Five world markets 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.

1/ INFLATION FOCUS

Price pressures in emerging and developed markets and central bankers' reactions will stay in focus as investment decisions are being influenced by which countries are further along the curve in controlling inflationary impulses. The European Central Bank has already taken a firm anti-inflation stance and the rhetoric used at Thursday's post-policy meeting news conference will show interest rate traders whether they have gone too far/not far enough in pricing in ECB action. Market inflation expectations for the euro zone are also in the spotlight given 10-year French breakevens have been on the rise. While a hawkish message from the ECB could help the euro, it will also spur investors in European equities to reassess their positions. In particular, any concern that tighter monetary conditions could compound the difficulties facing austerity-hit peripheral euro zone member states would imperil the rebound that these countries' stock markets have recently staged.

2/ RISKS TO OUTPERFORMANCE

ECB rhetoric is not the only potential risk facing euro zone peripheral stock markets, which have been outperforming Germany's DAX this month as sovereign credit concerns have abated somewhat (Spanish stocks are up 10.5 percent, Italy's index is up 10.8 percent and Greek shares have risen more than 11 percent vs the Dax's 3.7 percent). If the U.S. non-farm payroll report reinforces expectations that U.S. interest rates will stay low for some time, U.S. stocks could attract more interest even though they are currently looking more expensive than their European peers (the 12-month forward P/E for the S&P 500 is 13.1 vs a 10-year average of 15.6 and 11.1 times for the STOXX Europe 600).

3/ WHO'S SAFE?

S&P's move to cut Japan's ratings will reverberate, particularly in those developed countries facing high debt/GDP ratios and without the guaranteed domestic investor base for their sovereign paper that Japan enjoys. For example, CDS for Belgium and Italy pushed wider in the immediate aftermath of the downgrade. On the flip side, smaller countries that enjoy stronger fiscal conditions such as Canada and Australia should be the medium-term beneficiaries. Another beneficiary will be the Swiss franc which is typically the currency of choice for investors looking for safe-haven assets. The franc has been more popular in times of distress and this downgrade could further enhance its appeal.

4/ OUTSTANDING QUESTIONS

Strong demand for the EFSF's debut bond played its part in easing stresses in the euro zone's secondary government bond market and showed the ease with which financing could be raised, if needed/wanted. It does not, however, answer the outstanding questions - which will be decided by politicians, albeit not at next week's summit --- about how EFSF money could be deployed if needed. A number of ECB officials have said there would be advantages in using EFSF money to buy government bonds. Still, there are few answers to questions such as who will decide which bonds to buy and at what price or how such "intervention" would distort money markets if it is not accompanied by the sort of "sterilization" that the ECB currently conducts by draining the excess cash injected via its bond purchases. Also, while the sovereign credit concern about the likes of Portugal may not be as accentuated right now, it is unclear whether yields will keep falling at successive peripheral euro zone bond auctions given investors who bought Portuguese June 2020 bonds at auction on January 12 and held on to them would now be under water.

5/ REALITY CHECK

Spanish stocks have been benefiting from cheap valuations, higher risk appetite, a shift from emerging markets to developed markets, and some easing of euro zone sovereign credit concerns. The extent to which the IBEX 35 can extend gains depends on how big a reality check investors get when Banco Santander and BBVA announce their results along with debt-laden regional savings banks, or cajas, next week. Spain has already sought to head off problems by raising funds to help its weaker banks. However, any signs of deeper problems, especially among the savings banks, risk upsetting current trends.

(Compiled by Nigel Stephenson; Editing by Toby Chopra)