LONDON, April 13 (Reuters) – Following are five big themes likely to dominate the thinking of investors and traders in the coming week and the Reuters stories related to them.
1/ PLUS CA CHANGE
Investors are finding the secondquarter a trickier environment than the first. Stocks are ceding ground, concern about the euro zone’s highly indebted economies (especially Spain) has resurfaced, safe haven Bunds offer little more than capital preservation at best, and the FXoptions market is signalling a greater degree of uncertainty about the outlook for major exchange rates. Part of the problem is that this is the first time in a while that investors are having to figure out the appropriate price for assets without any prospect of either Fed or ECB liquidity injections. Those who think one can’t have too much of a good thing are already wondering whether Spain’s plight will deteriorate enough to force the ECB to consider a third LTRO, though there is no sign thecentral bank is inclined to take this route. But some are fretting about the unintended consequences of the central bank action already taken. Nomura’s Bob Janjuah, who terms the current policy-setting environment “monetary anarchy”, points out thelong-term risks to financial markets and the financial sector of central bank incentives to misallocate capital and therefore misprice assets. And even in the short term, any Spanish or Italian banks that have used cheap ECB loans to stock up on their government’s debt risk nursing losses that will only exacerbate concern about these countries.
2/ WHERE’S THE CORDON SANITAIRE?
Spain’s debt auctions in the coming week will ensure that the borrowing costs of the euro zone periphery stay at the forefront of investorfocus. Spain’s 10-year bond yields are not too far from 6 percent, and it won’t take much to push financing costs into territory that is deemed unsustainable if they break decisively above that level. While Spain has frontloaded its issuance thisyear, persistently weak demand at subsequent auctions could erode sentiment towards its markets even further and show that the tonic effect of the ECB’s LTROs is over. What’s more, Italy has been caught in the backwash of concern about Spain. Itsyields are back near levels that prevailed before the ECB’s first LTRO and this week it sold fewer bonds at an auction than it had originally intended because it didn’t want to lock in its borrowing costs at current rates. With no signs that the ECBis about to throw another lifeline anytime soon, the focus will turn to whether finance officials will agree to beef up resources at the IMF/World Bank Spring meeting.
3/ A LA MODE
Interest in auctions is not confined to the euro zone’s weaker sovereign issuers. Germany’s two-year bond auction on Wednesday will come under close scrutiny given two-year yields hit record lows in the secondary market and even briefly broke below those of Japanese counterparts in the past week. Appetite for safe haven German 10-year bonds showed signs of flagging at an auction in the past week. With the secondary market yield barely above 0.1 percent, this two-year offering will show just how little investors are willing to get for holding core euro zone debt right. France will also tap the primary market in the coming week, just before the first round of presidential elections on April 22. Markets are homing in on how French candidates are positioned on fiscal reforms and French bonds’ relativeunderperformance against Bunds risks becoming more marked if the pre-election rhetoric turns more strident.
4/ DEJA VU
European stock markets are underperforming world stocks. The FTSEurofirst has ceded nearly all the ground it gained in the first three months of the year and some national peripheral euro zone indices are actually lower in the year to date. As has been the case so many times before, the catalyst for the most recent decline has been concern about the outlook for global growth and the euro zone debt crisis. And there seems to be aslimmer chance that the earnings season which has just kicked off can generate enough positive news to offset that. Results from Goldman Sachs (GS.N), Citigroup (C.N), BoA (BAC.N) and Morgan Stanley (MS.N) will be in particular focus in the comingweek for what they show about the health of banks’ post-LTRO trading books and for what investors might be able to extrapolate about the health of European banks.
5/ FX CONTRETEMPS
Investors seem inclined to turn to the Swiss franc, the yen and even the British pound rather than the euro asthe euro zone debt crisis shows signs of flaring up again and global growth loses a bit of momentum. The near-elimination of the premium that investors get to hold two-year German debt rather than Japanese paper could bring particular pressure to bear on the euro/yen exchange rate, especially if the crossover between the two becomes more than a brief phenomenon. The preference for options that give investors the right to sell euros has become somewhat more pronounced. The options market is alsoflagging the risk of another test of the Swiss National Bank’s (SNB)resolve to defend the floor it has set for the franc’s exchange rate against the euro. Rhetoric has already been backed up by action but, given that has not pushed the franc too far away from the SNB’s 1.20 floor, the central bank may have to up the ante if it wants to preserve its credibility.
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