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Reuters: Five Global Investment Themes for This Week

Sunday, 21 Nov 2010 06:00 PM

Following are five big themes likely to dominate thinking of investors and traders in the coming week:

1.  Peripheral euro zone issuers remain vulnerable to a further sell-off as Ireland keeps financial markets guessing over whether and when it will seal an aid deal with the European Union and IMF. While some sort of assistance is widely expected, the crisis is unlikely to be over. Fellow weakling Portugal is already bearing the brunt of fallout from Ireland's problems and its borrowing costs have jumped in recent weeks with some bond market vigilantes seeing it as the euro zone's next weakest link.

Among pointers to the next phase of the crisis, Ireland holds a by-election, which some of Dublin's critics partly blame for its game of brinkmanship with the European Union, on Thursday, November 25, and the Portuguese government is scheduled to pass the 2011 budget the following day.

2.  The latest euro zone sovereign debt crisis, triggered by Ireland's shaky banking sector, is threatening to halt the normalization in euro zone money markets where banks have been weaning themselves off the European Central Bank's support measures.

Divisions in money markets look set to worsen, with weaker banks being frozen out of the market as Ireland -- whose banks are at the root of the crisis -- haggles over potential aid. The path of short-term money market rates in the coming week will depend on how much and how many banks take up 3-month money from the European Central Bank tender on Wednesday. Any increase in bank demand and prolonged Irish aid talks could leave the ECB's exit plans in tatters.

3.  Investors seem to have a rather relaxed attitude toward European banks even though the lenders may be hit by Ireland's debt crisis or exposure to other euro zone peripheral economies. European bank shares have fallen 1.5 percent in the past two weeks, though they are off more than 12 percent from a mid-April peak. Sentiment toward risky assets such as equities remains firm with stocks seen boosted by a fresh round of money-printing by the U.S. Federal Reserve, while the ability of General Motors to pull off what is set to become the world's largest share offering also lifts investor confidence. Bank valuations remain cheap, with European banks carrying a one-year forward price-to-earnings of 8 times versus a 10-year average of 10.9. However, concerns over tighter regulations may overshadow their attraction. The Fed and other U.S. bank overseers have advised lenders to maintain sufficient capital to cover any losses associated with foreclosure documentation problems.

4.  The steepening of the U.S. Treasury yield curve in the wake of the Fed opting for more quantitative easing is providing robust support to the dollar. There is a strong correlation between 10-year yields and the dollar index, and U.S. data -- good or bad -- will add fuel to the debate over whether QE2 is justified.

Opposition to the latest stimulus is growing, though some say low inflation provides the Fed with cover to implement its asset-buying program in full. Higher Treasury yields have pushed up yields on German Bunds, which have also sold off in anticipation of an Irish debt deal, to their highest since late July, though they remain low by historic standards.

A 6 billion euro Bund auction on Wednesday will show how keen investors are to seek safe-haven debt and forgo higher yields, while euro zone data, including flash PMIs and the German Ifo index, may influence the U.S./German spread which has narrowed in recent days as Bunds have underperformed.

5.  The euro's fortunes are undoubtedly tied to the Irish debt saga but year-end considerations will see it grind lower. It has been a tumultuous year and options traders are turning less bullish about the euro's prospects with speculators flipping short U.S. dollar/long euro positions. While questions over the fiscal sustainability of peripheral euro zone member countries will remain in focus, the possibility of dollar-buying flows from year-end position squaring in other asset classes also makes a case for downward pressure on the euro. In addition, capital controls being imposed by emerging economies will reduce the flow of dollars being recycled into euro assets.

Such flows helped lift the single currency off four-year lows this year. Investor confidence is fragile and, with the risk of contagion real, the euro may be seen as a sell on rallies. However, there could be a silver lining for euro zone exporters, which benefited from the weak euro in the sell-off during the Greek debt crisis, according to Credit Suisse private bank.

© 2017 Thomson/Reuters. All rights reserved.

 
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Following are five big themes likely to dominate thinking of investors and traders in the coming week: 1. Peripheral euro zone issuers remain vulnerable to a further sell-off as Ireland keeps financial markets guessing over whether and when it will seal an aid deal with...
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2010-00-21
Sunday, 21 Nov 2010 06:00 PM
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