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More Populism and More Inexperience: Global Week Ahead

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The big headline out early on Monday is that Italy is likely to be run by a novice.

Giuseppe Conte — a little-known 54-year-old professor who specializes in public administration law and has hardly any political experience — has emerged as the frontrunner to be prime minister for Italy’s nascent populist government, according to Italian media.

Welcome to more populism, traders!

In the Global Week Ahead, keep an eye on Reuters in London’s five big world-market themes, shown below. These are likely to dominate the thinking of investors and traders everywhere.

(1) There’s a New Government in Italy

Call them optimistic or complacent, until now investors were pretty unfussed about the talks to form Italy’s next government. However, the past week, after 5-Star and the League agreed on a government platform, has been the worst in more than two months for Milan’s stock market, given the incoming coalition’s plans to spend more and tax less.

Worst hit are banks and utilities, driving most of the stock market losses — Italian banks are major holders of government bonds where yields have surged to multi-month highs this weeks, for their biggest weekly jump in almost three years. The worry is the selloff will saddle banks with heavy losses on their bond portfolios.

Utilities are also in the firing line as the program includes a strong focus on green energy. Analysts say the turn to renewables could depress power prices, hurting state-controlled utility Enel and A2A.

The shock comes after a long period of Italian outperformance, driven by strong company earnings and a recovering economy.

Whether the market will be able to recover from here depends, to a large extent, on the planned fiscal measures being watered down — under likely pressure from Brussels.

(2) Watch the Euro and Watch Out for Italian Bond Worry

Since hitting a three-year high of $1.2550 back in February nothing has gone right for the euro. The latest blow is the concern over fiscal profligacy from Italy’s incoming coalition government.

With the euro set for its fifth week of losses in seven — it is languishing near 2018 lows around $1.1763 — many investors are racing to protect against further downside risks, and signs are hedge funds have struck large options to protect against further losses; a $1.8 billion option was expiring in the past week, followed by $1.6 billion in the week ahead.

But if concerns over an Italian borrowing binge rise further, that could pressure long euro positions, which are still near record highs despite a recent surge in the dollar, according to U.S. CFTC data.

As Italian bonds sell off, currency derivatives are flashing amber. Risk reversals on the euro — a currency market option market gauge for a ratio of calls to puts for a currency — in one-month and three-month tenors have fallen to their lowest levels since May 2017. That indicates markets are turning cautious if not outright bearish.

(3) Manufacturing PMIs Come Out Globally

The week ahead brings the first or “flash” estimate of manufacturing activity in May from around the world, an early indication of how the global economy is faring after signs of momentum slowing down.

In the Eurozone, economists polled by Reuters forecast IHS Markit’s Composite Purchasing Managers’ Index (PMI), seen as a good overall indicator of growth, expect a dip to 54.9 in May from 55.1 in April to mark a new multi-month low.

While business activity remains in expansion territory, any signs of softness could reinforce a view that an ECB rate hike remains some way off, keeping the gap between U.S. and German 2-year bond yields near their widest in three decades.

This week’s U.S. data clues, meanwhile will likely be scrutinized for signs of labor market tightening and price pressures building. All of which, of course, sets the scene for a likely rate hike from the Fed in June.

(4) Venezuela Voted

Venezuela held presidential elections on Sunday with Nicolas Maduro, the 55-year-old socialist incumbent and former bus driver who has presided over the Latin American country’s economic meltdown, the victor.

Two of his most popular opponents were banned from running. U.S. President Donald Trump has threatened further sanctions, and if that happens, it could ramp up its problems so far that it encourages regime change.

For investors that might be the glimmer of hope they need to buy up the country’s battered bonds again. Much of Caracas’ sovereign debt has long been classed as in default but debt of Venezuela’s state oil company PDVSA, in this case the 2020 bonds backed by assets of refiner Citgo, have obvious attractions.

(5) See How Higher Oil Prices Affect Asia

Asia accounts for two thirds of the global growth, but its momentum is not usually strong enough in itself to push global inflation higher. With oil prices at $80 a barrel, however, that may be about to change.

Asia is by far the worst hit region as it consumes much more than it produces. Its oil bill is now in the region of $1 trillion and countries such as Indonesia and India, which already have trade deficits, are beginning to struggle.

Indonesia hiked rates on Thursday one month after the central bank said it saw no need to rush yet the rupiah languishes near 2-1/2 year lows. The Indian rupee is approaching all-time lows and this week's data showed inflation already accelerating in April.

Bond yields are also on the rise, with Indian 10-year yields approaching three-year highs this week and Indonesian yields near one-year highs.

In many countries though the inflation pass-through is still limited, mostly due to sluggish domestic demand. But price growth data next week from Singapore and Malaysia will be closely watched, with risks seen on the upside for once — a rare occurrence over the past decade.

Top Zacks Rank Stocks—

(1) Goldman Sachs (GS - Free Report) : It was interesting to see this $89B market cap stock on the #1 Rank list this week. The $237 share prices garnered a C for Value, and there is a long-term D rating to worry about.

(2) Baidu (BIDU - Free Report) : This is the $88B market cap version of Google in China. The long-term Zacks VGM score of F tells you that this is a well-known fact in stock markets there and elsewhere. The PEG ratio at 1.37 is pretty solid, though.

(3) Kirin Holdings (KNBWY - Free Report) : This is a Japanese brewer, mostly. The long-term Zacks VGM score is a much stronger A here. That could be because no one is really interested in these shares, given the weak consumption growth posted by this country recently.

Kirin operates four businesses: an Alcohol Beverage segment, a Beverage and Food segment, and (believe it or not) a Pharma and Biochemical segment and an Others segment. The firm is headquartered in Tokyo, Japan.

Key Global Macro—

On Wednesday, at 2 pm ET, the U.S. FOMC minutes will hit the tape. Traders will look for references on inflation and to news on the pace of rate hikes. Consensus is for two more hikes tin 2018. With a June hike baked in, the emphasis will be on the future path after June.

On Thursday, we get German GDP growth and on Friday it is UK GDP growth.

Also on Thursday, the Bank of Korea should keep its policy rate on hold.

On Monday, the 7-day repo reference rate in Argentina, their monetary policy rate, is likely to stay at 40%. That’s not a typo.

Brazil’s tax collection looks to rise from 105.6 billion reals to 124 billion. The economy must be picking up there.

On Tuesday, the Swedish unemployment rate should be out. The prior was 6.2%.

The Russian unemployment rate is 5.0% and real wages are growing +6.5% y/y. Realize though, that the PPI is growing at +4.8% y/y too. In other words, it’s not an overheating economy, but a fully employed one.

On Wednesday, the unemployment rate in France is 8.9%. In Finland, it is 8.8%. We get fresh data.

The composite PMI for the Eurozone comes out. The number should edge up from 55.1 to 55.4. The manufacturing PMI for the Eurozone should go from 56.2 to 56.5. This will be a welcome upturn, if it indeed happens.

The U.S. manufacturing PMI comes out. It has been 56.5.

South Korea comes out with a fresh monetary rate decision. The prior rate is not supposed to change, at 1.5%.

On Thursday, Germany’s GDP growth comes out. It has been +2.3% y/y.

The U.K.’s retail sales (ex-auto fuel) come out. It has been +1.1% y/y.

U.S. initial claims last week were very low at 222K. They should stay down there this week, too.

On Friday, the Germany IFO indexes come out. Business Climate has been 102.1, Current Conditions has been 105.7 and Expectations has been 98.7.

The U.K. GDP growth rate comes out. It has been +1.2% y/y.

U.S. durable goods, ex-transportation, should climb +0.6% m/m.

The University of Michigan sentiment index comes out. It has been 98.8.


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