By Chris Weafer, Chief Strategist at Troika Dialog.
Equity markets look set to extend recent gains after another positive session in the US and broadly based gains across Asia this morning. However, after such a strong run into the end of August, investors will likely adopt a more cautious approach until the important economic indicators, due today and tomorrow, are known. In particular, there will, as usual, be a lot of focus on tomorrow’s US nonfarm payroll report which will be released just before many market participants head off for the long Labor Day holiday weekend. Investors in Russia will also want to see the latest weekly fund flows report, due later this evening. The hope is that the turn around in sentiment since last Friday will also have persuaded fund investors to halt redemptions. Russia dedicated funds have reported redemptions in nine of the past ten weeks, losing a total of $2 bln. Of that total, $1.4 bln was withdrawn over the past four weeks and that has acted as a considerable depressant on sentiment and prices.
The price of gold last traded at $1,828.4 per ounce, down 0.2% after rising 01% yesterday. Silver is also off 0.2% in Asia trade. The dollar-euro rate is currently at $1.4373. Strong earnings. While the headlines from Russia continue to be dominated by the oil & gas sectors, the real story is the very strong performance of companies in the domestic consumer and service industries that are benefiting from the improving economy and the higher oil revenues being expended through the budget. Most of the companies in this category that announced results in recent days have seen a strong share price reaction as investors wake up to the fact that global events have distracted from the solid earnings growth and cheap valuations in Russia. Amongst those that reported yesterday, internet provider Mail.ru closed 13.3% up for the session; retailer O’Key Group jumped 9.8%, and pharmaceutical company Pharmstandard rose 7.6%. The oil and gas names may take the headlines but the real growth stories are in the domestic themes.
Today. China has kicked off the monthly manufacturing surveys with a reading of 50.9 (from 50.7 last month) while a reading of 51.0 had been expected. The US number usually has an immediate reaction on Wall Street but, in the current environment, it is difficult to know whether a good number is bad or a bad number is good. If the data shows contraction, as is expected with a reading of 48.5 from 50.9 the month earlier, then investors will be more convinced that the Fed will add some additional stimulus when it meets later this month. In addition to the manufacturing indicators, Germany will release its Q2 GDP growth number and the weekly jobless claims report will be published in the US.
Corporate. The earnings season continues in Russia and the big number today will be theQ2 and 1H IFRS numbers from VTB.
The price of crude oil ignored a big increase in US oil inventories for last week and, instead, rose in line with the generally more optimistic mood in global markets. The US Dept. of Energy reported a jump of 5.28 million barrels while the market consensus was for a drop of 500,000 barrels. But, a more favourable statistic was the 2.8 million barrel drop in gasoline stocks. Traders had expected a drop of 1.05 million barrels and interpreted the bigger loss as a sign that consumer demand is picking up. One-month Brent closed 84 cents p/bbl higher at $114.88 p/bbl while WTI closed at $89.26. Prices are almost unchanged in Asian trade this morning.
Standard & Poor’s affirmed Russia’s credit rating at BBB yesterday. The agency still refuses to raise the country’s rating, from the third lowest investment rating, despite the fact that the value of Russia’s foreign exchange reserves is over $540 bln, i.e. just less than the total value of the country’s foreign private debt. Total foreign public debt is only about $46.5 bln. The ratings agency cited three reasons for not raising the current rating:
· Strong dependence on hydrocarbons and other commodities
· Political uncertainty from the ambiguous succession process
· Weak checks and balances between institutions.
Reasons one and three are valid while reason two is not. In most countries there is “ambiguity” in the process of selecting which candidates will be elected or choose to run for the elected office.
Economy: The weekly inflation report presented more good news for the government. In the week to August 29th, prices fell 0.1% (from flat the week earlier) and that brought the year to date inflation rate back to 4.8%.
Ruble: The ruble market was relatively stable yesterday. At the close of trade on MICEX the ruble was unchanged against the dollar, at 28.920, and up 2 basis points against the euro at 41.762.
Trading – Moscow: Moscow’s bourses again rose steadily throughout yesterday’s session as investors follow the improving mood and trends in global markets. At the close the RTS was up 2.4%, at 1,702.3, and MICEX added 2.1% to finish at 1,546.1. Sberbank, which released very strong numbers on Tuesday, was the best of the blue chips with a gain of 3.4% on MICEX. Some of that came from switching from VTB, which closed 1.2% lower ahead of today’s numbers. Rostelecom also attracted strong buy interest, rising 7.4% on MICEX.
Trading – GDRs: The London GDR market was even stronger with the IOB Index closing the day up 3.2%. That is because of the higher content of high-beta names in that index. Evraz led the theme with a gain of 8.6% while pipe-maker TMK, one of the laggards in August, rose 5.6%. Uralkali also followed the global materials theme with a gain of 6.7%.
Companies that reported yesterday, see intro above, also reported strong price gains. VTB was one of the few exceptions to the strongly positive trend with a loss of 0.6%.
Trading – ADRs: US equity markets extended recent gains after a better than expected factory orders update and as a continued reaction to the FOMC minutes released on Tuesday. The S&P 500 was up 0.9% when Moscow’s bourses closed but lost a little of that the session up 0.5%. Mechel rose 5.4%, MTS added 5.5%, Yandex was 3.4% better and Vimpelcom finished with a gain of 3.1%.
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