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. SHATTERING TABOOS

Euro zone leaders' rescue plan for Greece has broken several taboos and shown that politicians and the ECB will eventually compromise on staunchly-held positions if the stakes are high enough. For example, their deal knowingly risks a ratings default (albeit of a limited kind), opens the door for EFSF secondary market bond purchases, and requires other euro zone countries to make good any potential losses on Greek collateral placed at the ECB. That such a compromise has triggered a financial market rally shows the depth of concern about the alternative, which was a standoff that posed risks to the euro zone construct itself. Still, market pricing (e.g Portuguese 10-year paper is trading at 60 cents in the euro, Greek CDS is at 1675 bps, Portuguese and Irish CDS at 800 bps or more) shows that underlying structural issues have yet to be addressed and more compromises and policy U-turns will be required. How long the market rally lasts will determine how long it will be before other EU taboos are reassessed.

2. CHALLENGING CONVENTIONAL WISDOM

The high drama and rhetoric surrounding the haggling over the U.S. debt ceiling has yet to be fully reflected in market prices. U.S. five-year CDS have been relatively stable, global stock markets are rallying, and VIX is far from signaling a mass panic. Investors clearly expect a deal, even if it is produced at the last minute, and are not overly concerned by ratings firms' warnings to date about the risks of a selective default, or the risk to the country's triple-A rating. Short-term players who view such a stance as complacent are now being tempted to go against the current, by using CDS, FX or even going long high-quality U.S. corporate paper versus U.S. Treasuries in some cases. How close to the wire the debt talks go will determine how many others pile into such trades.

3. PURER SIGNALS

The Swiss franc remains the preferred channel for playing the euro zone sovereign crisis in the currency markets. One-month implied Euro/Swiss volatility recently hit its highest since 2008 and the vol curve even inverted. While there has been some retreat from these extremes after the EU summit, pricing suggests the FX market is not ruling out sharp moves in the short term. Investors are still prepared to pay a hefty premium for options that give them the right to sell euros for Swiss francs. Given the political tussle over the U.S. debt ceiling is likely to cast a shadow over the dollar, the extent to which the skew in euro/Swiss risk reversals shifts in the coming days and weeks will be a purer signal than the spot euro/dollar exchange rate of the extent to which the FX market is convinced by European policymakers' fix.

4. RISK/REWARDS

The poor trading revenues performance reported for Q2 by Goldman has lowered expectations of how much this business will contribute to the bottom line when Deutsche Bank, Credit Suisse, and UBS release earnings next week. While French banks with strong equity derivatives business (Societe Generale and BNP) may find themselves less exposed on this front, the performance of their shares is likely to be hobbled by the extent to which they are exposed to Greece or other highly-indebted euro zone countries. Valuations are cheap for European banks, with the 12-month forward price-to-earnings ratio at 7.4, a level not seen since April 2009. Those who believe the euro zone fix is only a temporary patch could end up betting on volatility in bank shares rather than valuations returning to historical averages.

5. EARNINGS TALLY

The U.S. corporate earnings season has got off to a relatively encouraging start with 85 percent of firms that have reported so far either beating or meeting expectations. The European tally is slightly less impressive but nonetheless points to steady growth as the recovery enters mid-cycle. The coming week's mix of corporate news (results from Boeing, Visa, Exxon Mobil, DuPont, Texas Instrument, Fiat, Peugeot, Infineon, Rolls-Royce, Danone, Royal Dutch Shell, Total, LVMH, Renault, and Daimler) and macroeconomic data (UK GDP, U.S. July consumer confidence, German inflation, EZ consumer sentiment, EZ flash CPI) will show investors whether they are right to have pushed world stocks up 4 percent in the year to date despite debt ructions on either side of the Atlantic and a slowdown in China (let alone the array of other left-field events that investors have faced already this year).

(Compiled by Swaha Pattanaik; Editing by Ruth Pitchford)