The fact that the S&P Composite Index closed above 1,115 (at1,125.9) is a strong technical signal according to traders. It adds to the view that the positive momentum in global markets can extend further this week. But, it is mid summer, volumes are light and the mood can change quickly. For now, investors are more focused on Friday’s payroll report, which means that we should trade not too far off yesterday’s closing level until that data is published.
The price of oil is holding close to yesterday’s level. WTI for September settlement is at $81.47 p/bbl and Brent is at $80.9 p/bbl in Asian trade. The dollar-euro rate is also unchanged at $1.3165. Currency traders may wait until Thursday’s ECB press conference before making any significant move in either direction. The price of gold is also unchanged at $1.1183.5 per ounce.
Reports of the extending drought continue to push up the price of wheat and other grains in international markets. That should have only a small impact (for now) on Russian producers/consumers as the state will remain very active and interventionist in keeping domestic prices stable.
The steel names should again be strong this morning (Mechel closed in the US with a gain of 7.5%). The ruble is expected to have a better day than seen yesterday (there is almost always a one day lag between drivers and price moves in the ruble market) due to the higher oil price and better risk appetite for currencies in Asia. That will add to the appeal of the banks again today.
Gazprom is the biggest under-weight in emerging market portfolios. The higher oil price has helped the stock move up in recent days (the lag effect on the gas price) so that a couple more days of strong performance, i.e. as we saw yesterday, will start to make many fund managers nervous of staying so light relative to the performance benchmark weight for the stock. That could also add some positive momentum for the stock over the short term.
After yesterday’s generally positive economic reports there is another batch scheduled for today. In the US, the more important reports include an update on personal income and spending, pending home sales and factory orders. The big data point of the week, and of the month, is Friday’s payroll report. That report will either help push this rally much higher or kill it.
The backdrop to markets this week is that investors have become more convinced that, although slower than that seen earlier this year, growth is still in place and the risk of a double-dip recession now minimal. That conviction, should it hold, will help Russian equities to push much higher over the medium term. That is because domestic factors are steadily improving and because of cheap relative valuations. Most big investment funds have simply been waiting for a higher level of conviction about global recovery before buying high beta themes, such as Russia, and that is now increasingly in place. The improving level of optimism, especially with oil now above $81 p/bbl, should act as a strong catalyst to funds with high levels of cash holdings in their portfolios.
Moscow’s bourses rose strongly with the positive trend in global equity markets yesterday. The opening gain was caused by Asian gains, which resulted from strong earnings growth in the region, and accelerated with much better than expected earnings from some of Europe’s biggest banks. The slightly better than expected PMI data in the US, plus the commodity price gains, helped the US to open strongly and Russian markets to close at the highs. The RTS ended up 2.9% at 1,523.2, while MICEX added 2.3% to end at 1,429.4.
The banks were predictably strong on the back of last week’s lending growth and NPL statistics and as the main equity proxy for rising oil. VTB and Sberbank added 2.6% and 2.4% respectively on MICEX. Gazprom also benefited with oil above $80 p/bbl because of the lag effect on the gas price. It closed 3.8% better. The best performance of the day was Uralkali. It rose 9.8% after media reports that the merger with Silvinit (+4.0%) is pushing forward. Raspadskaya also attracted buyers, rising 8.5%, with no immediate obvious reason.
The ruble moved with the trend in the dollar-euro rate. As the dollar slid further against the euro, to $1.319 as MICEX’s currency session closed, the ruble gained 7 basis points against the dollar (to 30.177) and lost 3 basis points against the euro (to 39.4547).
The London GDR market was even stronger than Moscow’s bourses because most of the high-beta names that react quickest to global market trends, are more heavily weighted in the IOB Index. It added 3.7% by the close. The steel names were by far the strongest. Severstal closed 8.3% better ($12.79) but Novolipetsk (+7.5%) and Evraz (+6.8%) were not far behind. Uralkali replicated the local share price move with a gain of 11.3% to close at $23.4. Gazprom and Novatek both gained 4.7% as a reaction to higher oil and the expectation of a higher gas price to follow. Gazprom Neft was the better performing oil stock, rising 5.9%, with at least some element of speculation that it may benefit from any BP concessions when its executives meet with Russia’s deputy PM on Wednesday. In the New York ADR market, Mechel led the way higher with a closing gain of 7.5%. Other Russian names also closed between 3.0% and 4.0% better.
