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Five world markets themes in the coming week

The U.S. Federal Reserve’s exit from its latest asset-purchase programme came less than 48 hours before the Bank of Japan extended its bond-buying.

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  QE – NO, YES, MAYBE

The U.S. Federal Reserve’s exit from its latest asset-purchase programme came less than 48 hours before the Bank of Japan extended its bond-buying. The European Central Bank has begun buying covered bonds, adds asset-backed securities in November and is considering buying corporate debt, sources say. Many expect it ultimately to buy sovereign bonds. How should markets react? There have been signs in recent days of how the absence of Fed QE might play out, with idiosyncratic price swings, much greater discrimination between credits and stocks and between countries and regions. Of course, some of the moves may be due to month-end choppiness and book squaring, but it does sound like a more discerning market forced to work harder at pricing and analysing securities. There could be more of this and less ETF-led passive herding.

* Fed ends bond buying, shows confidence in U.S. recovery

* Japan’s central bank shocks markets with more easing as inflation slows

* COLUMN-Good-bye bond buying, hello volatility

* Hedge-fund tactics win fans in volatile markets

2  MATTER OF TIME?

In the absence of any signal from the ECB that it is close to launching a large-scale programme of government bond purchases, euro zone peripheral debt got a lift from the BOJ. That eases the pressure on the ECB to deliver any drama at its meeting to appease bond investors, who could have made money in the euro zone by being mere spectators at the Mario Draghi “whatever it takes” show that has been running for the past two years. With inflation still close to zero, however, abstinence from activism at the meeting is likely to be seen only as an intermission.

* ECB stimulus may lack desired scale, QE an option -sources

* POLL-ECB must expand balance sheet by 1 trln euros to lift inflation

* ECB rate decision on Nov. 6, Bank of England Nov. 6, Australia rate decision Nov. 4

3  TRADING DIVERGENCE

Economic outlook and monetary policy divergence is set to return and dominate trading and push up volatility in the currency market. The dollar, whose index hit a four-year high in the wake of the BOJ move, is likely to remain in demand ahead of U.S. jobs data and with expectations that the U.S. labour market is recovering. With the ECB’s favourite inflation measure (the five-year five-year forward) still below 2 percent, reaffirmation by the ECB of its ultra-loose policy stance may weigh on the euro as will portfolio outflows and central banks paring euro holdings in their reserves.

* Weak inflation figures hit euro zone, but not expected to jolt ECB

* Swiss gold referendum holds risks for franc

* U.S. October non-farm payrolls data due Nov. 7

6  STILL FALLING

The Russian rouble is likely to remain the focus in the coming week after Friday’s surprisingly large interest rate rise and 3 percent fall in the currency, though with local markets shut on Monday and Tuesday, liquidity is likely to be thin. Moreover Russian inflation data will probably paint a dire picture. Meanwhile emerging markets are being pulled in opposite directions, with the BOJ’s stimulus decision providing a potential boost to equities and local debt but currencies bearing the brunt of a stronger dollar. Central bank meetings in the Czech Republic, Romania and Malaysia will be watched for clues on what road EM policymakers could take.

* Rouble still slumping after big Russian rate hike

* Rousseff’s win in Brazil raises questions over EM reforms

* Romania rate decision Nov. 4, Malaysia rate decision Nov. 5, Czech rate decision Nov. 6

5  VALUATION WAKE-UP

More violent swings in individual European stocks may be in store in the coming week as earnings season throws more focus onto companies that are falling short when overall earnings and revenues are rising. Trading updates from the energy sector have already seen huge swings in the share price of related companies, with Fugro falling 40 percent in two days and Saipem down 14 percent. A dissipating M&A premium in the pharmaceuticals sector, where a company like Shire has clawed back 20 percent over the past week after slumping as much as 30 percent, has led to stocks also being reassessed on their standalone basis — even Sanofi was not immune, sacking its CEO. And with central banks sending divergent messages over the fate of monetary stimulus, investors will be especially sensitive to changes in dividend payout after chasing yield even in the riskier equities world.

* Investors pull back from stocks in October as Fed money-printing ends

* Equity cult alive and kicking, despite deflation threat

* European/U.S. earnings diaries

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First published on: 01-11-2014 at 11:00 IST
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