LONDON, June 15 (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.
A three-day ECB forum on central banking kicks off on Monday in Sintra, Portugal, but under a very different backdrop to last year’s summit. The ECB has warned markets it will end its bond-buying programme by the end of the year, but it has also pledged to keep rates low possibly until after summer 2019. That has cheered bond and stock markets no end, but less so the euro.
Rewind to a year ago when ECB chief Mario Draghi told the folks gathered at Sintra that deflationary forces had been replaced by inflationary ones, putting markets on alert for tweaks in the ultra-loose policy.
Yet with the end of ECB QE now in sight, a taper tantrum along the lines of last year’s appears to have been avoided. Italian bonds have just enjoyed their best week since September 2012. But Sintra speakers will still be listened to because any signs of a European growth setback could complicate the QE exit path. Next Friday’s “flash” euro zone PMI data for June may also provide some insight on this front.
More generally, Sintra is a big central banking shindig — alongside Draghi will be the Bank of Japan’s Kuroda and the U.S. Federal Reserve’s Jerome Powell. All three have had their moment in the spotlight in the past week at their central bank meetings. But another big-name governor — the Bank of England’s Mark Carney — is not scheduled to speak. His bank holds a policy meeting next Thursday, though it is not expected to change interest rates.
ECB to end bond buying but pushes out first rate hike GLOBAL MARKETS-Euro tumbles as ECB vows to keep rates down Euro zone inflation already at ECB target - Nowotny
Several things are complicating life for Turkey’s Tayyip Erdogan before the June 24 elections. Hoping to use a beefed-up presidency to tighten his grip on the economy and monetary policy, Erdogan is finding he may not win in the first round after all. What’s more, the AK party could even lose its parliamentary majority.
Second, the lira is heading rapidly back to record lows despite 425 bps in interest rate rises. With the Fed propelling the dollar higher, the lira’s woes might continue. Its weakness will certainly exacerbate double-digit inflation. On economic growth — which Erdogan touts as one of the triumphs of his 15-year tenure — there are warnings.
Data shows Turkish growth running at 7.4 percent, making it one of the world’s fastest-growing economies. But borrowing costs have soared, with the government paying almost 16 percent for 10-year cash in local bond markets, up 500 bps since the end of 2017.
That could hint at a sharp slowdown because the growth bonanza hinges largely on credit, which is expanding around 20 percent year-on-year. Indeed, Turkey’s highly indebted companies and banks may already have run into trouble. For Erdogan, a self-declared “enemy of interest rates”, it could mean accepting more rate rises and slower growth. First though, he needs to win the election — at least in the second round. Poll shows support for Turkey’s Erdogan eroding, vote going to second round TABLE-Polls for Turkey’s June 24 presidential and parliamentary elections Turkish economy booms in Q1, boosting Erdogan ahead of elections
OPEC and its oil allies meet in Vienna on Friday and Saturday next week to review their production agreement. U.S. President Donald Trump has again been blaming the group for rising oil prices - they are up almost 60 percent over the last year - so the political pressure is on to pump more.
The big producers are divided though. While Russia is pushing for a significant output hike, Saudi Arabia favours a modest one. Others like Iran, Iraq and Venezuela want no change at all.
Most oil watchers do expect an increase however, before the end of the year. Negotiations should therefore centre on the scale, timing and phasing of any output boost. Also key will be whether it is agreed by the entire group or implemented by Saudi Arabia and Russia without wider backing.
OPEC and allies could hike output gradually from July - Russia Saudi’s Falih expects ‘reasonable and moderate’ oil agreement next week COLUMN-Higher oil prices set to moderate consumption growth: Kemp
Brazil, Mexico, Taiwan, Philippines, Thailand and Hungary all have central bank meetings next week and with the dollar crashing through emerging market currencies like a wrecking ball right now, what the banks do and what they say will be important.
Reuters polls show they are all expected to hold fire for now although there is an outside chance that Mexico and the Philippines could pull a surprise hikes. That means it will mostly be about the rhetoric and who might be preparing to move.
Brazil’s markets are pricing 2.5 percentage points worth of hikes between now and this time next year, and Mexico’s see around 75 basis points. Thailand and Taiwan may point to one or two hikes later in the year, and even Hungary’s central bank is expected to ditch its dovish tones in the wake of a sharp fall in the forint.
FACTBOX-Emerging markets that are hiking interest rates POLL-Hungary central bank seen holding fire as ultra-loose stance is tested EMERGING MARKETS-Currencies in the cross-hairs as Fed hike looms
In June 2017, when U.S. banks cleared the Federal Reserve’s annual stress test, their shares surged as the results unleashed a massive round of stock buybacks and dividend increases. Don’t look for the same outcome next week when the 2018 vintage are released.
The largest U.S. banks have notably underperformed their smaller, regional rivals so far in 2018 and even if some do get more cushion to increase their capital return programs, few analysts believe that will be enough to put them back in the lead.
A flattening yield curve and underwhelming loan growth are among the big culprits weighing on the performance of large banks, and that doesn’t look like it’s changing anytime soon.
The latest Fed data on commercial and industrial loan growth shows smaller banks holding a greater-than-4-percentage-point lead over large banks in that key lending category. Small bank C&I loan growth is up 6.7 percent year over year, while for the biggest banks it is just 2.4 percent.
And the Treasury yield curve - a key indicator of bank net interest margins - has flattened further since the Fed’s latest rate hike. The spread between 2-year and 10-year Treasury yields is below 40 basis points and the narrowest in nearly 11 years.
Reporting by Sujata Rao, Marc Jones, Dhara Ranasinghe, Marius Zaharia, John Kemp, Dan Burns Editing by Hugh Lawson