The MSCI Asia-Pacific Index is up 0.5% today. Investors in Japan are hopeful that the Bank of Japan will again intervene to weaken the yen. China’s markets are trading by more than 2.0% higher but that is because they were closed Friday and are now playing catch-up after the better than expected manufacturing report. Further dollar weakness is expected this week after Fed officials confirmed again on Friday that there is likely to be more easing in coming weeks. The dollar-euro rate is today at $1.3756. Gold is trading not far of last week’s record ($1,320.8 per ounce) at $1,318.6 per ounce. The price of crude oil (Brent, one month forward) is trading at $83.58 p/bbl today. That combination of weaker dollar, higher oil and a generally improved risk appetite in global markets, should help the ruble to make further gains today. High-beta steels and mining stocks should move better this morning. The banks will again benefit from the improved underlying market mood, the higher oil price and the expected gain in the value of the ruble. President Medvedev will visit Algeria on Wednesday (see note below) with gas again one of the main topics to be discussed. This Week: Start of 3rd Qtr Earnings Season Prospects for a year-end rally depend on these numbers. This is a very busy week for economic updates in the US and the EU plus the first of the 3rd Qtr earnings reports will be published. Investors, quite rightly, will approach the week with a lot of caution while hoping that the reports justify the optimism that has been very slowly building through the summer. Currency markets will also be volatile as monetary authorities in Asia and Europe review policies. By the end of this week, we will have a much better picture of the trend in the US and EU economies and the likelihood of another coordinated bout of stimulus spending. We will also be better placed to know if a strong end to year rally is on the cards or not. Most important will come Friday. There are a series of economic updates, all of which with market moving potential, every day this week. Total will see the pending home sales and factory orders in the US and the Sentix Investor Confidence survey in the EU. Retail sales data, one of the most important monthly reports, is scheduled for Tuesday. The most sensitive report will come on Friday. Economists expect to see a small increase in overall employment (+5K) but with an 80K increase in private payrolls. The unemployment rate is expected to have increased slightly to 9.7%. Big week for currencies. Monetary authorities will be busy this week, starting with the monthly meeting of the Bank of Japan monetary policy committee on Monday. The yen is again at the level at which the Bank last intervened to weaken it and a similar action is on the cards for early this week. That will lead to volatility in the Asian currency markets, albeit only for a few days. Traders will continue to test the Bank’s resolve by pushing the yen higher after any brief correction. The ECB and Bank of England will also meet to review interest rates on Thursday. Neither is expected to make any changes but, as is now usual, investors will be very keen to hear the ECB’s thoughts about the future trend and especially whether it is considering following the US Fed with an additional stimulus package. The ECB is undoubtedly under pressure to take action to halt the appreciation of the euro against the dollar as that is hurting competitiveness and slowing regional recovery. Inflation will be main focus in Russia. In Russia, the monthly inflation report will be published and will again focus attention on the prospect for near double-digit growth by year-end. That, in turn, will channel into more commentary about the threat of a rate increase later this year or early next year. Given that the Central Bank have few other options, the prospect of inflation targeting using the currency, however unsatisfactory, must be coming closer. There is an investment conference in Moscow this week with almost all senior government officials, including the prime minister, scheduled to attend. Expect lots of policy headlines over the next two days. 3rd Qtr numbers start on Thursday. US aluminum producer Alcoa traditionally kicks off each new quarterly earnings season. It will do so again this season with its numbers on Thursday. They will be released after the US market closes so will only have an impact on Friday – payroll day. The more important numbers from the Wall Street banks will be published the following week. In Russia, the 2nd Qtr earnings season is approaching an end. Novolipetsk Steel and PIK Group will both publish their numbers on Monday. Mechel and Aeroflot will follow on Tuesday. Norilsk Nickel will release operational data later today and is scheduled will hold a conference call for investors on Friday. President Medvedev in Algeria: Gas is again the main topic Talking about high-tech, signing oil & gas. President Medvedev continues to promote his plans for modernization in the economy and to attract a much larger volume of direct investment into industries that will represent diversification. In terms of actual deals, it is still all about oil and gas and commodities in general. That was the case in China earlier last week and it will be no different in Algeria when he visits on Wednesday. Gazprom and Algeria’s state gas producer several years ago signed a deal to jointly develop gas assets. But, the deal quickly turned sour and very little progress has actually been made. Russia is now keen to revive that deal. With Gazprom’s position in the European gas market under threat from LNG and increased supply from Norway, etc, the government is keen to push ahead with pipelines that can secure long-term supply contracts. Pipelines remain key. The Nord Stream is well under way and plans to expand the capacity of Blue Stream appear viable. Whether South Stream happens or not is purely political and is dependant in whether Nabucco is constructed or not and whether Gazprom can get a 50% stake in the Ukraine pipeline system. If South Stream is shelved, then Russia will increase gas supply across Ukraine into the Balkans. Keen to get an African link. The missing part of the land encirclement of Europe is from the south, from North Africa. Russia has long harbored a plan to create a trans-Sahara gas pipeline that would take gas from Nigeria, where it has a JV called NiGaz, from Algeria and Libya. The export route to Europe could be either from Algeria or Libya or both. Either way, sorting out the issued with Algeria in order to ensure the option of the trans-Sahara pipe, is now a priority as Gazprom faces a long-term threat to its share of the European gas market. Defense sales. President Medvedev will also likely talk about the possibility of reviving defense contracts after Algeria significantly scaled back its purchases amidst complaints of unreliability. Financial cooperation with Cyprus. President Medvedev will stop in Cyprus on his way home. Cyprus is effectively the offshore financial services center for Russia and is the biggest source of FDI into Russia, albeit all of it is round-tripping Russian owned cash. Russia and Cyprus have been holding talks about financial market cooperation and, doubtless that this will be one of the main items on the agenda. Cyprus is an EU member and is tightening up its financial markets regulations. Moscow is keen to ensure that the island state is not used as a tax evasion center – or, at least not for much longer. Trading last week: Russia Better week for Russian equities. Russian market investors again spent a week looking both east and west at global market trends. After having been largely ignored by international investors through September (see table below), last week’s gain was more in line with the general trend in emerging markets. The difference between the dollar based RTS and IOB indices and the ruble based MICEX accounted for the slight strengthening in the value of the ruble relative to the dollar. Over the week, the RTS gained 2.9% and the IOB Index of London GDRs added 2.2%. MICEX closed the week with a net gain of 1.4%. Most of those gains came on Friday with the better mood in global markets after the better than expected economic reports in Asia and the US plus the gains in the price of most commodities. The bank sector also followed the trend in international markets and was the worst performing market theme last week. US banks fell, as investors fear that results from the Wall Street banks will be worse than hoped for and Europe’s banks fell as a reaction to Ireland’s escalating problems. The RTS Financials Index added 1.3% for the week and is up only 2.6% for the year. The best performing sector was metals, rising 3.9% for the week and bringing the year to date gain to 22.5%. The worst sector theme this year is oil and gas, which is off 3.1%, while the best is the consumer sector, up 39.1% since the start of 2010. September 3rd Qtr YTD MS EM Index 8.2% 17.7% 8.2% S&P Composite 5.6% 11.1% 2.3% MS Brazil 5.3% 19.1% 0.1% MS Russia 2.3% 15.6% -0.6% MS India 13.9% 16.7% 17.1% MS China 7.8% 10.2% 1.6% MS Turkey 12.3% 31.4% 27.3% RTS 4.0% 17.0% 4.4% Source: DataStream Trading last week: International Climbing the wall of worry. Global equity markets gained 0.6% last week with all of the gains coming from Asia and emerging markets. Investors remain very focused on those regions with the best fiscal positions and strongest economic growth. There is still a risk that the solvency problems in Europe may not be containable and may yet de-rail the fragile recovery taking place. But, for now, the consensus is that growth can be sustained in Asia and EM with a more modest growth rate in developed economies. The hope is that governments will take whatever action is required to sustain that growth with, e.g. additional easing measures. The delicate balance between the optimism and fear was clearly evident last week with Ireland’s debt shock only just balanced with generally better than expected manufacturing report in China and net positive indicators in the US. US equities could not sustain their rally for a fifth week as investors look nervously into this week’s raft of economic indicators and the start of the 3rd Qtr earnings season. The S&P Composite added 0.4% on Friday to cut the five-day loss to only 0.2%. The Dow Jones Industrial Index also added 0.4% on Friday and ended the week down 0.3%. The indices are respectively up 2.8% and 3.9% for the year so far. Solvency issues in Europe. European investors were much more focused on the debt problem in Ireland and in some other countries. Most of the high-risk countries experienced general strikes last week, adding political instability on top of economic unpredictability. The other problem for Europe is that the strong euro is hurting export competitiveness and slowing the pace of recovery. That was made clear with the September manufacturing update issued last Friday. The Stoxx Europe 600 Index fell 1.9%. Asian markets had a good week, rising 1.2% after China reported good manufacturing data. There is still a great deal of focus on the yen and the effect it may have on competitiveness in the region. Stronger week for EM. Emerging markets were again the strongest asset sub-set in equities. The MSCI EM Index gained 3.1% for the five days. That was despite China remaining closed for a holiday on Friday. The market was more likely to have risen due to optimism that the government will soon relaxed lending curbs in real-estate and as a reaction to the better than expected September manufacturing report. Over the four days it traded, the Shanghai Composite Index rose 2.5%. The Kopsi added 1.6% and Brazil’s market climbed 3.0%. Russia’s gain was approximately consistent with that move. Chris Weafer is the Chief Strategist for Uralsib Group