Mining and steel stocks are leading the rally in Asia and will likely be amongst the best performers in Russia today also. The price of metals and oil are also trading higher with Brent last trading at $79.26 p/bbl. Copper is 1.5% higher in Shanghai. The dollar-euro rate is currently at $1.2399 (it closed Friday at $1.2388). Gold is unchanged at $1,258 per ounce.
China’s Yuan move will help boost investor confidence in developing market currencies and that, plus the better oil price, will help the ruble to extend last week’s rally and push the ruble-dollar rate back towards 30.5 over the short term. Bank shares will also benefit from the better ruble.
The big decision for investors, however, is whether it is now time to move back into Gazprom and the oils. We highlighted in our mid-year market strategy review, issued early last week, that the valuation of Gazprom and the oils has fallen relative to international peers and are due a bounce. Gazprom is off 19.2% year to date and Rosneft s down 23.0%. We believe these moves to be excessive and consider the sector now a trading buy.
Rosneft’s shares were already under pressure due to the prospect of the East Siberia tax break ending when hit with the prospect of BP selling the $1 bln of shares that it acquired as part of the IPO in June 2006. It is possible/probable that these shares were sold in the heavy volume trade in Rosneft shares last Thursday. The uncertainty over the future of Rosneft’s CEO will inevitably re-start the familiar rumours about a possible stake sale in the company to Surgutneftegaz. This is an annual rumour, i.e. that Surgutneftegaz may buy shares from both Rosneft and the government. Last week the rumour was boosted when Surgutneftegaz’s CEO was appointed to Rosneft’s board and, recently, rumours that Surgut is about to sell its MOL stake have started. That would give Surgut enough cash to acquire a significant stake in Rosneft. That would help Rosneft’s balance sheet and the Federal Budget. To repeat, this is all strictly rumour and is no more, or less, likely to be true this year than last or the year before that. But, it can push Rosneft’s share price much higher over a short period.
President Medvedev travels to the US this week to try and convince US businesses to invest in Russia. He meets President Obama on Thursday after initially visiting Silicon Valley companies. Expect to see a lot of Russia commentary in the US media this week. The main macro report for end May in Russia will be published this week, e.g. retail sales, unemployment, etc, and is expected to confirm that the pace of economic activity is picking up. That will also help improve confidence in the Russia story. Economic reports in the US will focus on the housing market this week, albeit there are no reports with any market significance due today. The US market usually drifts higher in no-news days.
Moscow’s bourses rallied into Friday’s close with the better opening in the US. That helped the RTS to end the week with a gain of 3.9% while MICEX added 2.4% for the five days. The former was helped with a 1.7% gain in the value of the ruble relative to the dollar. The MSCI Emerging Markets Index added 0.7% on Friday to bring the five-day gain to 4.0%. Year to date, MICEX is off 0.2%, the RTS is down 3.6% and the MS EM Index is off 3.6%. The FTSE All World Index gained 3.3% for the week with the US indices closing with gains of 2.4% each.