That may not be any clearer for weeks. Shorter-term, investors will focus on this week’s economic updates in the US. How markets trade later in the week will be dependant on whether these show that last week’s numbers were a one-off or the start of a deteriorating trend in US growth.
The price of oil is trading weaker this morning, also as a short-term reaction to the events in Japan. One month Brent last marked at $111.88 p/bbl, down almost $2 p/bbl, and WTI is back below $100 p/bbl at $99.52 p/bbl. But, while the short-term driver will be the newsflow in Japan and the US economic data, the instability in the Mid East will remain the key driver. News of protests in Saudi’s oil producing eastern province on Friday will keep traders nervous and will provide support for the oil price.
The surprise agreement at the EU leader’s summit on Friday, i.e. where a deal was reached over how to use the 440 billion euro fund to ensure stability in the region, will push the euro higher at the start of this week. The $1.40 dollar-euro level will again be tested later today. Especially as the ECB has made it clear that it will almost certainly raise its benchmark interest rate next month while the US Fed will continue to delay until later this year. The Fed will hold its monthly interest rate meeting, and will also announce the decision, tomorrow. The euro is trading stronger against the dollar in Asia this morning at $1.3924.
The price of gold is edging higher this morning and last marked at $1,422.4 per ounce, up 0.1%. Most industrial metal prices are trading lower. Copper is off 1.4%.
Investors are more likely to retain a defensive bias early this week. Defensive names in Russia should include the mobiles (MTS, Vimpelcom and Sistema – see below), the house builders (LSR and PIK), some retailers (albeit inflation control is a concern), OGK-4 and OGK-5 amongst the Gencos and the gold sector. The gold sectorshares have been amongst the worst performing year to date and we should see some pick up in the gold price over the early part of the week as investors play it safe. Petropavlovsk is our top pick in the sector with over 30% upside to target price.
See list of Stocks to Watch This Week below
The weekly fund flows report from EPFR Global showed that emerging market funds, in aggregate, reported a small inflow of $19 mln last week, ending six straight weeks of outflows totaling almost $23 bln. However, the uncertainty over the effects of the Japanese disaster and week economic data in the US and China is very likely to result in a resumption of outflows this week.
Russia continues to attract very strong inflows but the proportion coming via ETFs is again rising and that adds considerable future risk. Last week Russia dedicated country funds reported inflows of $486 mln, up from the $139 mln of the week earlier and the fifteenth straight week of inflows. Also, because the previously significant redemptions of the regional and thematic funds, in which Russia has a % share, almost ended this week, portfolio managers ended with a net $434 mln to invest. In most previous weeks the positive inflows to Russia dedicated funds was almost balanced with the share of redemptions from the bigger EM funds. Of the $486 mln received last week, $414 mln came via ETFs. That is an 85% share and is sharply up from the average of just over 50% in February. ETF investors are using Russia as a proxy for the rising price of oil and may quickly reverse that “bet” if oil falls or global growth uncertainty increases.
The ruble fell with general risk aversion towards emerging markets in the latter half of last week. While the Canadian currency hit new highs against the dollar because of the high oil price, the ruble fell as a contagion from the weakness in Asian currencies. The fact that Russia actually reported capital outflows in January, i.e. despite the rising oil revenues and appreciating ruble, also shows how cautious both Russians and currency traders are about Russia’s economic prospects in 2011. Last week the ruble fell 1.7% against the dollar to end Friday’s MICEX session at 28.6815. One week earlier the ruble seemed ready to break below the 28.0 level. Against the euro the ruble lost 0.3% to end Friday at 39.585. Year to date, the ruble has strengthened 6.0% against the dollar and 2.3% against the euro
The first of the important US economic indicators will be Tuesday’s Empire State manufacturing report, followed by the monthly housing update on Wednesday and a raft of updates on Thursday. That list will include the monthly CPI update, the weekly jobless claims report, the Philadelphia Fed survey and the Leading Indicator for February. By the middle of Thursday investors will have a much clearer picture of the strength of the economic revival and that will determine where all equity markets trade over the medium term. But, just to keep an element of uncertainty through and otherwise quiet Friday, that is the quarterly quadruple witching in the US.
The first of Russia’s February macro indicators, the Industrial Production growth number, will be published on Wednesday or Thursday. After a disappointing start to the year, investors are hoping to see a stronger pickup in February. The consensus is for a year on year growth of 7.5%, up from 6.7% at the end of January.
The much higher than expected average price of oil will of course soon lead to forecast upgrades. The Finance Ministry based its 2011 plan on $75 p/bbl average Urals and, at that price, assumed a budget deficit of 3.6%. Our forecast of 4.6% GDP growth and a deficit of 1.5% is based on an average Urals price of $83 p/bbl. Last Friday’s closing price was $109.95 p/bbl and the year to date average is now at $99.9 p/bbl. At that price, over a full year, the budget balances. If the average price were to stay at $110 p/bbl then the budget would have a surplus of approximately $20 bln.
Russia’s markets were not much more than passengers in last week’s global market turbulence. The weaker ruble meant that the dollar indices were worse affected than MICEX. The RTS lost 1.0% on Friday to end the holiday shortened week down 4.7%. The IOB Index of London GDRs fell 4.5% and MICEX lost 3.4%. That compares with a loss of 2.6% for the MSCI EM Index. Year to date, the stronger ruble has added more support for the RTS and IOB indices and they are up 9.0% and 10.4% respectively. The MICEX index is up only 1.9% in the period, albeit that is still better than the 3.7% loss for the MSCI EM Index. The oil producers and the metals & mining sector shares were the worst performing last week as a result of the increased uncertainty over the strength of the global economic recovery.
The tables showing last week’s best and worst ADR/GDR moves and the year to date moves are at the end of this note.
There was almost nowhere to hide in global markets last week as investors pulled back from equity markets after weaker than expected economic indicators in the US and China. Over the week, the MSCI All-World Index fell 2.5% and that cut the year to date rally back to 2.7%.
The US markets fell after the Labour Dept reported a worse than expected jobless claims report for last week and a separate report showed a gain in the trade deficit as more expensive oil imports more than counter-balance the growth in exports. But, while confidence in the future direction of the economy was weakened, investors are still generally hopeful and not yet ready to end this long bull market rally that started in March 2009. Late buying helped the Dow to end just above the technically important 12,000 level (at 12,044.4) and the S&P to end above 1,300 (at 1,304.3). Over the week, the S&P lost 1.3% and that cut the year to date gain to 3.7%.
It was a disastrous week for most commodity prices as the fear over slowing global growth from the weak US and China indicators was compounded with Friday’s earthquake. All metal categories, except silver, fell last week, albeit gold picked up on Friday. Nickel was the worst hit metal, falling 9.9% over the five days.
The price of agriculture commodities were equally badly hit. Wheat fell 13.6% last week and is off 10% year to date. The supply situation has been improving in recent weeks. Corn fell 3% on Friday as Japan is the biggest buyer of US corn exports. That pushed the five day loss to 8.8% and cut the year to date gain to 5.6%. Sugar fell 3.4%.
Stock Watch This Week
The tables showing last week’s best and worst ADR/GDR moves and the year to date moves are at the end of this note.
Defensive at the start of the week. Investors are more likely to retain a defensive bias early this week until the consequences of last week’s Japanese earthquake are better understood and the next series of US economic reports shows whether the recent weak data was a blip or the start of a declining trend. The more important economic data in the US will come Wednesday and Thursday and that’s when we should expect investors to take more decisive action. Defensive names in Russia should include the mobiles (MTS, Vimpelcom and Sistema – see below), the house builders (LSR and PIK), some retailers (albeit inflation control is a concern), OGK-4 andOGK-5 amongst the Gencos and the gold sector. The gold sector shares have been amongst the worst performing year to date and we should see some pick up in the gold price over the early part of the week as investors play it safe. Petropavlovsk is our top pick in the sector with over 30% upside to target price.
Sistema Strong defensive theme, via its MTS holding, with good oil sector exposure via Bashneft. MTS is more defensive just now (with around 65% upside to Target Price) but Sistema also offers good upside of over 30%.
Vimpelcom Vimpelcom will hold its EGM to approve the Swaris deal on Thursday. That may draw a line under the dispute with Telenor and allow the market to again focus on the valuation. We calculate about 60% upside to Target Price.
TNK-BP The dispute between BP and AAR escalated over the weekend and will lead to further share price weakness in TNK-BP shares this morning. But, as we have seen many times in the past, disputes like this in strategic sectors get resolved relatively quickly. It is usually right to buy into any weakness.
Norilsk Nickel Now that the EGM is over, there will be a lot of speculation about what happens next in the conflict between the major shareholders. The head of Interros said last week that he may consider another share buyback as the $335 level ($33.5 p/gdr). The price closed at $238 p/s ($23.5 p/gdr) on Friday. Short-term, all stocks in the metals and mining sector will suffer from the uncertainty caused by the Japanese earthquake and the bad economic numbers from the US and China. But the potential for more buybacks at that level should soon provide some relative downside protection after last week’s 7.3% fall.
Sberbank Sberbank will publish February (RAS) results this week and this is expected to show continued improvement in lending and loan loss provisions. Sberbank shares are up less than 1.0% year to date (i.e. versus +20% for most of the oils) but is one the main beneficiaries of the higher oil revenues. We calculate almost 50% upside to our target price.
Uralkali Uralkali was the worst performing of the big blue chip GDR/ADRs last week, falling almost 10% as metal and mining stocks around the world all fell. The next major issue for the stock will be the contract price for India exports and that is expected close to the end of the month. Globally, potash remains a strong investment theme and Uralkali is well positioned. We calculate about 30% upside to Target Price and see last week’s decline as over done.
Razgulai The price of wheat fell 13.6% last week and corn fell 8.8%. Razgulai is the only listed grain producer on the Russian stock market.
Steel names The Japanese earthquake and slower growth numbers in China and the US adds very considerable uncertainty to the steel market and to iron ore and coking coal prices. Japan is the world’s second biggest steel producer and was the largest exporter in 2010. That will be disrupted. As against that, demand is likely to slow and Japan will also have to slow imports of coking coal and iron ore.
Global Markets On A Knife Edge
Posted by Chris Weafer on Monday, 14 March 2011 14:17 | Published in Chris Weafer's Investor Notes-
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By Chris Weafer
Chief Strategist, Uralsib
Global market sentiment is on a knife-edge after Friday’s disaster in Japan and because of a series of weaker than expected economic indicators in the US and China last week. The Tokyo bourses have predictably fallen sharply today but most other regional markets are – at mid session - showing relatively small changes. Nervous indecision will likely be the main theme in most other markets today. Because of the unprecedented nature of the catastrophe in Japan – and the rapid injection of $183 billion in the economy by the Bank of Japan this morning - nobody has any idea of the longer-term implications for the regional or global economy.
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