LONDON, Oct 5 (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/HOME SWEET HOME IN AMERICA U.S. bond yields have jumped in the wake of stunningly strong economic data and hints from Federal Reserve officials that interest rates could rise for a fourth time this year in December.
That rate-hike cycle may be about to take another bite into the already softening U.S. housing market, as rising mortgage interest rates weaken home affordability. Mortgage application volumes are lower on a year-over-year basis and refinancing activity continues to decline -- fewer borrowers can benefit, given today's higher interest rates.
So next week's data by the Mortgage Bankers Association on home loan applications will be closely scrutinised, after 10-year benchmark borrowing costs leapt to their highest since May 2011. If 10-year Treasury yields stay near their seven-year peaks, borrowing costs on U.S. 30-year mortgages would increase 10 to 15 basis points by the upcoming week, Freddie Mac's chief economist Sam Khater estimates.
- U.S. Treasury yields hit decade high; Fed rate hikes seen on track - U.S. 30-year mortgage rates edge down - Freddie Mac
2/MIND THE GAP The divergence between depressed European stocks and their buoyant American counterparts seems to be here to stay.
While some investors hope that a strong third-quarter earnings season on the old continent might revive a stock market stuck in negative territory, there is in fact little chance Europe will play catch-up.
Third-quarter earnings for the pan-European STOXX 600 are expected to increase 13.9 percent from the third quarter of 2017, according to data from Refinitiv I/B/E/S. Sounds like a good quarter, right? But look at what is expected of the S&P500 -- 21.5 percent earnings growth.
Then contrast Europe's sluggish growth with the U.S. economy, which is not just firing on all cylinders but appears on the verge of overheating. German retail and manufacturing data shows Europe's biggest economy is likely to have lost steam over the summer. The U.S. manufacturing PMI meanwhile has surged to its highest since May.
Difficult, therefore, to imagine how Europe could possibly catch up on the S&P's 16 percentage-point lead. - European, Asian factory growth sputters on weakening exports - European equities: Cheap isn't beautiful - U.S. still in the lead as divergence grows
3/NIKKEI GAINS NUMBERED? Japanese stocks recently scaled 27-year highs as foreigners turned buyers of Tokyo-listed blue-chips. Improving growth, tentative wage inflation and "Abenomics" have all helped. But the rally's main driver has been yen weakness.
As U.S. yields rose gradually to 3 percent while Japan seemed committed to its yield control policy, the yen seemed on track to fall toward 115 per dollar -- a level last seen in early 2017 -- and Japanese exporters looked a hot purchase. Now though, the sell-off in U.S. Treasuries could end the Nikkei rally.
Aside from surging U.S. yields, temperatures in the U.S.-China trade war are climbing further and when Chinese markets open on Monday after a week long-holiday, the yuan could play catch-up with other emerging currencies which are nursing heavy losses against the dollar.
If all that conspires to send the yen higher, the Nikkei -- already in some discomfort -- could end up being crushed.
- Foreigners bought Japan stocks for third straight week Sept 24-28 – - BOJ tolerates yield rise, may trim super-long bond buying further – 4/QUO VADIS, ITALY? Anti-EU and anti-euro rhetoric is rife these days in Italian politics, which is keeping investors' eyes trained on just how far Italy's stance can diverge from fellow EU members and what implications that would have for the single currency.
With the bloc's third-largest economy due to present its budget to Brussels on Oct. 15, concerns over Italy's spending plans and what they mean for its position within the EU should dominate bond markets next week.
"Quitaly" fears reared their head briefly last week, sending the euro and Italian bonds lower. While it's calmed down on that front, combative comments from the government haven't stopped. Deputy Prime Minister Matteo Salvini is leading the charge, accusing top European Commissioners on Friday of wrecking Europe.
He said his government aimed "to change this Europe from the inside", however, implying there is no appetite yet to exit the bloc. - Italy's Salvini attacks Juncker, hopes for change in 2019 - "Quitaly" gauges flicker but don't flash as Italy heads for budget clash - Italy's Di Maio says he will back Italian people over markets
5/BRAZIL'S DIVISIVE ELECTION Brazil is holding its most divisive election in decades and far-right presidential candidate Jair Bolsonaro looks set to take a commanding first-round lead. But he may still be short of votes to win the election outright; polls show him deadlocked with Fernando Haddad of the leftist Workers Party.
That makes a runoff vote on Oct. 28 likely.
The election in Latin America's biggest economy comes at a testing time for emerging markets. A toxic cocktail of a strong dollar, rising borrowing costs and soaring oil prices has hit emerging currencies, ramped up inflation pressures and forced countries into tightening policy at a time of slowing economic growth.
Brazilian markets have risen in recent days on hopes Bolsanaro, if he wins, will promote an orthodox economic policy. But whoever wins Brazil's presidential race will inherit a fiscal straitjacket and an economy that only recently emerged from its deepest recession in decades. What's more, while reform is desperately needed, the new president is unlikely to have a governing coalition in Congress that could enable these to be passed.
- Poll shows Bolsonaro in lead before Brazil's Sunday presidential vote - ANALYSIS-Brazil's next president to struggle for base in Congress - GRAPHIC: Candidates, polls, issues: tmsnrt.rs/2Ixe0NI
Reporting by Jennifer Ablan in New York, Vidya Ranganathan in Singapore; Julien Ponthus, Virginia Furness and Karin Strohecker in London; Compiled by Sujata Rao; Editing by Catherine Evans