By Chris Weafer, Chief Strategist at ING in Moscow.
There continues to be only one key event in global markets and that is the US debt deal. As this note goes out, there is optimism that a deal will be reached either this evening or tomorrow. That should allow for a modest relief rally in global markets, albeit the long drawn out process has severely undermined confidence and exposed more serious issues in the US.
Along with continuing threats in the eurozone sovereign debt market, investors have little reason to be cheerful and most will be fearful that the same concerns will dominate market sentiment in the autumn-winter period. The relief rally, therefore, will be more of a “the patient didn’t die but remains in critical care”
Regardless of the debt deal, there is still a high risk that S&P, and other rating agencies, will cut the US credit rating from AAA status. S&P placed the rating on Creditwatch on July 14th and said that apart from a debt deal it needs to see a “credible solution to the rising U.S. government debt burden”. A rating cut will not come as a surprise to the markets but it will act as a restraint against any early optimism that recent problems can be left behind when the new “investment season” starts after US Labor Day in early September.
Russian equities and the ruble performed relatively better than either developed or developing market peers during the last month of crisis (see below for numbers). It is understandable that investors avoided all but so-called haven assets while the threat of mayhem hung over global financial markets. But now that this (hopefully) has been avoided, investors will start to look more critically at where to invest through to the end of the year. Fiscally, Russia has benefited from higher oil revenues and the economy is making steady progress. Asset valuations are cheap and the perception of political risk is clearly overdone. Russian equities, and the ruble, are well placed to attract more investor cash once this period of uncertainty has eased and investors get time to reflect on relative opportunities and risks.
The price of Brent has been well supported between $115 and $120 p/bbl and, at least over the short-term – and assuming that US legislators beat the deadline – that price support should hold. The main threat of Brent tracking back below $115 p/bbl is that the economic indicators, due over the first week of the month, disappoint and lead to a lowering of global growth, i.e. oil demand, forecasts. If Brent does threaten a move back above the $120 p/bbl level it would be because of further weakening of the US dollar, i.e. if the ratings downgrade threat increases, and/or the threat of an escalation of violence in the Mid East as Ramadan starts. News of increased violence in Syria, the assassination of the Libyan rebel group’s military leader and spreading unrest in Israel should all help support the oil price this week.
The outlook for oil sustains a generally a positive backdrop for the Russia investment case in the autumn.
The price of one month Brent closed Friday at $116.74 p/bbl and WTI was at $95.7 p/bbl. Both are down from Friday’s close of $118.67 p/bbl (Brent) and $99.87 p/bbl (WTI). The price of oil has essentially traded in a very tight band through July and that is unlikely to change much in August unless the US defaults. That of course would be a game-changer for most assets.
The ruble traded 10 basis points better than the dollar last week to finish Friday’s MICEX session at 27.7247. Again the euro, the ruble gained 0.8% to end at 39.913. Year to date, the ruble is up just over 9% against the US currency and just over 2% against the euro.
The dollar-euro rate finished the week at $1.4360, a gain of 0.3% for the euro. Both currencies are, however, firmly in the sick-ward over debt concerns and that has favoured the safer currencies of, e.. the yen and the Swiss Franc.
United Russia has postponed its annual congress from early September to the weekend of September 23-24. Prime Minister Putin will address the congress and will declare whether he will again lead the party into the election. One obvious reason for the postponement is because United Russia’s popularity has slipped significantly in national opinion polls since the start of the year.
A survey carried out by Levada showed that a majority of people – 75% – support the reinstatement of the “against all” option on ballot papers. The survey also showed an increase in cynicism amongst the population. 59% of those polled said that they see the Duma elections as no more than “a struggle between bureaucratic clans for access to the state budget”.
The head of Russia’s delegation to the WTO General Council meeting, held in Geneva last week, said that the plan is to have all remaining issues relating to Russia’s entry into the organization wrapped up by the next meeting in mid December. Discussions between Russia and Georgia, which can block a unanimous vote to admit Russia, are continuing with Switzerland as mediator. Prime Minister Putin is reported to have discussed some of the outstanding issued with the EU Commission President on Thursday, i.e. a measure of just how eager the government is to wrap up the seventeen year dialogue before the next government is put in place.
Moscow’s bourses, as was the case for most market, were little more than spectators to the Washington show last week. But, because of Russia’s strengthening fiscal position, steady economic recovery and relatively cheap valuations, the Russia equity indices fared better than the developed and peer developing markets. The RTS closed down 0.6%, at 1,965, and MICEX lost 1.4% to close Friday at 1,705.2. The FTSE IOB Index of Russian GDRs lost 0.9%. That compares with a loss of 1.3% for the MSCI EM Index, a loss of 2.4% for Brazil’s Bovespa, a loss of 2.5% for the Shanghai Composite and a 2.8% drop in India’s Sensex Index. Turkey was one of the few markets to post a positive gain with a rise of 4.25.
The RTS and IOB GDR Indices are up 11.0% and 10.4% respectively year to date while MICEX is up a modest 1.0%. The strength of the ruble relative to the dollar this year (+9.2%) makes up most of the difference. Those gains compared with a loss of 1.2% for the MSCI EM index. Brazil and India indices are amongst the worst performers, losing 15.1% and 10.8% respectively in local currency terms.
Yandex closed the down only 1.9% and that was despite a near 10% fall over the last two days because of weaker than expected numbers. But the stock was well up ahead of those numbers in Monday & Tuesday trading. The stock is the best performing Russian name in 2011, up almost 40% from the IPO listing price. Uralkali and Novatek are nest best with YTD gains of 34% and 30% respectively. retailer O’Key Group and gold producer Petropavlovsk are at the bottom with respective losses of 34% and 30%.
Global market sentiment was completely dominated by the debt talks in the US last week. The FTSE All-World Index closed down 2.9% for the five days, led by US markets. The Wall Street indices fell for the five straight days with a worse than expected GDP report on Friday doing nothing to calm nervousness. The S&P closed Friday off 0.7%, to bring the loss for the week to 3.9%. Year to date the S&P is now up only 2.8%.
The total volume of money invested into emerging market (EM) funds last week was relatively low, even for mid summer, as investors prudently remained on the sidelines while waiting for a resolution of the US debt talks. But, although low, the net flow remained positive as a majority of investors expect a deal ahead of the default deadline. Russia funds reported a small ($13 mln) outflow for the week bring the net loss for July to a modest $158 mln. Year to date, Russia funds are still well ahead of other big EM country funds with a net inflow of approx $3.2 bln while others are still showing net redemptions.
Industrial metals fared well last week. Copper had an extra boost with news that the strike at the Escondida mine in Chile, the world’s biggest producing mine, looks like extending well into this week as unions rejected the latest offer. The price of copper rose 1.6% for the five days and should move higher this week as the strike has now spread to another of Chile’s big mines in Collahuasi.
The price of gold was the clear winner from the US government delay in reaching a debt deal and the continuing cloud of uncertainty hanging over eurozone debt. The price of gold gained 1.9% for the week to end Friday at a record high of $1,631.2 per ounce. Silver ended flat for the week, albeit the price is up almost 30% year to date while gold is almost 15% higher. Through the month of July, gold rose 10% and silver gained 19%.
The agriculture market was again very volatile as the end of the growing season approaches and various speculations and weather patterns have an immediate impact on prices. Having been very strong in recent weeks, the price of grains rose more modestly last week with corn up 2.5% and wheat up 0.5%. Year to date, corn is off 10% while wheat is up almost 10%. The price of sugar fell 4.7% for the five days and is down 7% YTD. In July, Corn jumped 15.4%, wheat rallied 16.9% and sugar is up 9.4%.
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