Moscow’s bourses are set for a big single digit gain at the opening today as local share prices catch up with the 9.6% average gain in GDR prices yesterday. Moscow’s bourses were closed for a holiday yesterday. But, don’t expect too much of an immediate follow through, i.e. beyond the opening price bounce, as global markets are already focusing on the consequences of the EU deal and on China.
Asia’s equity markets are trading lower today after a report showed higher than expected China inflation and because of indications that several big new equity issues are imminent. The former keeps alive the threat of monetary tightening that may cool Chinese growth and demand for commodities. The latter risks diverting cash from existing equities into new issuance. Metal prices, such as copper, also gave back some of yesterday’s gains due to the fear of China growth curbs
The euro is down slightly in Asia trade today, at $1.2742 from $1.2787 yesterday, as investors focus on the interest rate and inflation implications of the deal. The ECB will likely have to restrain interest rate growth in order to help economic recovery in the eurozone while such a massive issuance “threat” raises inflation fears. Gold last traded at $1,202.4 per ounce, down slightly from Friday’s close of $1,210.4 per ounce.
The problems in Europe reflect favourably on the investment case for Russia (see our note of last Friday, “When the Chaos Stops”). The price if oil has been remarkably resilient in the midst of the recent global turbulence and, this morning, Brent is again trading above $80 p/bbl. The latest macro reports also show that economic recovery is under-way in the country and that should lead to stronger earnings growth later this year and into 2011. Of course Russia will be just as caught up in any repeat of global market turbulence but, if there is now a more settled pattern to global markets then Russia is one of the countries that should perform relatively better.
MSCI will release the changes to its emerging market indices late this evening and that is expected to include some Russian Index changes. The changes will take effect as of close May 26th. Magnit, Magnitogorsk and Raspadskaya are considered contenders for inclusion. MRSK Holdings should also be admitted but may have to wait until its merger process is complete. One of the real estate companies, such as LSR Group, may also be considered as MSCI looks to replace the recently deleted Vimpelcom with other consumer themes.
Raspadskaya will be affected by the news of the fatal accident at its mine over the weekend. Investors will be concerned that this may lead to fines and other additional costs for the company.
Today is a relatively quiet news day in global markets with only the ABC Consumer Sentiment survey due in the US.
The ruble was hit last week with the double whammy of global market risk aversion and the falling price of oil. It ended Friday’s MICEX session at 30.5913 against the dollar and at 34.261 against the euro. That is a respective loss of 5.0% and 0.5%. With oil again above $80 p/bbl (Brent for July settlement) and better risk tolerance in global markets there should be a recovery in the ruble this morning, albeit also somewhat tempered.
The IOB Index of London traded GDRs gained 9.6% yesterday to partially reverse the 10.5% decline recorded last week. Gains were recorded across the board but with the high-beta global names leading. TMK added 14.11% while the other steel names closed between 11% and 13% better. Sistema was also particularly strong, rising 16.8% to $24.88. Russian ADRs were also particularly strong in the US last night. Mechel led the gains with a rise of 17.6% to $24.84. Both mobiles closed almost 10% better.
US retail sales and eurozone GDP are most important numbers. This will be a quieter week for economic newsflow, at least at the start of the week. There are no reports of importance on Monday and on Tuesday there is only a consumer update that is usually of no significance. In these fragile markets, however, any missed forecasts can have an impact. Wednesday will be a more active day for reports with the March Industrial Production update and the advance reading of 1st Qtr GDP in the Eurozone. Good numbers will go a long way to calm fears of sluggish economic recovery in the region while bad numbers will reinforce last week’s fears and send prices lower. The ECB’s monthly economic report will be published on Thursday. Friday is the busiest day for important US numbers. The April retail sales report, April’s industrial production and the University of Michigan’s May consumer sentiment survey will all be published.
Fund Flows: Not (Yet) Spooked By Volatility
Still adding to Russia. Investors continue to increase exposure to Russia and even though the emerging market asset class suffered net redemption in the week to last Wednesday, Russia funds reported net inflows for a twelfth straight week. Russia was the only major country category, within the EM universe, to attract new money last week.
Moving to relative safety of GEM Balanced. According to data supplied by EPFR Global, the total emerging market asset class reported net redemptions of $215 mln. That compares with new money flow of $1,484 mln in the previous week. Within that, investors again moved from the uncertainty of country specific selection to the relative safety of the GEM Balanced funds. These funds reported new money of $607 mln, a broadly similar amount to the $612 mln of the previous week. Year to date, the EM total asset class has taken in $15.0 bln of new money, compared to approx $75 bln in 2009, with GEM Balanced funds taking $7.3 bln of that heading to the GEM Balanced funds.
Russia funds net positive by $2.2 bln in 2010. Russia funds attracted a modest $26 mln last week. But that is the twelfth straight week of inflows and brings the year to date total to $2.2 bln. That move to relative safety was also reflected in the Russia flows with ETFs attracting $76 mln while active managed funds lost $50 mln. Although modest last week, the Russia flows were again better than money flows in the other major EM country funds. China funds reported redemptions of $236 mln, Taiwan funds lost $112 mln, India funds lost $92 mln and Brazil funds lost $192 mln. That was the 4th straight week of redemptions from Brazil funds and, year to date, these funds have lost $241 mln.
Chris Weafer is the Chief Strategist of Uralsib Group. http://www.uralsib.com