Weak Conviction
Posted by Chris Weafer on 14.05.2010 07:42 | Published in Chris Weafer's Investor Notes-
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Equities face another sluggish opening session after the final hour collapse in US equities and generally weaker trading across Asia’s markets. The US markets fell by over 1.0% in the last hour as a reaction to reports that US regulators are investigating an increasing number of market deals. Asia’s markets are lower with weaker commodity prices and after Sony missed profit estimates. While Asia’s economies are currently strong, they are highly dependent on exports to the US and the EU. The fear is that weakness in Europe, especially, will start to ripple into Asian corporate earnings. The US S&P 500 closed down 1.2% while the Asian markets are off between 0.5% and 1.0% in afternoon trade. India’s Sensex is the exception, rising 0.4%.
Metals and mining stocks are again the most vulnerable as metal prices fell again in Asia, albeit modestly. Copper is off 0.3% while other metals are slightly better. The latest news concerning Raspadskaya’s mine accident is more negative (i.e. rescue delays and damage assessment) so that will increase pressure on the share price today. Rostelecom, up almost 10% yesterday, may again be a focus as progress towards the industry consolidation is picking up (see note issued by our analysts yesterday). 1st Qtr earnings reports from Novatek (no specific time – expected to be very positive) and Severstal (early morning) are due to be released today. RusAl’s price responded to the reported profits improvement and is up close to 1.0% (at $8.33) today.
The ruble will see some downward pressure this morning as investors are again moving away from emerging market currencies and into the relative safety of the yen. The price of oil is also slipping lower and that will pressure on the ruble after several days of gains. The euro-dollar rate is currently at $1.2546 while the yen-dollar rate is at 92.845.
The price of WTI crude continues to be affected by technical storage problems in Cushing, Oklahoma and last traded at $73.75 p/bbl. However, the more credible Brent (July settlement) contract is at $79.77 p/bbl and Urals last traded at $76.30 p/bbl. Both contracts are off about 20 cents this morning. The WTI August contract is trading about $3 p/bbl better, albeit that will depend on whether Cushing storage issues are resolved in the coming weeks or not.
How market close into the weekend will depend on US investor reaction to the week’s most important economic reports that are due today. The advance reading of April retail sales, the industrial production report for last month and the University of Michigan consumer sentiment report will show if activity in the economy has been affected by recent uncertainties.
Chinese Premier last night expressed the view held by many investors when he said that the foundations for global recovery are not yet solid enough and that the sovereign debt problem is far from over. Investors increasingly fear that while the immediate threat of a market collapse has been avoided with last week’s EU rescue deal, the fallout from the event will weigh on markets for months to come.
That nervousness has been reflected in last week’s fund flow report from EPFT Global. Investors increased net redemptions from emerging market funds, taking out more than $2 bln in the week to last Wednesday. Within that, there was a more to relative safety with, e.g. the GEM Balanced funds taking $211 mln of new money. All major country funds reported redemptions, led by a $530 mln withdrawal from China funds (including “Greater China” funds), $248 mln from Brazil funds, and $189 mln from India funds. Russia funds reported redemptions for the first week in twelve, losing $203 mln last week. That compares with net inflows of $729 mln in April and $2.0 bln year to date.
Markets tracked sideways yesterday. A lackluster day on Moscow’s bourses yesterday saw the RTS lose 0.8%, to 1,476.0, and MICEX ending 1.0% lower at 1,378.7. Reported volume on MICEX of $2.3 bln was good but most price moves were between plus/minus 2.0%. The biggest mover was automaker Sollers, rising 10.7% as a reaction to the mid week report of a 20% gain in April auto sales. Rostelecom common and preference shares also rose strongly, gaining 9.2% and 8.1% respectively, as investors start to position for the end game in the industry restructuring. In the London GDR market, the IOB Index closed 0.9% lower. There were no stand-out share price moves. In the US ADR market, Mechel and the mobiles ended between 2.0% and 3.0% lower while Wimm_Bill_Dann bucked that trend with a gain of 2.4%.
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