LONDON, May 25 (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.
Italy's new government will be taking shape next week. The eurosceptic, anti-austerity coalition comprising the anti-establishment 5-Star and far-right League has already been described as on a "suicide mission" by a euro zone policymaker. For investors though, the post that matters is that of economy minister and the favoured candidate for The League is Paolo Savona, a former banker who has called Italy's euro membership a "historic error."
President Sergio Mattarella, who has veto power over ministerial appointments, has let it be known that he does not want Savona -- setting up a potential clash even before the government gets off the ground.
This could be make-or-break time for Italy's bond markets, where the yield premium paid on its 10-year debt over euro zone benchmark German Bunds has widened to 200 bps. Further rises in Italian yields risk spilling into other weaker euro zone states too. A no-confidence motion mooted against Spanish Prime Minister Mariano Rajoy isn't helping in that respect either.
One bit of support may come from Thursday's May flash euro zone inflation data. If that remains subdued it will cast more doubt over the ECB's plans to end its bond buying programme by year-end. That would mean bond investors could count on that powerful central bank backstop remaining in place for some time.
Italy's bond yield gap with Germany hits 200 bps as sentiment sours Italy parties push president to name eurosceptic economy minister ANALYSIS-New Italian government has little chance of staying the course Euro partners warn new Italy government against "suicide mission"
Bond bears have had a pretty good run of it recently, but not so in the past week. The fall in yields, most notably the 10-year Treasury yield's slide back below 3 percent, chips away at the narrative that growth and inflation are strong enough to warrant much tighter monetary policy across the developed world.
The fall in benchmark 10-year yields this past week was remarkable: UK gilts -13 bps, the biggest weekly fall in a year; U.S. Treasuries -10 bps, the biggest fall in over a year; German Bunds -14 bps, the biggest fall in over two years.
Analysts at HSBC are turning more bullish on government bonds, especially gilts, given their view that UK inflation is headed back below 2 pct. Bank of England governor Mark Carney this week warned a hard Brexit might prevent the Bank from raising rates, while the latest Fed minutes were surprisingly dovish. Political and trade concerns are rising again too, and there's still a near-record short spec position in U.S. bonds.
Could the bears be in retreat for a bit longer yet? INSTANT VIEW 3-Minutes from Federal Reserve's May FOMC meeting U.S. Treasury yields fall on North Korea concerns Italy's bond yield gap with Germany hits 200 bps as sentiment sours
Asia's worst performing currency, the rupee, is once again staring at ghosts of past emerging market tantrums and, despite all the talk of the Indian economy being in better shape than in 2013, ugly twin-deficit heads are rearing up again.
The rupee is down more than 6 percent against the dollar this year, hit by the same issues as emerging market peers Argentina and Turkey -- jitters around Fed policy tightening and $80 oil. Indian borrowing costs are on the rise and portfolio investors are moving out of stocks and bonds.
While the Reserve Bank of India might be loath to use interest rate rises as its main currency defence mechanism, as it did during 2013, coming weeks will show how far it can go with spending precious dollar reserves to stop the rupee heading for 70 per dollar.
The risk is that the balance of payments might go into deficit, should capital flows turn negative at the same time as Prime Minister Narendra Modi's government throws fiscal caution to the winds before elections next year. After a surprise defeat in a regional election this month, Modi is under pressure to prevent higher fuel prices from hitting voters' pockets. India's Modi faces revived opposition after setback in southern state – Suspected Indian central bank interventions stems rupee's fall – Slower growth, higher prices or more subsidies: Asia's oil-related trilemma –
4/ LONG-TERM PROBLEM
The next snapshot of the U.S. jobs market due next Friday is likely to show more solid hiring in May. Unemployment is seen at 3.9 percent, matching the near 18-year low hit in April. But those numbers gloss over some darker patches in the labour market.
Parts of it are still struggling to recover from the Great Recession, which ended nine years ago and among the most striking is the plight of the long-term unemployed.
The number of Americans out of work for half a year or longer is around the lowest in 11 years, but as a proportion of the unemployed it is unusually large. In April, one in five unemployed Americans had lost their job at least half a year earlier. While that is down from a record 45 percent eight years ago, it is well above the long-term average and tops even the highest percentages seen in several past recessions. U.S. job growth picks up, unemployment rate falls to 3.9 percent INSTANT VIEW 4 -U.S. April payrolls up less than expected
Britain's long-known difficulties in establishing political consensus for its approach to Brexit look to be coming to a head again just as the economy and sterling are showing strains.
Its politicians may be having their half-term break from parliament, but behind the scenes it will be all hands on deck as they try and work out how long they want to stay in the EU's customs union.
The nagging issue of trying to avoid checkpoints on the Northern Ireland border with euro zone member Ireland still looks close to intractable, and matters could come to a head with an EU withdrawal bill debate due in mid-June, potentially leading to another messy election.
Add to that a flurry of UK data including forward-looking PMI's that give one of the best health checks of the economy and it might be frazzled sterling traders rather than the Westminster set that need the time off. Sterling stuck near 2018 low on Brexit uncertainty, stagnant growth EU dismisses latest British ideas on Ireland after Brexit UK set for parliamentary showdown on Brexit law "in weeks"
Reporting by Dan Burns in New York; Vidya Ranganathan in Singapore; Dhara Ranasinghe, Jamie McGeever, Sujata Rao and Marc Jones in London; editing by John Stonestreet