Even though there is a high risk of a further oil price rise due to supply threats in Nigeria and the Persian Gulf, the key to Russian performance is still the Eurozone debt talks. If global investors become more confident of a resolution, then Russian equities and the ruble could make substantial gains, as we saw in 1Q11. If euro debt risks continue to frighten investors, then it will really not matter where oil trades - all risk assets will stay down.
European leaders' continuing efforts to find a solution to the region's debt crisis and to restore investor confidence in the bond markets will dominate again this week. Today's meeting between Chancellor Angela Merkel and President Nicolas Sarkozy in Berlin is unlikely to bring anything new. Positive US macro indicators, including a better-than-expected payroll report on Friday, proved no match for investor fears that failure to contain the debt crisis may yet plunge the world into both a banking crisis and a recession. Indicators in Europe, and specifically Germany, show a faster deterioration in some growth indicators than had been expected. The IMF's chief economist said over the weekend that the organization will soon make a "substantial cut" in its growth forecast for 2012.
On top of these concerns, US analysts are already talking down prospects for 4Q11 earnings. The first of those numbers will come out later this evening, when Alcoa publishes its report. The more important numbers will start to appear next week, when the big Wall Street banks publish.
One stock-specific story over the weekend to pay attention to is the news that Potash Corp of Saskatchewan will extend cuts in potash output as buyers are delaying purchases. The company, which announced temporary shutdowns at two other mines last month, plans a four-week shutdown at its Allan operation in Saskatchewan from February 4. Separately, Mosaic, North America's second-largest potash producer, said that fertilizer buyers are taking a "wait-and- see" attitude toward replenishing inventories by postponing purchases because of concern about the global outlook for economic growth.
Chris Weafer, Chief Strategist, Troika Dialogue
