called amendments.

There are signs that this session is starting, currency traders are increasing their cautious bets on the pound.

The shorter-term risk reversals and the pound-bid ratios indicate that investors are now more likely to buy options to hedge against a larger drop in the pound compared to the previous year. dollar, rather than anticipating significant gains.

This demand for put options also put a floor on implied volatility, a gauge of expected currency fluctuations, and a key component of option pricing. Implied flights of a month and a week, as they are called, rose last week, after a steady decline in January.

This caution is reflected in the spot markets. The pound fell below a key technical level of the market: the 200-day moving average, indicating that investors are no longer optimistic about the outlook for the currency. In fact, the pound sterling has traded below this average since May 2018, surpbading only briefly that of January.

(Chart: Sterling risk reversals – tmsnrt.rs/2UJZ4AA)

HAPPY NEW YEAR?

When Chinese markets reopen after the Lunar New Year, they may have more tangible evidence of the damage caused by the Sino-US trade war. Data released on Thursday is expected to show that exports and imports are shrinking, with the latter benefiting from the slowdown in domestic demand.

If March 1 is adopted without a trade agreement with Washington, Chinese exports to the United States will be subject to additional tariffs. The hopes are therefore based on the US trade delegation that will visit Beijing Monday under the leadership of the trade representative Robert Lighthizer and Secretary of the Treasury, Steven Mnuchin. But President Donald Trump has somewhat curbed hopes of breakthrough, saying he was not planning to meet Chinese President Xi Jinping in the coming months.

If negotiations collapse and tariffs rise on March 2, the Chinese economy and the rest of the world will suffer more. In turn, this will further encourage Chinese decision-makers to step up their efforts at next month's parliamentary summit.

(Chart: Main items among the $ 200 billion of Chinese products subject to tariffs announced in September – tmsnrt.rs/2HGBgfj)

DIE REZESSION

For months, most people have wondered whether the US economy is headed for recession, but it seems the euro zone can do it first.

The European Commission has shocked the markets by reducing the growth and inflation forecasts for the bloc. Thursday's release of flash data on GDP is expected to show the region grew 0.2% in the fourth quarter. There is already growing evidence that Germany, the largest economy in the group, was on the verge of recession towards the end of 2018 because of global trade difficulties and the slowdown of the Chinese economy.

The picture below may be even less rosy. German industrial production declined for four consecutive months, reinforcing expectations of the economy's actual contraction in the fourth quarter. This would translate into a recession after the drop in GDP in the third quarter.

Markets have become aware. German 10-year bond yields are no more than zero basis point of 10 basis points – a territory that, in the bond markets, bears witness to extreme concern for economic conditions.

(Graph: yield curve of German bonds – tmsnrt.rs/2UPzUAO)

PRESSURE, WHAT PRESSURE?

Clouds are looming on the horizon for the world's largest economy: global growth is coming up against obstacles and the trade war is worsening, while the government is expected to close soon.

Markets will look at various consumer and producer inflation data in the United States in the coming days to see how accommodating the Federal Reserve can be after President Jerome Powell, who said in January that rising interest rates will rise. was "weakened". The Fed's statement after the meeting had also dropped its earlier expectations of a "new" tightening.

The latest employment data shows that workers' wages have increased slightly over the previous year, suggesting a further reprieve for concerns about rising rates.

The US government also suffered a 35-day closure that ended on January 25, cost the economy at least $ 3 billion, and put unpaid workers in trouble. Lawmakers are opposed to President Trump's request for funds for the construction of a Mexican border wall. They have until February 15 to find a compromise.

(Chart: US inflation vs. wage growth – tmsnrt.rs/2tcl7Ef)