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Take Five: Monitor Interference Here

LONDON (Reuters) – The yen grabbed the market spotlight after the Bank of Japan stepped in to buy the yen for the first time since 1998, while markets remain on the lookout for any signs of escalating tensions between Russia and the West.

Election results from Italy, eurozone inflation numbers and US and Chinese data give investors plenty to chew on.

Here’s a look at next week’s markets from Kevin Buckland in Tokyo, Tom Westbrook in Sydney, Louis Krauskopf in New York, Danilo Masoni in Milan, and Dara Ranasinghe and Karen Stroecker in London. Drawings by Vincent Flassier, Vinette Sachdev and Bassett Konkonakunkurnkull.

1 / dollar when?

The Japanese authorities are finally fed up with the weak yen and have intervened to stem a sharp decline against the dollar.

But will you succeed? The runaway dollar is up more than 20% against the yen this year, and some suspect it has left much in the tank. But with US interest rates rising, Japanese interest rates remain stuck at below 0% and are unlikely to budge.

So the case for a strong dollar is still there. Japan, along with its neighbors China and Korea, which are resisting the dollar, may find themselves fighting the fundamentals, the market and the Federal Reserve.

Traders in Seoul suspect that the authorities have already sold dollars, but the won is falling. Likewise, it hit new lows despite the central bank slipping across the trading range. Friday’s Chinese PMI readings, if disappointing, could add to the bear’s case.

Japan’s History of Supporting the Yen https://graphics.reuters.com/JAPAN-MARKETS/YEN-INTERVENTION/zgpomoolbpd/chart.png

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2 / “NOT A BLUFF”

Russian President Vladimir Putin’s military mobilization order, threats to use nuclear weapons and pressure to annex swathes of Ukrainian territory mark a new phase in the seven-month-old conflict.

The ads – which coincided with the year’s most prominent diplomatic event, the United Nations General Assembly – were universally condemned and sparked new protests in Russia, as raft-aged Russians headed abroad to escape Moscow’s biggest recruitment drive since World War II.

The latest escalation reverberated across the markets: Oil prices rose sharply, raising the specter of more pain on Europe’s energy front. Meanwhile, EU foreign ministers are preparing for another package of sanctions – their eighth – which could be formalized in mid-October.

Maps: Ukraine’s rapid counterattack https://graphics.reuters.com/UKRAINE-CRISIS/lbvgnkwerpq/ukrainianCounteroffensive.jpg

3/ Red Hot

A “quick” estimate of Eurozone consumer price data for September was released on Friday and inflation should appear at a new record high above 9%.

Investors have already boosted their expectations for another 75 basis points, and the European Central Bank raised interest rates in October, so the data should not change interest rate expectations in the near term.

However, any signs of widening underlying price pressures, could raise expectations as to where interest rates end up in the block. The European Central Bank is increasingly hawkish in its rhetoric and some ECB watchers say a 100bp rate hike cannot be ruled out in the coming months. In fact, that’s what Sweden’s Riksbank did, as did the Bank of Canada in July.

European Central Bank ramps up fight against inflation https://graphics.reuters.com/GLOBAL-MARKETS/klpykaarbpg/chart.png

4 / Test times

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Can the American consumer defy severe inflation and rising borrowing costs? Tuesday’s gauge of consumer confidence will indicate how long this mainstay of the economy will hold.

Last month, the Conference Board’s general consumer confidence index rebounded to 103.2, ending three consecutive monthly declines. A Reuters poll indicates that this month’s index is expected to come in at 104.

In one positive sign, data earlier this month showed that US retail sales unexpectedly rebounded in August as Americans ramped up their car purchases and dined more thanks to lower gasoline prices.

But with stock markets faltering and bond yields rising, we have yet to see whether consumers are optimistic – especially given the Fed’s intention to cut inflation even at the cost of a sharp slowdown in growth.

Test times for US consumers https://graphics.reuters.com/GLOBAL-MARKETS/byprjggwkpe/chart.png

5/ No drama here?

When Italy last went to the polls in 2018, markets were shaken by anti-euro rhetoric from populist parties. Fast forward and there is little visible pressure in the markets as it looks like the right-wing bloc led by Georgia Meloni will gain a majority in both houses of Parliament in Sunday’s vote.

Her Party Brothers of Italy traces its roots back to the post-fascist movement. But Meloni, the candidate to succeed Mario Draghi and become Italy’s first female prime minister, has adopted an EU-friendly face – reassuring investors.

Italy’s 10-year bond yield gap has widened compared to Germany’s from post-pandemic lows but is far from levels seen in 2018. However, the size of Meloni’s grip on Parliament will be closely watched. Investors may welcome a solid majority of less than the two-thirds needed to change the constitution, which could cause instability. The way the new government deals with the energy crisis pushing debt-laden Italy into recession will also be subject to scrutiny.

READ ALSO :   Germany nationalizes Uniper as energy crisis with Russia deepens

Beware the gap https://graphics.reuters.com/ITALY-POLITICS/zdpxommemvx/chart.png

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