China’s Shanghai Composite Index is off 1.7% and is one of the worst performing major indices this year. Despite that, inexplicably China focused funds have attracted most money from investors in 2010, to date, than have other EM funds. Australia’s equity market is off 1.2%. The slight weakness in equities has also made commodity and currency market traders nervous. The price of oil is down 60 cents per barrel from yesterday’s close (WTI at $80.99 p/bbl and Brent at $80.41 p/bbl) and Asian developing market currencies are off against the dollar. The dollar is up slightly against the euro at $1.3158. The price of gold is a little better with the increased nervousness and last traded at $1,201.9 per ounce. In Moscow, despite the extreme weather conditions across much of the country, the main driver of market sentiment is still external. Asia’s weakness and that of oil will mean a nervous start while the main focus will be on global market reaction to US Fed’s statement later today. That will come after Moscow’s bourses and the London GDR trade has closed so the effect of investor interpretation of comments made, or not made, will be felt only tomorrow morning. But, it is hard to see anything significantly positive from the Fed for equity markets. If, as expected, the indication is for further easing, then after a brief relief rally, investors will worry why such a move is necessary and will factor in lower-for-longer growth. If the Fed says nothing, the disappointment will be palpable. Everything still points to a long period of modest economic growth and with equity markets slowing edging higher while pricing in ever-distant recovery. That’s not to say that the Russian markets cannot perform well in that environment. So long as investors are convinced that a double-dip recession has been avoided and oil stays within an acceptable range, i.e. above $75 p/bbl, Russia can attract more investment funds and move towards our RTS target of 1,950. Over the very short term, the best place to be positioned is in stocks in the export earners (steel, mining stocks), banks and un-regulated domestic sectors, such as mobiles. The other domestic themes, which are expected to be the best performing through to the election in early 2012, may see some further downward pressure as was the case yesterday. That is because investors worry that the extreme weather conditions may have a longer lasting effect on the economy or the government may exert pressure to keep prices low in an effort to contain inflation. It is far too early to know what the effect will actually be, but for now, the concern about outcomes may continue to affect prices. Global Trans and Novorossiisk fell yesterday because they may suffer lower business volumes from wheat and other export products. Most of the food retailers fell because this is the biggest segment in the inflation basket and margins may be hit later this year. The auto retailers fell even though the July vehicle sales report showed an almost 50% year on year increase. Across the board, stocks in these domestic trade, consumer and regulated categories may experience further relative weakness until the weather conditions improve. That will be a very good buying opportunity for investors looking to build portfolios for the next 6 to 18 months. The extreme weather conditions took their toll on activity on, and interest in, Moscow’s bourses yesterday. Volume was very light even for a summer period and prices did little more than track the trend in global markets. The RTS ended up 0.7% at 1,520.6, while MICEX moved better to close up 1.2% at 1,419.2. Gazprom and Rosneft led the energy sector as a reaction to the fact that the price of crude did not fall through $80 p/bbl and now has a good chance to establish a new range in the $80 to $90 p/bbl area. Respectively they gained 1.6% and 1.1%. The banks also gained, albeit volume was very small here also. The best performing MICEX stock was the Moscow electricity distribution company, MOESK. It closed 6.7% better as some investors expect that it is one of the beneficiaries of higher electricity consumption. Acron closed 5.7% better as speculation about a fertilizer/potash merger grows and because investors expect that spending on domestic agriculture will have to increase this year and next. Amongst the losers were the food retailers and auto retailers, the latter category despite the fact that the AEB said yesterday that sales of new cars and light vehicles reached 173,171 in July. That was an increase of 48% year on year. Investors worry that the current weather conditions will not only affect August sales but will lead to a slower pace in the autumn. Sollers fell 1.6% and Avotvaz ended down despite the stronger market. The ruble held stable against the dollar (down 3 basis points to 29.861) but lost 28 basis points against the generally strong euro. It closed the MICEX session at 39.636. In the London GDR market, volumes were also very low, reaching only $400 million compared to a more normal $1.0 bln. The IOB Index ended up 0.2%. The best performing stock was LSR Group, one of our top stock picks for the next 12 months because of its position in the affordable mass-housing market. It gained 3.7% to close at $9.70. PIK Group, the other big player in that market segment, lost 2.4% as the prospect of an SPO hangs over it. Stocks that may be affected by the extreme weather conditions led the declines. Global Trans and Novorossiysk respectively fell 2.8% and 2.6%. Magnit lost 1.5% and Pharmstandard ended down 0.2%. In the ADR market, prices of Russian names also traded within a small range. Mechel was best with a gain of 0.8%, while Vimpelcom, a strong gainer in recent sessions, closed down 0.7%.