Russia: Still on a Tightrope
Posted by Chris Weafer on Thursday, 19 May 2011 08:31 | Published in Chris Weafer's Investor Notes-
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By Chris Weafer
Chief Strategist, Uralsib
After twelve straight sessions of weakness, during which the RTS fell by 10%, Moscow’s bourses may now see yesterday’s tentative rally extend further. Buyers have returned to commodities and the dollar looks likely to give back some more of its recent gains against the euro. Of course, whether this is just a knee-jerk reaction to recent weakness or a more substantive rally will absolutely depend on global market sentiment rather than domestic factors and until that becomes clearer investors will remain wary. Today’s economic updates in the US (see below) are something of a double-edged sword; if the numbers are good then the equity rally will extend further but the dollar may recover and hold back oil. If the numbers are disappointing then the dollar will weaken further as hopes for additional stimulus will increase. But yesterday’s equity rally will be cut short.
This morning we should see some interest in the oil majors (they missed yesterday’s closing rally) and the banks. The ruble should again push below 28.0 to the dollar as oil holds firm and the dollar tracks lower.
The real threat to Russian equities over the short term is whether last week’s redemptions in mutual funds continues as retail investors prefer a neutral risk position until the global picture becomes a lot more clear. Last week these funds were hit with net redemptions that was partially compensated with inflows into Russia ETFs. With the exception of yesterday’s small rally, Russian equities and commodities were weak every day since last Thursday (the fund flows week is Thursday to Wednesday). It will be a minor miracle if Russia funds do not report a more substantial outflow in this period. The data will be published later this evening.
After yesterday’s closing gain of 0.88% for the S&P 500, Asia trading offers a very mixed picture this morning with losses in Japan and China but gains in Australia and India. The dollar-euro rate is at $1.426 and gold is holding just below the $1,500 level at $1,495.8 per ounce. Silver is up another 0.5% after yesterday’s +5% gain.
The price of Brent is also close to yesterday’s closing level at $112.29 p/bbl and WTI is just under $100 p/bbl at $99.95 p/bbl. A number of factors combined to boost the price of crude yesterday. The slight dip in the dollar versus the euro and a better risk appetite in global markets encouraged some buying in commodities after the collapse seen in recent weeks. To that was added a much better than expected weekly oil inventory report in the US. The Dept of Energy reported that crude oil inventories fell 15,000 barrels while a build of 1.7 million barrels had been expected. The inventory of oil as Cushing fell by 1.6 million barrels and that helped the price of WTI to rally by a greater number than Brent. Most of that was because of a drop in oil imports last week. What really pushed the market was the smaller than expected gain in gasoline inventories and the increased demand for the fuel. Stocks gained 119,000, as against a forecast gain of 950,000 barrels, and usage rose 2.5%. That offers encouragement to traders ahead of the doming summer driving season.
Russia’s domestic economic news continues to be poor and is undermining the investment case. Yesterday’s April Industrial production report for Russia was again disappointing and shows that the slower than expected recovery seen in the 1st Qtr has not yet started to improve. The level of confidence in the economy and amongst businesses remains low and despite the boost to the country’s fiscal and budget position from higher than expected oil & gas revenues. In April, Industrial production grew by 4.5%. That compared with a consensus forecast of +5.4% and a reading of +5.3% for the previous month. The main hit was in the manufacturing sector which also suffered due to the strengthening of the ruble and the higher tax charge from the start of this year. The broader macro report, i.e. covering such data points as retail sales and unemployment, will be published either Friday late afternoon or Monday, usually the former.
There was nothing particularly new in President Medvedev’s speech yesterday (more in a separate note on politics later). Focus will now shift to the (unsurprisingly) delayed reading of the verdict in the Khodorkovsky appeal case which should take place on mid next week, i.e. just before President Medvedev heads to France for the G8 Summit.
Corporate earnings reports will be provided by Vozrozhdenie Bank and Veropharm. The former is the 1st of the banks to issue 1st Qtr numbers and we expect a positive report which should also be reflected positively in terms of sentiment towards Sberbank and the other listed banks. The latter will issue 4th Qtr numbers and, given that we have already had revenue numbers for the period, the report should be well received. We rate the stock a buy with upside of 55% to target price.
Today will be more active in terms of sentiment affecting economic reports in the US. Investors are always sensitive to the weekly jobless claims update and the monthly Philadelphia Fed survey. April existing home sales and the leading economic indicator also provide useful guidelines for the strength of the economy.
The ruble finally shook itself out of the downward spiral it has been in this week. The bounce in the price of oil helped but investors across Asia and in other developing markets started to shift back to higher-yielding currencies from the dollar from earlier in the day. The ruble mainly benefitted from that trend. By the close of the session on MICEX the ruble had gained 10.5 basis points, to 28.04, and contained its loss to the euro to 5 basis points at 39.958. Yesterday’s weekly inflation report showed a weak-on-week gain of 0.1% for CPI, bringing the year to date rise to 4.5%.
Moscow’s bourses traded sluggishly for most of yesterday’s session as investors waited for some global catalyst to either extent the recent pain or to justify a bounce. That catalyst did come in the last hour of trade courtesy of the weekly US Energy Dept’s oil inventory report which showed a small drop in oil stocks, while a gain of 1.7 million was forecast. The report also showed increased demand for gasoline and that is an encouraging indicator as the summer driving season approaches. The net effect was a gain in most commodity prices, led by crude oil, and a jump in Russia’s indices through the last hour of the session. MICEX climbed 0.9% in that hour to end the day up 1.1% at 1,627.0. The RTS also closed up 1.1% to end at 1,849.6. Gazprom led the local blue chips with a gain of 2.0% on MICEX and banks were also better as the ruble rallied with higher oil. MICEX volume was typical for a May session at $1.55 bln
In London, the IOB Index of GDRs, which has an extra 45 minutes of overlap with global markets, closed up 1.6% and with volume of $1.7 bln. Novatek (+4.7%) and Gazprom (+1.8%) led the energy sector gains over the last hour. The steel names were also better as the improved mood in global markets encouraged buyers to return to the high-beta global names. Polymetal was the best in the metals category, rising by almost 4.0% as the price of silver rose by more than 5%.
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