Sentiment in Moscow’s markets continues to be dominated by the deteriorating newsflow in the US economy and the weakening trend in global markets. Domestic factors are of secondary importance for now. Faster car sales in Russia provide no comfort against collapsing house sales in the US. The S&P 500 Index closed down 1.45% yesterday (it was down 1.3% when Moscow closed) and, at 1,051.87, is dangerously perched just above the technically important 1,050 level. A close below that level raises the risk of a retreat to under 900 according to technical charts.

Asia’s markets are all lower today, albeit no more than reflecting the move in the US yesterday. The main focus in the region is what the Bank of Japan may do to reverse the sharp decline in the value of the yen that is undermining export competitiveness and earnings growth. The dollar-euro rate is holding at yesterday’s close and last marked at $1.2647. The price of gold is also not reacting, as might have been expected, to the heightened uncertainty. It is at $1,233.3 per ounce.

The price of Brent is at $72.78 p/bbl across Asia this morning and WTI for October settlement is at $71.88 p/bbl. Brent is a little better and WTI is a little lower. The weekly inventory report will be published later today by the US Energy Dept.

After yesterday’s destructive figures, investors will again be fearful that today’s batch may overfill the sense of economic dread and scuttle any lingering sense of optimism that growth worries can be corralled as a summer phenomenon. Included on the list of scheduled reports for today are the July durable goods updater, mortgage applications and new home sales. Although the dominant, if not only, driver of investor sentiment towards the Russia market is the trend in Wall Street, the weekly inflation report is acquiring a scrutiny that one usually associates with something like a train wreck.

Deputy Economy Minister Klepach, yesterday said that the inflation rate for 2010 will not now be in the 6-7% range hoped for but will be higher. He cited the consequences of the drought for the increase, albeit we have had a 2010 forecast of 7.5% for some time. The expectation is that inflation rose 0.2% again last week while anything higher would hit bond yields and slightly undermine equity sentiment.

AvtoVaz shares, up almost 10% on Monday, were again one of the few to show a gain yesterday. The commons rose 6.4% and the Prefs added 2.2% as at least one investor bets on very positive comments at this weeks International Motor Show and equally positive earnings growth this year. Comstar is scheduled to release 2nd Qtr results today and while not involved in the Rostelecom aggregation, it does provide a timely opportunity to remind investors that the fixed line telecom sector is amongst the most defensive in the market especially as global worries again escalate.

Moscow’s bourses slid steadily all day yesterday, initially as a reaction to the negative effects from the appreciating dollar and, later in the session, to the big drop in US markets after the much worse than expected home sales report. Both the RTS and MICEX ended the day off 2.0%. The former at 1,396.9 and the latter at 1,339.8. The ruble also took a beating against the generally stronger dollar, falling almost 20 basis points to 30.82 at the close of the MICEX session. Against the euro, the ruble gained a very modest 1.5 basis points. Sberbank, the proxy for hopes and fears in Russia and for the ruble, took the main hit with a fall of 3.3% on both bourses. In the London GDR market, the high beta names were unsurprisingly to the forefront of those stocks to be hit. Evraz fared relatively well with a decline of only 1.4% while the other steel names fell by between 3% and 5%. Global Trans also too a big hit (-3.6%) as a result of the Economy Ministry’s more cautious economic outlook for the balance of the year. In the US ADR market, Mechel unsurprisingly led the declines in the high-beta global stocks. It ended down 4.1% at $21.62. Vimpelcom fared a little better with a loss of 1.5%.

Deputy Economy Minister Klepach is usually the messenger of bad news when it comes to the economy. It was he that first used the word “recession” in late 2008 and is usually quite sobering in his comments about recovery prospects. Appropriately it was he that gave the latest update on Russ’s economic revival yesterday;

· The inflation rate will be above 7% for this year due to the effects of the drought. Previously the government was targeting a range between 6% and 7%. Our forecast is for a rate of 7.5%.
· The Ministry will not now upgrade its previous forecast of 4.0% GDP growth for 2010, again due to the effects of the drought and the extreme summer weather. It was hoped that the growth forecast might have been raised to almost 5.0%.
· Deputy Minister Klepach did say that GDP grew 2.5% (YoY) in July and that the January to end July growth rate was 3.8%.
· But, the Ministry is significantly raising its forecast for industrial growth in 2010 from 2.5% to 7.6%. That is closer to our forecast of 8.1% growth.

Chris Weafer is the Chief Strategist for Uralsib Group