But, even though the China data should help improve the mood on Monday, investors remain very undecided about prospects for growth and market sentiment is clearly very fragile. Equity markets are now in an upward trend because the most recent economic data supports the view that global growth is recovering. That could change quickly with a bad set of data – the next tests being the US retail sales report on Tuesday and industrial production on Wednesday. Also, as last week ended, optimism for economic recovery was at least partially balanced with the threat of another round of solvency risks in the eurozone. Investors pushed the yield on Irish and Portuguese bonds much higher on Friday as they fear that the recent bank stress tests were nowhere near rigorous enough.

The increase in fears over eurozone solvency pulled the dollar 1.7% higher against the euro last week (to close at $1.268) and that trend is very likely to extend at the start of this week. A bad retail report on Tuesday would halt the trend but if investors remain optimistic about prospects for US recovery while fearing debt risks in Europe, then the dollar could rise much higher over the short term. Of course, a bad set of numbers in the US this week would likely have the opposite effect.

For investors in Russia, it remains a waiting game. The domestic economic story is “okay”, the country’s fiscal position is strong and the 2nd Qtr earnings reports confirm that the equity market is trading at too big a discount to emerging market peers. But, the main driver of market direction is not domestic but the global trend. Russia is viewed as a high-beta theme within global markets and investors are not going to build country exposure until they have a higher level of conviction about global recovery. That may not come until the 3rd Qtr earnings reports start to emerge in early October.

Investors will remain focused on the highest-beta themes in the Russian market, i.e. mainly metals and mining stocks. At the same time, concerns are building about the threat of margin erosion in stocks and industries where the government can either directly or indirectly influence prices in its battle to keep inflation lower. The banks remain the best investment sector over the medium term and into 2011. There is still plenty of upside in some of the regional telecoms as part of the industry consolidation into Rostelecom. State champions, VTB and Rosneft, may also gain from speculative interest. The state may soon sell a minority stake in VTB to a sovereign wealth fund in the Gulf or in Asia. The change of CEO in Rosneft may signal the start of a more proactive phase in the company’s development with, e.g. the possibility of a major move into the gas industry.

The ruble continues to trade as a default of the movement in the dollar-euro exchange rate rather then reflecting Russia’s fiscal strength and stable economy. On balance, given the well supported price of oil, the country’s strong fiscal position and stable economic growth, the ruble should be trading closer to 28 against the dollar rather than the current 30.88. Last week the ruble lost 0.7% against the strengthening dollar and compensated with only a 0.3% gain against the euro.

Prime Minister Putin met with his Italian counter-part on Sunday. The meeting was very relaxed and partly televised. PM Berlusconi said that he planned to finance research into extending the average lifetime to 120 years. Putin remarked that they both might remain as prime minister for 100 years in that case. An interesting comment as speculation becomes intense over Putin’s plans for the March 2012 election. The PM has been very active all summer in raising his profile as the “can do” leader. That was at least partly in response to some slippage of his still very high popularity ratings in the opinion polls. Most observers are convinced that whatever decision is made concerning the candidates for the March ’12 election, it will be Putin’s choice. (note: refer to Private Briefing notes for more on political trends).

This will be a busy week for economic reports in the US and EU and that raises the potential for more market volatility. As markets closed with a modestly positive trend last week, investors are hoping that this week’s reports will growth is either stable or picking up rather than a return to the slowing trend of early summer. The week will start slowly with, on Monday, only the US budget update scheduled to be published. One of the more important monthly indicators, retail sales in the US, will be published on Tuesday.

Friday is quadruple-witching in the US and that always causes increased market volatility as it approaches.

In Russia, the 2nd Qtr earnings season continues with reports due from Bank St. Petersburg (Monday), Cherkizovo (Tuesday), Sistema (Wednesday), Magnitogorsk (Thursday) and Raspadskaya (Friday).

On the economic front, the weekly inflation report is acquiring much greater significance and the first of the August economic indicators are due to be published. The Industrial Production report is expected to show a year on year increase of 5.8%, compared to a YoY growth of 5.9% for July. While the Economy Ministry and economists are cutting their full year GDP forecast by up to 1.0% because of the effects of the August drought, industrial production growth is expected to have remained on track. A positive number will increase pressure on the credit rating agencies to finally upgrade Russia’s rating and it will also help support the ruble.

The price of crude gained last week, partly because of the general improvement in global equity market sentiment and partly because of moderately upbeat oil forecasts for 2011 from both the IEA and OPEC. The price of WTI also narrowed the discount with Brent after a better than expected weekly oil inventory report from the US Energy Dept. Over the five days, WTI for October settlement gained 2.5% to close Friday at $76.45 p/bbl while the equivalent Brent contract climbed 1.9% to $78.16 p/bbl. Urals last traded at $77.76 p/bbl.

Tuesday is the 50th anniversary of the founding of OPEC. Member countries have been targeting an average price between $75 p/bbl and $80 p/bbl for this year and have indicated that the target average for 2011 will be in the range $80 p/bbl to $85 p/bbl. Year to date, the price of Brent has averaged $77.36 p/bbl (13.5% higher than the average at this time last year) and that has allowed OPEC members to reduce compliance with the official quota to around 53%. China demand, up 13% year on year in August, has been the most significant factor in allowing the reduced compliance while achieving the targeted price. Expect to hear confident predictions about OPEC’s role in managing the oil price so as to achieve that target price range, during various speeches and comments on Tuesday.

The price of wheat continues to trade with a great deal of volatility as traders speculate about the prospects for Russia’s winter crop and exactly how much grain the country has in storage. Basically, the uncertainty centers on when will Russian exports return to the market and, meantime, will Russia need to import grains and how much? The likelihood is that this year’s crop yield will be a lot less than expected and Russia will not be able to return to the export market in any meaningful way until autumn 2011. There may, of course, be some token return – using stored grains, for political reasons but any meaningful return of exports is at least one year away.

Over the five days, the RTS gained 1.3% to close the week at 1,487.09. MICEX added 1.7% - the decline in the value of the ruble against the dollar helping the relative performance – to close Friday at 1,433.8. The IOB Index of London traded GDRs added 1.3% for the week. Year to date, the RTS and MICEX are up 2.9% and 4.7% respectively.

Novatek saw persistent buying over the week with good volume. It closed up 11.1% for the five days. The company has the best growth profile in the Russian energy sector that more than justifies the premium rating.

Global equity markets (MSCI World) extended the end August relief rally by 0.7% last week. It was a holiday shortened week in the US and there were very few economic reports to either upset or boost investor optimism. Nevertheless, investors ended last week in a more hopeful mood that global economic growth can be sustained and a double-dip recession avoided. On Wall Street, the Dow and the S&P 500 both added 0.5% on Friday. Over the week, the indices managed more modest 0.1% and 0.5% advances. Year to date, the Dow is up 0.3% and the S&P is off 0.5%.

Industrial metal prices traded weaker on Friday as the dollar rallied, albeit over the five days, there was more of a mixed picture. Copper fell 1.0% on Friday and ended the week down 2.7%. That was mainly caused by a report that the Chinese authorities are investigating allegations of price manipulation. Nickel, which also fell 1.0% on Friday (to end at $22,496 per tonne) gained 4.4% over the five days.

Gold was also a casualty of the recovering US dollar and the continuing strong yen. The price per ounce closed down 0.2% on Friday and with a loss of 0.4% for the five days. It ended at $1,246.5 per ounce. Silver lost 0.5% for the week. Year to date, the price of gold is up 13.7% while the MSCI World Equity Index is off 2.5% and the Emerging Markets Index is up 2.4%. Palladium is the best performing metal year to date, gaining 28.5% due mainly to ETF buying.

The weekly fund flow report from EPFR Global showed a big increase in funds invested into Emerging Markets, albeit investors continue to favour the safer EM Balanced funds rather than specific country funds. For the week to last Wednesday, a total of $1,3 bln was placed into the Balanced funds and that is a significant increase on the $581 mln of the previous week and the $318 mln of the week before that.

India and Brazil funds attracted net new money ($57 mln and $36 mln respectively) while Russia and China reported net redemptions of $38 mln and $115 mln respectively. Turkey funds (+44 mln) continue to attract net new funds as investors favour that market over Russia in the Emerging Europe category.

Chris Weafer is the Chief Strategist for Uralsib Group