Five world market themes in the coming week

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.

GROWTH RATES

The view on the U.S. economic outlook that emerges from next week's FOMC will set the tone/backdrop for markets into the end of the year and the beginning of 2010. This week has already seen a shift in expectations of how soon the RBA and RBNZ could raise rates next year and the FOMC statement has scope to cause even bigger waves across global financial markets. Data, such as the flash PMI and inflation reports, will feed into the debate in many developed countries over how quickly accommodative monetary policy should be reversed, particularly since upward pressure on inflation rates will be generated purely by base effects dropping out.

RETHINKING THE CARRY TRADE

The FX market is moving away from its recent default "risk on" vs "risk off" stance. As it becomes clearer that central banks are carrying out their exit strategies at different speeds, investors are having to think longer and harder about what currencies will form their carry trades. This applies to both sides of the trade, but perhaps more to the higher-yielding currency. The funding currency of choice would appear to come from the following narrow selection of ultra low-yielders: the yen, dollar, Swiss franc, sterling. And probably in that order too. But that leaves plenty more relatively higher-yielding currencies investors will want to buy, including the Australian and New Zealand dollars, Norwegian crown and a host of emerging market units. The market's reaction this week to two policy decisions was instructive. The kiwi jumped vs the dollar after the Reserve Bank of New Zealand kept its key overnight cash rate on hold but indicated it will raise it earlier than previously thought. The Bank of England, meanwhile, also kept its key policy rate on hold. But investors believe the BoE will start raising rates only in Q4 next year, and even then at a gradual pace. Sterling barely moved on the news.

LAST DASH FOR CHEAP ONE-YEAR MONEY

Money markets are set to stay bloated with excess liquidity, keeping interbank rates subdued at the turn of the year with commercial banks likely to take even more cheap funds at the European Central Bank's final 1-year tender on December 16. However, key for money markets going into 2010 will be plans to tighten the quality of collateral banks can swap for ECB cash. This could make it difficult for banks in countries like Greece and Ireland, which may face further credit rating downgrades, to access central bank funds.

CAST IRON OR CAST ADRIFT?

The cut to Greece's sovereign credit rating and the revision of Spain's outlook to negative, which hit the euro and saw "peripheral" euro zone bond spreads over German benchmarks blow out, will reverberate in markets for some time yet. Apart from concerns over which highly-indebted country will be next in the rating agency cross-hairs, the moves again raise the question of the value, or indeed existence, of implicit guarantees. Would Germany or France bail out a stricken fellow euro zone member? Angela Merkel says the responsibility to help a struggling euro zone member is collective. At the wild fringe of speculation, some are again talking of the risk of euro zone break-up. While this is extremely unlikely, the perception that euro zone laggards are on their own will weigh on bond spreads and credit default swaps. The cost of insuring Russian and Turkish debt against default is already less than the equivalent for Greece.

TIME TO DISCRIMINATE

With global equities surging more than 70 percent from their March lows and economic recovery maturing, investors are differentiating between markets with stronger and weaker fundamentals. Shares in countries like Greece, Spain, Ireland and Portugal, which have weak fiscal positions and whose credit ratings are under pressure, have been the weakest performers in Europe in the past month. Norwegian and German shares, on the other hand, are the top performers in the same period. Expect more of the same in coming weeks.