Three Days to Save the Summer
Asia’s markets were encouraged by the late rally in the US markets yesterday and are mainly trading higher today, albeit modestly so. The MSCI Asia-pacific Index is up 0.7%, led with metals & mining stocks. The Nikkei is up 0.7%, China’s CSI is off 4 basis points and the Sensex is up 1.4% in afternoon trade.
The price of Brent is clinging stubbornly to the $70 p/bbl level ($70.02 p/bbl) while the equivalent WTI contract is at $69.47 p/bbl). Copper and most industrial metal prices are also between 0.5% and 1.0% higher than yesterday’s close as traders hope that the recent sell-off was overdone relative to fundamentals. The fundamentals in this case; China demand. Traders are encouraged by the fact that the Baltic Dry Index jumped 6.2%, the biggest gain since March 4, to its highest level in six months
The dollar-euro rate is at $1.2286, i.e. more of less where it traded at yesterday’s close. The price of gold last traded at $1.206.0 per ounce and silver is up 1.5%.
All of that should translate into a better opening for Russian equities and a small bounce in the ruble-dollar rate. Stocks that led yesterday's big fall should gain most this morning. However, even though the US market rallied into the close yesterday, stocks uch as Mechel (-1.1%) did not fully participate. The prevailing mood is, however, one of extreme nervousness that a solvency crisis may yet develop in Europe’s financial institutions. A majority of investors will again stay on the sidelines, waiting for fresh news in Europe and to see how the US markets follow through later today. The next three days will be critical for how markets trade over the next three months.
News in Vedomosti today that the Federal Anti-Monopoly Service is to impose a fine of $1 bln on Russian oil refiners over domestic pricing practices. The state is adopting a much tougher line on prices, i.e. profit margins, in industries that are either important for keeping inflation low or a critical parts of the modernisation/infrastructure rebuild story.
The most important economic reports due in the US today will include new home sales and April’s durable goods report. The US Energy Dept will release the weekly inventory report with traders most focused on the inventory position at Cushing, Oklahoma. If stocks decline at the oil hub, then the WTI contract price may recover relative to Brent. The stock news will come from VimpelCom (VIP US; Buy). It will release selected operating data and pro-forma financials for the 1st Qtr.
Moscow’s bourses picked up the global trend from the opening yesterday. Apart from a brief hopeful, but ultimately futile, pause in mid-session the indices slid lower all day. MICEX ended below 1,200 for the first time since October and the RTS closed at its lowest since mid September last. Over the day, MICEX lost 5.7%, to 1,197.4, while the RTS lost 6.5% to end at 1,226.6. Sberbank was the biggest blue chip faller, pulled lower with negative market sentiment and as a reaction to ruble weakness. The biggest decliner was LSR Group, which closed 12.1% lower. Magnit and INTER RAO were amongst the very few stocks to record session gains. The former because it is to be included in the MSCI Russia Index from the close of markets tonight and the latter after details of its shares for assets swap with the government were revealed.
The ruble also followed the global trend as investors fled from risk assets to the relative safety of the US dollar. The ruble’s decline was exacerbated with oil price weakness. By the close of trade on MIEX, the ruble had lost 52.7 basis points, to 31.515 against the dollar, while ending unchanged against the euro at 38.555.
The London GDR market resembled the proverbial bloodbath. The IOB Index lost 7.8% as stocks with greatest exposure to the global economy fell hard. Those are also the stocks that investors believe are at risk of price controls in Russia. Of course, if the global economy does fall into a double-dip then the price of all commodities will fall sharply and the Federal Anti-Monopolies Commission in Russia will have no need to intervene. There is something of a “can’t win” scenario for stocks in these sectors. Gazprom Neft was the major faller, down 11.3%, after it released neutral 1st Qtr results. Severstal (-10.9%) and Evraz (-8.2%) led the steel names down while PIK (-9.3%) and LSR Group (-8.8%) were also big casualties. Surgutneftegaz re-balanced the previous day’s gain with a loss of 10.3%. Amongst the relative defensive stocks, Cherkizovo closed 1.6% higher and Magnit only dropped 1.3%.
Of Material Concern
Just when you might have been forgiven for thinking that it can’t get worse, reports overnight that North Korea is preparing for war have spooked Asian markets and currencies. The MSCI Asia-Pacific Index is off 3.1% and the Korean Won is trading almost 4.5% lower against the dollar. US Futures are also indicating a lower opening in the US today. That trend will be reflected in a weaker opening for the Russian markets and the ruble this morning.
Adding to the international uncertainties, news of the investigation into Evraz’s pricing policy will worry investors that the state intends capping profits in sectors that are key to economic revival and government efforts to rebuild the country’s infrastructure. The risk premium in these sectors, already rising due to global uncertainties, just got bigger in the minds of investors. Whether the perception of risk proves correct or not, for the medium term it will be a drag on share prices in materials industries.
The banks and global market themes will be worst affected in the expected market weakness this morning. The domestic “defensive” names (utilities, fixed line telecoms, consumers) will be relatively better performers. Comstar is attracting a great deal of interest again. It was one of the better performing shares (+4.3% in GDR trade) yesterday.
News from Korea and from Europe remains very unpredictable. However, for now, the news is still only keeping potential buyers on the sidelines rather than emboldening a larger number of sellers. How much more bad news the markets can absorb without cracking under a weight of sell orders is a major question.
The main economic news in the US today will be the Case-Shiller House Price Index and the Conference Board’s consumer confidence survey. The confidence survey will show how the current air of renewed crisis is affecting consumers. In Europe, markets will reopen after yesterday’s holiday and will have to deal with the fallout from the rescue of a Spanish bank over the weekend.
The price of Brent is still just trading above the $70 p/bbl level ($70.15 p/bbl) in Asia while the price of WTI for July settlement is at $69.14 p/bbl. Copper is down almost 2.0%, also as a reaction to the news from North Korea.
Traders are again migrating to the dollar as the relative haven. The dollar-euro rate is at $1.2304 and the yen-dollar is at 90.0. Gold is off 0.2% at $1,1191.6 per ounce.
Steel names fall most. Moscow’s bourses and the ruble opened predictably better yesterday but without any conviction to sustain the rally. Prices slid for most of the day before a late bounce when the US markets looked like heading positive. The RTS closed 1.1% better, at 1,311.7, while MICEX ended 0.4% higher at 1,269.4. The better RTS performance was again a function of the ruble rally. By the close of the MICEX currency session, the basket was up 40 basis points and the ruble again below 31.0 against the dollar. Evraz led the steel names lower after the news of the Federal Monopolies probe. It ended down 4.8% at $24.87. In the US ADR market, all Russian names ended lower with Mechel leading the way down. It closed 4.9% lower at $20.08. Global worries and the Evraz investigation, which reminded investors of Mechel’s problems in the summer of 2008, provided the rationale.
Sechin’s Very Interesting Comments