By Chris Weafer
Chief Strategist, Urasib
The dominant sentiment in all global markets is one of nervousness. Nervousness that Europe’s debt problems may worsen and threaten the pace of economic recovery in the region; nervousness that China’s efforts to contain inflation growth may slow demand for imported materials; nervousness that events across the Middle East may yet worsen and drive the price of oil to a level that also damages the growth outlook. That sentiment is unlikely to change much this week and, perhaps not for several weeks. For investors that means avoiding risk assets and stocking to defensive themes until some of these issues are resolved or stabilized (see Stock Watch below).
The eurozone and the euro will hold centre stage at the start of this week and that will be a big contributory factor to where the dollar-euro rate trades. The dollar remains one of the major factors in the oil and metals market and a driver of sentiment towards risk assets generally. EU Finance Ministers are scheduled to meet early this week to decide on what action is required to resolve Greece’s debt problem. The yield on Greek debt and the CDS market all clearly show that investors are pricing in a high risk of Greek debt restructuring, albeit most expect a fresh bailout as part of that restructuring
Last week the dollar extended the previous week’s rally as investors reverted to the US currency as a haven to escape the threat of a worsening debt problem in the eurozone and the threat to growth in Asia as China introduced further measures to slow credit growth. The dollar gained 1.4% against the euro to close at $1.4118.
Gold staged a strong rally early as traders took the view that a price below $1,500 per ounce is unjustified. But the mid week strength did not hold as the dollar rally undermined the case for haven assets. Gold fell 0.9% on Friday to cut the five-day gain to 0.1% and the closing price to $1,493.6 per ounce.
Crude oil gained on Friday despite the strengthening dollar. Traders preferred to focus instead on the better than expected economic reports in Germany and the eurozone and also the reports of more violence in Syria. Over the five days, one-month Brent recovered 3.5% from the previous week’s loss to close at $113.8 p/bbl. WTI ended Friday at $99.65 p/bbl and Urals last traded at $111.1 p/bbl. That was despite a bigger climb in US crude and gasoline inventories announced by the US Energy Dept.
While traders are reluctant to push oil back to the high levels of mid April, i.e. at least not without a major threat to another oil producing/exporting nation, they are equally loathe to sell the price too far down – just in case. The dollar is still a critical factor for oil and other commodities. A longer dollar rally will put a lot of downward pressure on oil while a rally in the euro will help push Brent back towards $120 p/bbl.
The major domestic event this week will be President Medvedev’s planned speech at Skolkovo (the site of Russia’s major business school and proposed technology park) on Wednesday. The primary purpose of Wednesday’s speech is to further set out measures designed to help improve the business climate and investor perception of Russia. But it is politics that the majority in the audience will be interested in. Especially after the President’s comments about the dangers of concentrating too much power in one person for too long. The thinly veiled reference escaped nobody.
Russia will publish the preliminary 1st Qtr GDP report is expected to be published on Monday or Tuesday. The consensus is for YoY growth of 4.2%. That compares with YoY growth of 3.5% in the 1st Qtr of last year. On Wednesday or Thursday the April Industrial production growth number will be released. Consensus is for YoY growth of 5.4%, up from +5.3% YoY in March. Later in the week, probably Friday, the full macro report will be released. Amongst the numbers expected, the consensus is for retail sales growth of 5.1% and unemployment to have dropped to 6.7% (from 7.1% at end March).
In terms of major economic updates, the Empire State manufacturing update and house market index will be published Monday. In general, this is house market week with statistics covering new and existing house sales scheduled to be released. Those statistics are always taken as one of the important indicators of consumer activity and confidence about the future. Thursday, as always, is the big day in the US with the weekly jobless claims update, the monthly Philadelphia Fed survey and the Leading Indicator update. Friday is a rest day in terms of economic reports with nothing scheduled in the US.
Moscow’s bourses were the worst performing major indices last week as the beta effect worked in reverse to that seen in the 1st Qtr. Investors view Russia as being more at risk of a global slowdown in demand for materials if, e.g. either eurozone debt or rising global interest rates affect economic growth. Over the week the RTS lost 3.8%, to end at 1,866.3, and MICEX lost 3.4% to end at 1,623.2. The IOB GDR Index fell harder, losing 4.4%, because of its higher weighting in steel names. Moscow’s losses compared with a drop of 1.6% for the MSCI Emerging Markets Index. Year to date, the dollar denominated RTS and IOB Indices are up 5.4% and 4.2% respectively, i.e. better than the MSCI EM loss of 0.6%, but the ruble based MICEX is off 3.8%.
Note: tables showing the best and worst stocks of last week, and also year to date, are at the end of this note.
According to the weekly fund flows report from EPFR Global, investors looked past the big fall in emerging markets and commodities over the past week and added more money to funds in the asset class for a seventh straight week. Russia funds did not, however, escape the collapse in commodities and suffered only their second week of redemptions this year. Turkey funds gained by almost a similar amount. But while redemptions were reported amongst the traditional mutual funds across the EM universe, ETFs continue to attract more new money (see more details in note below).
After a very nervous and volatile week in global equity markets, the FTSE All-World Index closed 1.3% lower and reduced its year to date gain to 4.1%. US markets fared better than others, partly because of the dollar boost. The S&P 500 Index closed down 0.2% with the biggest hit coming Friday as the index closed 0.8% lower. Year to date the S&P 500 is up 6.4%. The biggest sector hit was financials as legislative and judicial threats increase.
Another bad week for commodities, albeit much less so than was the case the previous week. Industrial metals were very mixed as sellers were more evenly matched with buyers hoping that the correction is near an end. The price of copper closed 0.2% higher while nickel fell 0.8% and aluminium lost 1.5%.
Silver was again very volatile with speculative buyers willing to bet against the curbing measures announced by the exchange regulator. The price of silver gained 0.6% on Friday – with most buying reported from China and India – to finish the week off 0.8%. That followed a decline of over 27% the previous week.
In the agriculture sector, wheat was the big loser. The price ended off 4.2% for the week as Russia’s agriculture agencies talk up prospects for this year’s crop yield and an early return to the export market (see more detail below). Corn gained 0.3% for the five days (+9.4% YTD) and sugar climbed 4.8% (-33.2% YTD).
The dominant driver of stock picks this week will again primarily be external newsflow and events. The currency markets, in particular, will be key (see This Week below). Other events that may affect individual stocks include;
MSCI Balancing. MSCI is scheduled to announce the rebalancing of its major indices late on Monday night. It is not a given that MSCI will make changes to any particular index and, in the past, has skipped the Russia index several times. The only change that we know of is that Rostelecom (RTKM RX Hold) will be added to the index as of the end of this month. That is one of the main drivers of the relatively strong stock performance recently. MSCI has, however, confirmed that RDRs (local listings of foreign stock registrations) will not qualify a stock for inclusion. That excludes RusAl (486:HK N/R). Investors have given up trying to second-guess MSCI’s actions in advance but any stock to be added will, like Rostelecom, be expected to gain strongly ahead of the end May inclusion.
Mechel Pref. There is a very strong case for Mechel Prefs to be included in the MSCI Russia index when MSCI announces revisions to its global emerging market indices on Monday. The decisive factor was the recent placing of stock by core shareholders, which raised the free float and the daily traded volume
TNK-BP. Monday is the deadline for Rosneft to reach a new deal with BP and/or TNK-BP (TNPB RU Hold). We have written extensively about this deal in the recent past and, so far, there is no new news or new rumours. The share price of all three companies involved (BP, Rosneft, TNK-BP) will react to the revised terms or if the deal is abandoned/delayed.
Steel Sector. Severstal (SVST LI Buy) and Evraz (EVR LI Buy) are both scheduled to publish 1st Qtr numbers on Tuesday. Severstal’s numbers may disappoint somewhat because of operating issues at the Cherepovets Mill and weak mining volumes. Evraz’s numbers should be good. The main driver of share prices in this sector will be, as it was last week, the strength of the dollar and investor perception about demand trends in China.
Defensive Themes. It is clear that this period of global market volatility against a weakening trend is set to last for several more weeks at least. In several similar patterns in the past the markets found stability and started to slowly climb from early July. It may be the case again this year. Meantime, amongst the best defensive names are stocks in transport logistics (Transcontainer & Global Trans), in oil field services (Eurasia and Integra) in upstream power generation (OGK-4 and 5, RusHydro), and Pharma.
TMK. ChelPipe’s decision to indefinitely postpone its planned IPO will boost TMK (TMKS LI U/R) shares. The valuation of the proposed ChelPipe IPO was at a significant discount to TMK shares and led to an expectation that investors would switch. Now that threat is removed. The stock gained 2.2% last week but is still off by almost 10% year to date.
M.Video (MVID RX N/R) will publish 2010 IFRS numbers on Tuesday. The stock has been something of a portfolio manager’s favourite in recent years but last week there was an unusually large amount of stock on offer.
Norilsk Nickel. (MNOD LI Buy) will publish 2010 IFRS numbers on Wednesday. The shareholder controversy is less of an issue, albeit far from resolved. Until the next event in that saga takes place the main driver will be the price of metals, especially nickel and copper. Basically the dollar and China.
Vozrozhdenie. (VZRZ RX Buy) will, on Thursday, be the first of the 2nd tier banks to publish 1st Qtr numbers. We expect good numbers and a positive statement to reflect the recovery in the economy, the growth in lending and declining loan loss provisions.
Gazprom. There is growing speculation that Russia and China will formally announce the long awaited gas export contract just ahead of the June Economic Forum in St Petersburg. That will add another significant export stream to Gazprom’s (OGZD LI Buy) business and while a long way from actually providing any revenues the deal should be a positive sentiment driver.
Mail.ru. Marketing of the Yandex IPO is now formally underway. We see that stock as a better play in the IT sector than Mail.ru (MAIL LI Sell) and expect to see some switching from Mail to Yandex if the issue is completed.
Agriculture. There is a growing amount of optimism that Russia’s agriculture sector will have a better year in 2011 than last year. Crop yield indicators are much better than this time last year. That growing optimism may help sentiment towards Razgulay (GRAZ RX N/R) and recently listed Ros Agro (AGRO LI N/R).