Net, net, investors in all markets have very little conviction either way and that means most will be as unlikely to buy aggressively as they will be to sell. The trend of good and bad alternating days, and weeks, in markets will likely continue through August unless some of this week’s more important economic reports are significantly better, or worse, than expected. Russia will again the high-beta theme within, rather than outside, that trend. Russia’s economic performance, corporate earnings and fiscal health is clearly improving but that makes only for a gilded cage in a still very uncertain world. As usual, the first week of each month brings the most important economic indicators and this week’s batch will be keenly awaited, and reacted to, by investors. The two most important reports will sandwich the week; all countries will publish manufacturing activity surveys on Monday and that will show how confident are companies looking forward. The US payroll report on Friday is expected to show further job losses and a small increase in the unemployment rate. China’s July Purchasing Manager’s Index fell to the lowest level for seventeen months according to data released Sunday. The index was 51.2, compared to 52.1 for June. But, economists were quick to point out that the government still expects to see GDP growth of 9.5% this year, up from 9.1% in 2009, and expect it to do whatever is necessary to ensure that target is achieved. The ECB and Bank of England are expected to leave current low interest rates unchanged when they meet on Thursday. But, investors will keenly scrutinise the words used in the post-meeting press conference. The dollar fell by over 6% against the euro in July because investors believe that the US is less likely to raise rates, even in early 2011, than is the ECB. If the ECB confirms that view then we should see continued support for the euro relative to the dollar. If not, then the drift back to the dollar may start and, with it, less support for oil and for Russia. That said, dollar weakness is expected to continue this week. Investors are now convinced that the US Fed will keep the low rate well into 2011 because of the fragile state of the economic recovery. This week’s data will be very critical in determining whether the dollar-euro rate now heads towards $1.35 or back towards $1.25. That will be equally critical for the price of commodities, for risk appetites in developing market currencies and for the Russia investment case. The dollar-euro rate closed Friday at $1.305, a loss of 6.2% of the month and the first monthly gain for the euro since last November. The ruble gained 3.3% against the dollar in July and is now flat, in nominal terms, year to date. The rate at Friday’s close was 30.246. The main reason for the gain is because of dollar weakness and a better investor risk appetite for developing market currencies. The higher price of oil and positive economic growth indicators in Russia also help support the currency. But, against the euro, the ruble lost 0.6% last week to close at 30.421. The weaker ruble-euro rate will add to inflation pressures in Russia, especially with imports also rising strongly. That may also put pressure on the current account later this year. US equities ended Friday, and the week, almost flat. The S&P Composite did manage to stay above the 1,100 level. It added 6.9% though July and that followed a 13% decline in May and June. Russia’s bourses fell by 1.5% on Friday as a reaction to the opening weakness in the US. That weakness was later reversed but only after Moscow had closed. For the week, the RTS gained 2.1% and MICEX closed 1.2% better. The relative strength of the ruble against the dollar helped the RTS Index to the better performance. That was a better performance to the MSCI EM Index, which closed the five days with a gain of 1.0%. The government will upgrade its macro forecast for this year according to the Economy Ministry. The preliminary indication is that 2nd Qtr GDP grew by 5.4% the Deputy Minister said early last week. The Presidium of government approved the draft outline of the 2011-13 budget last week albeit the final budget is not expected to be passed into law until the autumn. That is much later than is usual with the delay largely due to the Finance Ministry’s proposals for higher taxes across the extractive industries and the proposals to raise $30 bln from selling state assets and equity in state companies. The budget is still forecasting a deficit for 2011-’13. We believe that to be too conservative give the oil price assumptions used. We see this as part of the Finance Ministry’s deliberate effort to force government spending discipline and to push through its tax reform proposals. If the price of oil stays at current levels, the actual outcome will clearly be much better. Amongst the reports that will be published in Russia this week, the most important will be the July inflation update and the financials reserves data. The current drought conditions threaten to push prices higher and the euro rally makes the cost of imported goods more expensive. But, given how important is inflation control, the government is expected to use whatever mechanisms are available to it – directly and indirectly - to keep prices as low as possible this year and next. Not good for regulated industries or others that are important components in the economy. The improvement in the economy and in the country’s fiscal situation has led to optimism that the rating agencies may soon upgrade Russia’s credit risk. Such a move is clearly well overdue. Russia’s five-year credit-default swaps dropped 32 bps, the biggest monthly decline since March, to 1.64% by Friday’s close. The premium yield over US Treasuries fell 52 bps, the biggest monthly decline since December, to 2.31%. That is much better than the emerging market average of 2.77% premium. Ukraine’s credit ratings were raised by Standard & Poor’s after the International Monetary Fund approved a new $15.2 billion loan program for the country. Ratings were also removed from CreditWatch. The price of oil has remained surprisingly stubborn close to $80 p/bbl. It is surprising because the current supply to demand ratio is more indicative of a price below $70 p/bbl than one threatening to break through $80 p/bbl. Last week’s US inventory report was much worse than expected. Which way it actually breaks will also likely be determined by the direction of the US dollar and this week’s key economic indicators. The price of WTI for September settlement closed Friday at $78.95 p/bbl, the equivalent Brent contract ended at $78.18 p/bbl and Urals last marked at $76.78 p/bbl. The weekly funds flow report from EPFR Global showed that investors responded to the EU bank stress tests and gains in global equity markets by almost doubling the amount of new money they placed into EM funds. The total was $3.2 bln for the week to last Wednesday and that brings the total so far in 2010 to $25.9 bln. Investors are mostly sticking to the relative safety of EM Balanced funds, $18.3 bln YTD, and to China funds. Russia funds, the best performing fund category in the 1st half of the year but totally out of favour for the preceding four weeks, reported relatively strong $103 mln of inflows last week. That does not put Russia back into its previous favoured positioned but at least it is no longer the laggard amongst the major EM funds. Turkey funds, which were almost ignored through the 1st half of 2010, have been attracting a steady flow of new money since last June. Emerging Europe funds, however, are still losing funds as investors still fear bank and solvency problems in the region. Commodities gained strongly last week as traders took a more optimistic view of recent global macro indicators than did their equity market counterparts. The weaker US dollar also provided good support. Industrial metals were particularly strong on demand hopes from both the US and China. Aluminium was the best performing, rising 7.0%, while most others gained 4.0%. Palladium and nickel are the best performing metals in 2010, rising 19.9% and 14.3% respectively. Gold has fallen 6.5% from its peak in late June as investors avoid haven assets in favour or higher risk, and better performing, assets. Some buyers did return late last week, but the price ended off 0.3% for the five days at $1,183.9 per ounce. The main action was in the agriculture sector where prices were boosted as reports of the drought in Russia. Kazakhstan and Ukraine worsened. Russia is now expected to cut its wheat exports to less than 10 million tons in 2010-11 from double that last year. The price of wheat gained 11% last week and is up 33% in July. Corn added 6% and sugar added 7% last week.

This week

Investors will scrutinise indicators of current activity very closely. The first week of each month is the most important for current economic indicators and this week’s batch will be even more eagerly awaited, and reacted to, than usual. Investors are still undecided as to whether the global economy is facing into a double-dip, a prolonged period of slow growth or whether growth will again pick up to the faster pace recorded earlier in the year. The first of the week’s important indicators will be Monday’s manufacturing indictors, which will be published in Asia, Russia, Europe and in the US. Economists in Europe expect an unchanged indicator from the previous month while, for the US, the consensus is that there will be a slight decline in the growth indicator (from 56.2 to 54.5). Anything worse and equity markets everywhere will start the new month with a big drop. US payroll report will again be key. The other important indicator is Friday’s US employment report. The consensus is for a loss of 73,000 jobs. That is better than last month’s loss of 120,000 jobs but that was because of the expected loss of temporary census jobs. The unemployment rate may rise to 9.6%, from 9.5%, according to Bloomberg consensus data as more people register for work. In between Monday’s manufacturing and Friday’s payroll reports, there will be a whole raft of important indicators in Asia, Europe and the US. ECB interest rate policy affects Russia view. The first week of each month is also when the Bank of England and the ECB decide on interest rate policy. Neither is expected to change the current low rate but, as usual, investors will keenly scrutinise the words used in the post meeting press conference. The dollar fell by over 6% against the euro in July because investors believe that the US is less likely to raise rates, even in early 2011, than is the ECB. If the ECB confirms that view then we should see continued support for the euro relative to the dollar. If not, then the drift back to the dollar may start and, with it, less support for oil and for Russia.