LONDON (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.
1/ JAW-JAW, SELL-SELL
An unnerving war of words between Washington and Pyongyang has pushed the cost of insuring South Korean debt against default to its highest in 1-1/2 years and the expected volatility of the Korean won is creeping higher. Gauges of market risk have been rising but are far off their peaks as the expectation still is that diplomacy would prevail and prevent a nuclear conflict. But investors are increasingly jittery and some are wondering what other threats to the benign environment in markets may be lurking below the radar.
(Graphic: Korean markets reaction to U.S.-North Korea tensions reut.rs/2hPtW3Z)
Immediate winners as tension ratcheted higher over the Korean peninsula were U.S. defense industry stocks. Raytheon, maker of the Patriot anti-missile system notched up an 8 percent gain for the month on the day of President Trump’s “fire and fury” warning, slightly outperforming Lockheed Martin, the Pentagon’s No. 1 weapons supplier. Overall, defense stocks on the Dow Jones Industrial Average are up about 4.3 percent, more than twice the gains of the wider index.
(Graphic: U.S. defense stocks in the past month - reut.rs/2hQBS5i)
The dollar’s nearly 9 percent fall this year has exposed a stark divergence of fortunes between U.S. companies with high international sales and those that rely on domestic revenues. Goldman Sachs’s basket of U.S. stocks with high domestic sales (which includes Wells Fargo, Charter Communications, Altria) is up 4 percent so far this year, significantly underperforming the S&P’s 9 percent gain. Their index of stocks with high international sales (including McDonald’s, Tiffany, Qualcomm, NVIDIA, Boeing), has forged ahead, up 14 percent. Among S&P stocks, almost 30 percent of total revenues are generated overseas, according to Goldman. Earnings season is wrapping up with S&P earnings estimated to increase 11.9 percent - which would mark the first consecutive increase over 10 percent since the second and third quarters of 2011. An above-average number of companies are beating analyst expectations, according to Thomson Reuters I/B/E/S data. Still, data from market research platform Sentieo shows that dollar mentions in earnings were on balance weighted negative in the month to Aug. 9, with 388 transcripts during the month seemingly mentioning a foreign exchange effect in a positive way and 455 with a negative bias.
(Graphic: U.S. stocks with high international sales have outperformed as the dollar has fallen - reut.rs/2fxe4m3)
Talks in the coming week between the United States, Canada and Mexico on updating/renegotiating/ditching (depending on who’s talking) the North America Free Trade Agreement come at something of a crossroads for world trade. Trump’s campaign pledge to renegotiate or ditch NAFTA raised concerns in many countries about a re-emergence of protectionism and an unwinding of the globalization that supporters say has lifted millions of people out of poverty. The latest trade figures from China, Germany and Britain were all much weaker than forecast, raising worries over the level of demand in major economies as central bank take steps towards tighter monetary policy. What happens next may depend on whether the dollar stays weak. Most trade is in dollars and a weaker U.S. currency makes financing such operations more attractive. Oxford Economics has plotted the inverse relationship between the dollar and world trade and find that trade is growing at its fastest rate since 2010.
(Graphic: Global Trade and the dollar - reut.rs/2fvPGRT)
The euro zone economy outperformed both the United States and Britain in the first half of the year. Economists polled by Reuters expect growth of 2.0 percent in 2017. But Germany’s slowing trade has raised questions about the strength of demand in leading economies just as central banks consider scaling back their stimulus programs. Gross domestic product data from across the bloc due in the coming week will be closely watched. German flash second quarter growth is expected to pick up to 0.7 percent from 0.6 percent in the first three months of the year. Overall, euro zone economic activity is forecast to have expanded by 0.6 percent, the same as in Q1. Italy is picking up - its Q1 GDP growth was revised up to 0.4 percent from an initial 0.2 percent and that strength is expected to have been maintained in the three months to end-June.
(Graphic: Mixed picture: Germany peps up euro zone growth - reut.rs/2hRYFxE)
Reporting by Marius Zaharia in SINGAPORE, Megan Davies and Caroline Valetkevich in NEW YORK, Nigel Stephenson and Jamie McGeever in LONDON Editing by Jeremy Gaunt