By Chris Weafer

Anybody that thinks there is safety in number clearly hasn't been paying attention to the stock market pages.

Irene Peters

After last month’s US non-farm payrolls report fell well short of expectations, investors will be very keenly focused on the next update, which is due on Friday. The low number last month set the backdrop for increased investor nervousness and weak markets through April. Was that data point a blip or part of a new trend? The answer will be a major factor in whether investors again retreat from markets and risk through the summer months, or whether this will be one of those rare years with a summer rally. 

The prophetic warning implicit in every Friday the 13th has again been proven correct, as fears that the Eurozone is heading into an even more destructive debt crisis undermined the fragile confidence about global economic growth. This was illustrated by how trading ended last week, with a big drop on Wall Street and heightened anxiety about where the markets may trade this week. Whether that anxious condition proves justified will depend on a pragmatic response from the Spanish government, ECB officials or EU leaders. Without it, Spanish bond yields will likely move closer to the 7% level considered the trigger for a bailout or real default risk, and that, in itself, will then force a response.

You can't change the past, but you can ruin the present by worrying about the future.

Anonymous

"If" and "maybe". The equity market ignored the positive factors in the domestic market and instead prices were hit harder than in any other big global market. The reason cited was because of fears over how possible problems in other economies, if they happen, may eventually affect the positive picture in Russia. A lot of "ifs" and "maybes" for an equity market that is already pricing in $80/bbl Brent and not so much a hard landing as a crash landing in China. It is a paradox of which Greek philosopher Zeno would have been proud. But, as last week's fund flow data from EPFR Global showed, retail investors are, for now, avoiding the negative sentiment and last week's almost 5% market decline was mainly a result of trader activity. 

" Belief is a wise wager. Granted that faith cannot be proved, what harm will come to you if you gamble on its truth and it proves false? If you gain, you gain all; if you lose, you lose nothing"

Blaise Pacal

Further global market upside looks more likely. Notwithstanding the constant reminders of still viable threats to global growth, the list of those threats with medium term destructive potential has eased markedly.

Investors more risk-averse. We see two trends in the EPFR Global fund flow data this week. The first is that investors are less keen to take risk. Investors took a step back from the EM balanced funds last week as they wait to see what will be the fallout from the Greek bailout deal. After investing over $15.6 bln into EM balanced funds since the start of the year, investors took back a very modest $154 mln (0.04% of AUM) of that in the week to Wednesday, according to the latest report from EPFR Global. Inflow into GEM balanced ETFs totaled $281 mln, which implies that flows into long-only balanced GEM funds were negative and that long-only investors were, in fact, redeeming funds and taking some profit on the news ("fact") that the Greek bailout package was approved in both Athens and Brussels. This is, however, more than likely just a pause in inflows, as ETF investors were still quite open to buying EM risk and overall inflow into ETFs, as a sum of all geographies, was still positive at $355 mln, supporting the case that risk appetite remains positive.

MSCI said that it will announce the results of its February 2012 quarterly index review on February 15 at 23:00 CET, meaning the market will react the next day. There is only a slim chance that MSCI Russia's composition will be changed in this rebalancing, with no stocks being added or deleted. Following last year's additions of MRSK Holding in November and LSR Group in May, there is now a gap between the stocks fitting MSCI requirements and stocks next on the list that can be added to MSCI Russia. The next two stocks that fit the market cap criteria are Bashneft and PhosAgro, but neither of them have sufficiently large free float to be included.

BEHIND THE DOGE'S MASK

By Chris Weafer

Concern may shift to strength in the global economy. While Greece will undoubtedly continue to grab the headlines as the new week starts, investor attention, and concern, is already shifting to the state of the global economy. It may well be a case that while the immediate threat of a Greek default is eliminated, the fact of removing the distracting Doge's Mask may only serve to reveal the Sword of Damocles threat overhanging global economic growth. That was the main reason for the downturn in Western markets and across all so-called risk assets on Friday. With so many important indicators of current economic activity due this week in the US and Europe, it is likely that the picture revealed by these reports will increasingly dominate market headlines as we move into the week.

This month we devote our Strategy Monthly to a review of The Russia Forum, held over the first few days of February in Moscow. Speakers and forum participants reviewed global macro trends and considered how these may affect Russia. The forum also looked at specific Russia challenges and the opportunities waiting as those challenges are addressed.

Russian equities have started 2012 as they left 2011. The direction and volatility in the Russian equity market continues to be dictated mainly by external events. The Eurozone crisis, although currently the critical global issue, is not the only factor that will determine how Russia and other emerging markets perform this year. In this note, we look at the 12 most important "known" factors expected to have an impact.

> Euro debt fears increasing. The optimism that helped all major equity markets start the year off strong is likely to be in short supply today. Investors are expected to throw the risk switch back to "off" for a few days until there is some clarity over how the Eurozone countries plan to proceed with the bailout plan after S&P cut the AAA ratings of France and Austria, two of the six original sponsoring countries. The fund now may not be able to raise enough money to contain the debt crisis. In addition, investors will want to hear how Greek debt restructuring talks may proceed to avoid a default after talks broke down on Friday. The US markets are closed for a holiday today, so that will give investors an unhindered view of the wreckage strewn across Europe. In particular, the equity markets will keenly watch how the bond market reacts to the sale of EUR 8.7 bln in French bonds scheduled for today.