by Chris Weafer
➢ Global markets are set for a very turbulent week. Investor hopes that the G20 meeting might produce some instant financial market and economic relief, are being rapidly downplayed by political leaders while economic indicators continue to show deterioration in most global economies.
➢ Despite last Friday’s sell-off, there may still be some gains, or minimal selloff, as part of the usual end quarter “window-dressing” with the real test for market sentiment coming as the new quarter starts on Wednesday.
➢ There are several major economic reports due out in the US this week with Friday’s nonfarm payroll and unemployment reports likely to have the biggest impact. If these disappoint then markets, and commodities, will start the new quarter heading south regardless of what the G20 agrees.
➢ The RTS had risen 50% during this rally before losing 4.2% on Friday. That reduced the month to date gain to 32.4%. After such a strong run, the tendency will be towards caution, especially with March indicators expected to show a continuing sharp decline in the economy and the prospect of a big hike in bank bad debts looming large. The bank sector looks particularly vulnerable to a short-term decline.
➢ Russian equities have strongly out-performed both the global emerging markets and All-World indices in March. The RTS gain of 32.4% compares with a gain of 18.4% for the MS EM Index and a 9.8% rise for the All World Index. The S&P 500 Index has gained 11% in the period.
➢ The price of oil held above $50 p/bbl at Friday’s close but the rally in the value of the dollar, and fears over a repeat of February’s contango in WTI, look set to undermine the price over the short-term. The outlook for the 2nd half looks better, given OPEC’s more decisive actions, but over the next couple of weeks the price looks vulnerable. The big issue, also for metals, is where the dollar will trade and whether Friday’s gain was the start of a partial reversal of weakness or just a blip.
➢ The dollar and related oil price trend will have a direct bearing on whether the Central Bank will have to buy dollars or rubles to keep the currency relatively stable.
➢ President Medvedev will meet with German Chancellor Merkel on Tuesday. The still stalled Nord Stream pipeline plus the EU’s decision to help fund an upgrade of the Ukraine transit pipeline, will likely top the agenda. Without Russian gas, the proposed pipeline upgrade doesn’t make sense while any compromise may save Nabucco.
➢ Government actions are focused almost entirely on creating stability, and riding out the global storm, rather than trying to stimulate growth. GDP may have fallen 7.3% year on year in February.
➢ The price of oil fell almost $2 p/bbl on Friday as traders reacted to the gain in the value of the US dollar and fears grow that rising US inventory levels may again create a significant price contango for WTI. Brent closed the week at $51.98 p/bbl, only forty cents less than WTI, while Urals closed just above $50 p/bbl.
➢ The ruble eased down slightly against the dollar on Friday, to close at 35.536. That was because of the dollar gain against the euro and the near $2 p/bbl drop in oil. That weakness may extend today as oil is expected to drop further and the dollar may extend its Friday gain against the euro. The dollar-euro rate ended Friday at $1.329, down 2% for the day and the week. Brazil’s real dropped 1.8% on Friday as investors ran shy from commodities.
➢ Industrial metal prices dipped slightly on Friday, as a reaction to the stronger dollar, but most had another good week of gains. Gold ended Friday at $925.3 per ounce and looks vulnerable over the short-term if the dollar rallies.
➢ Investors responded to the performance of emerging markets with a $2 bln injection to GEM Balanced funds last week. Russian equities were also rewarded with a second straight week of inflows, albeit with a modest $50 mln. Not as good as Brazil, but better than China and India.
➢ Through the 1st Qtr, global investors approach to Russia appears to have been “neither a seller nor a buyer be”
Note: As summer time has now started in Russia/Europe, there will again be only a one hour, fifteen minute overlap between MICEX and US market trading hours.
The 2009 Focus Russia Survey and Emerging Europe Survey, part of the Pan-European Thomson Extel Survey, is now underway. Voting will close on 16 May. You can vote online. Goes without saying, but will anyway, that we very much appreciate your support in these surveys, especially in tough markets.
G20 Summit is decisive event. After having had one of the best monthly performances for almost two decades, global markets, commodities and currency markets are facing into what looks set to be a very turbulent week. It will certainly be an historic week with the G20 Summit on Thursday and US President Obama’s first major international event. Market action on Friday showed that investors remain very nervous and ready to hit the sell button. The negative momentum from Friday will overhang the start of the trading week today but, with end month “window-dressing” still running until Tuesday’s close, any further decline should be limited and a small bounce is possible in some markets. Most traders and investors will be more inclined to wait until the G20 meeting, and the start of the new quarter, before making any major portfolio decisions. There are several big economic reports due in the US this week, the most important being Friday’s nonfarm payroll and unemployment reports, and they will add to the dossier of evidence concerning the health of the economy. The results season, covering a terrible 1st Qtr in all economies, will start on April 7th and the prospect of negative surprises will also generally keep investors very cautious this week.
Dollar rally may continue and undermine oil. The dollar is expected to claw back some of the losses of recent months against the euro. There is still huge concern over the US Administration’s spending plans and while the consensus view remains that the dollar will weaken significantly over the course of the year, the economic woes of the EU do not support the euro’s credentials as the alternative haven currency. The January industrial report showed just how bad is the current trend and that will likely serve to undermine the euro again early this week. That short-term move towards a stronger dollar will also undermine support for oil and metals, as it did on Friday. The price of oil unlikely to hold above the $50 p/bbl level this week, partly for currency reasons and also because the contango situation of February appears to be again building in the WTI market as inventories continue to rise. Beyond the next few months, oil market looks as oil, and most metals, although prone to a pull-back after recent strong gains, look more stable. If the dollar continues to gain against the euro and oil does breach the $50 p/bbl level, then the pressure seen on the ruble-dollar rate during Friday will continue.
Banks look vulnerable. In stock terms, it is difficult to have a positive conviction about any sectors until we see where global market sentiment is heading after Thursday, where oil trades and the trend in the dollar. But, we can point to a strong conviction about expected further weakness in the banking sector stocks. Sberbank and VTB have both risen strongly since late February, but the looming hike in the cost of nonperforming loans will undermine the shares. Sberbank has risen by 73% since February 20th (VTB by 37%) even despite Friday’s fall, and investors will be tempted to lock in some of that. The oil majors will trade with the trend in crude oil again this week and are more likely to suffer a downward trend over the course of the week. Gazprom should be a better performer with some positive momentum towards the Nord Stream pipeline possible from the meeting between President Medvedev and Chancellor Merkel on Tuesday. The telecom sector looks relatively better than others with optimism over the Svyazinvest story refusing to die off. Sistema also looks good for more gains as it restructures its business and, according to media reports, offloads its real estate business to VTB. 2nd tier auto maker, AvtoVaz could be the speculative play of the week. Prime Minister Putin is scheduled to visit the company over the next few days to discuss state support for the sector. He is unlikely to want a photo opportunity just to be the bringer of bad news.
Week ahead
May be a case of better to travel than arrive. No doubt that the most important even this week is the G20 summit in London on Thursday. Optimism that the group may agree some significant measures to reverse the collapse in the global economy and financial markets is one of the main factors behind the strong run in global equities and commodities over the past month. Almost inevitably, such events tend to come up short on expectations and that is the main reason to justify a more cautious short-term market stance. The question of a global reserve currency may be one of the more important discussions for the markets. Amongst the other issues that investors will also be keen to hear any decisions on include financial market regulations, the likely extent of quantative easing and how much money may be made available to bail out trouble countries and the financial sector. Europeans are generally skeptical about the American approach and that “rift” may prove too distracting for any market soothing decisions.
Medvedev and Merkel to talk gas. President Medvedev will meet with German Chancellor Merkel on Tuesday and the question of how to progress the Nord Stream pipeline plus the row over the proposed EU funding to upgrade the Ukraine pipeline will top the agenda. Both sides are very keen to progress the Nord Stream pipe and Russia will press Germany to use its influence to quickly resolve the objections of the Nordic countries to the route. President Medvedev will press Moscow’s unhappiness with the EU decision to fund an upgrade of the Ukraine pipeline and will probably look to have that stalled. The main point of course, is that there is no point in adding an additional capacity of 60 bcm, to the existing 120 bcm flow, unless Russia actually agrees to make the gas available for it. Moscow would obviously prefer any additional gas to flow to Europe via alternative pipelines, especially the South Stream network. One possible compromise, that might finally make the Nabucco pipeline viable, is that Russia could agree to support Nabucco in exchange for no upgrade of the Ukraine pipe.
Several major economic updates due. Beyond the G20, there are several important economic reports due out in the US that are capable of significantly influencing investment sentiment. No doubt, the most important will be the end March nonfarm payroll and unemployment report. The consensus is for a cut in employment numbers of 660,000, up slightly from last months 651,000 cut, and a rise in the unemployment rate to 8.5%, from 8.1% last month. Additionally, the ISM manufacturing and non manufacturing indices will be published (the former on Wednesday and the latter on Friday). Previously, these reports have had a big impact on markets. The monthly vehicle sales report will come out on Wednesday, the same day as pending home sales. Factory Orders, another big macro indicator, will be updated on Thursday. The week will be rounded off with a speech by US Fed Chairman Bernanke. He is scheduled to deliver the keynote speech at a credit markets symposium on Friday morning. As the week ends, investors will start to focus on the start of the 1st Qtr results season. Alcoa will be the first to report on April 7th. A Bloomberg survey shows that analysts expect an average drop of 36% in the profit of S&P 500 companies.
Economy
Government’s priority is stability rather than growth. The Russian government’s key priority is to create stability in the economy, in the currency, in the banking industry and in the country generally. Measures to promote growth will have to wait. For now it appears to be a case of battening down the hatches and riding out the global storm. This runs counter to the so-called quantative easing being pursued in the US, and elsewhere. But, given that there is very little that Russia can do to buck the declining global trend then, frankly, this is a very sensible policy. Measures taken so far include;
➢ Money supply has been reduced since September. M2, cash in circulation, fell by 16.6% from end September to end January as part of measures to ease pressure on the ruble. The government appears satisfied with the current situation and, through February, M2 rose slightly by 0.25%.
➢ Repo rate was increased by 1.0% to support the ruble and Central Bank “liaison” with the top banks in the country has increased
➢ Provision made in the revised 2009 budget for increased spending in unemployment payments and other measures to support people and regions suffering most from the downturn.
➢ The Trade and Industry Minister said last week that about 600 companies may be eligible for state support.
➢ Government is working closely with the banking sector to try and identify problems ahead of time and to broker solutions. This is not going to prevent the problems but it should help reduce any nasty surprises.
➢ Senior government ministers are pushing the theme that this “crisis” will be the catalyst for greater effort to push the long talked about reform agenda. The battle against corruption, in particular, has been identified as a priority area. Too early to be optimistic but the right noises nonetheless.
Finance Minister urges caution. But against those pragmatic measures, and a generally much more upbeat rhetoric from some Ministers and officials, the Finance Minister continues to point out that the country is not much more than in the “eye of the storm” rather than clear of it. He has focused particularly on the area of bad debts and the threat posed by the expected hike in nonperforming loans later this year. That will certainly be a huge problem to be faced by the economy. The Deputy Economy Minister, Andrei Klepach, said last week that the economy probably shrank by 7.3% in February when compared to the same month last year. The first macro indicator for March will come early this week with the monthly Purchasing Managers Index.
Oil
Oil struggling to stay above $50 p/bbl. The price of crude fell on Friday and looks vulnerable to a further decline this week. The rally in the value of the US dollar, negative for all commodities, plus yet another big increase in US crude oil inventories, points to a weaker price trend over the near term. Longer-term, the prospects for sustainably stronger oil in the 3rd Qtr and 4th Qtr still look good. OPEC member countries continue to cut supply and the production decline in Russia is expected to accelerate later in the year. But, for now, the more likely trend is lower. WTI for May settlement fell $1.96 p/bbl, to close at $52.38 p/bbl, while Brent ended the week at $51.98 p/bbl, down $1.48 p/bbl. Over the past five days, the price of oil rose 0.6%. Urals closed Friday at $50.86 p/bbl.
US inventories still rising. Qatar’s Oil Minister said Friday that the main reason for the oil price rally in recent weeks has been the dollar weakness and he sees no medium-term improvement in the demand for oil. His comment is aimed at those OPEC member countries that remain delinquent on the quota commitments and is a warning that the organization cannot yet ease up on discipline. The price reversal on Friday, as the dollar strengthened, quickly proved his point. During the week, the US Energy Dept reported an increase of 3.3 million barrels in crude inventories to bring the amount of oil in US storage to their highest since 1993 and 13% higher than the five-year average. Trader’s fear that we may again see a repeat of the contango situation of February and that resulted in a widening of the front end discount to $3.47 p/bbl when compared to the July contract. Earlier this week the discount was only $1.18 p/bbl.
Currency
Ruble likely to lose ground to the dollar. The rally in the dollar relative to the euro on Friday had a knock-on effect to the rouble. The Russian currency lost ten basis points to the dollar, closing at 33.536, while gaining forty basis points against the euro, closing at 45.005. Earlier in the week the Central Bank probably bought some dollars to maintain stability in the ruble-dollar rate. Pressure is expected to be maintained on the ruble-dollar rate as this week starts because commodity prices are more likely to extend Friday’s dip and the dollar to rally further against the euro. An indication of that probability came with the 1.8% drop in Brazil’s real late on Friday as global investors started to cut exposure to oil and materials. The Russian Central Bank does have tighter control over the currency market than its Brazilian counterparts so we will not see the same sort of volatility in the ruble. The basket rate should not come under much pressure as ruble-dollar weakness would be balanced with the ruble-euro trend.
Euro haven status undermined. Investors returned to the dollar and yen in the latter part of last week as many think the weakness in the US dollar has been overdone. Economic data in Europe confirmed a still rapidly deteriorating situation in the region’s economy. The dollar gained the most against the euro for three months on Friday after the worse than expected January eurozone industrials report. The speculation is that the ECB may have to buy bonds to promote growth. Friday’s 2.0% gain in the dollar relative to the euro brought the weekly gain to 2.1%. The rate closed Friday at $1.3292.
Trading: Russia
RTS up almost one-third in March. Russian stocks recorded another big week, despite running into profit-taking on Friday. The 4.2% drop in the RTS (-4.0% for MICEX) cut the gain for the week to 10.5%. The MSCI Global Emerging Markets (EM) Index rose 12.0% by virtue of the better gain in Asia on Friday. The MS Russia Index gained 10.9% for the week. Since the start of March, the RTS has added 32.4% and the MS Russia index is up 27.7%. Russia gained from the favourable troika of rising global markets, the stronger oil price (+18.2% since the start of the month) and the gain in the value of the ruble relative to the dollar. The ruble has gained over 7% relative to the dollar since March 1st.
MICEX is one of best world indices in 2009. Year to date, the RTS is up 14.1% and MICEX is up 31.6%. The difference is explained by the approximate 14% drop in the value of the ruble relative to the dollar. The MS Russia Index is up a more modest 11.9%. That compares with a gain of 4.1% for the MS EM index and a drop of 2.1% for the MS EMEA region as a whole. The best and worst performing shares, with a greater than 30% gain/loss so far this year, are in the table below:
Download Leaders and Laggards last week_Mar_27_2009
Trading: International
Asia is the best performing region in March. Equity markets extended their strong rally to a third straight week and are on course for the best monthly return for almost twenty years. The MSCI World Index rose 9.0% over the past five days with the emerging markets (EM) index bettering that with a gain of 12.0%. Since the start of March, the World index is up 9.8% while the EM index is up 18.4%. The best regional gains have been recorded in Asia with the MSCI Asia index up 20.8% this month. The EMEA region is up 16.5% and Latin America trails with a gain of 14.6%. Year to date, the World index is still down 10.4% while the EM average is up 4.1%. The Latin America region started the year much stronger and is up 8.2% since January 1st. Asia is nest with a gain of 5.1% while the EMEA region trails with a negative 2.3%.
End quarter momentum is easing. The S&P 500 in the US rose by a more modest 7.9% last week, as Friday’s 2.0% drop cut back the performance. In March, so far, the index is up 11.0% and year to date it is down 9.7%. Europe’s markets gained 8.2% over the past five days, bringing the monthly gain to 7.6% and cutting the year to date drop to 14.6%. The reason for the big drop in global markets on Friday is because the end quarter momentum is running out of steam and investors want to hear what measures the G20 leaders will agree to on Thursday. The banks, a major driver of the indices and overall sentiment early in the month, led the fall on Friday after the heads of JP Morgan Chase and Bank of America said that results deteriorated in March. The dip in the price of commodities also cut the price of oils and material company shares.
Commodities
Metals dipped with the dollar. Base metal prices rose again this week, with the generally more optimistic mood in global markets. However, most ended Friday with a price dip as a reaction to the stronger dollar. Copper closed Friday down 1.0% and that cut the gain for the week to 2.2%. Nickel traded last at $9,608 per tonne. While copper is up 30% this year, nickel remains negative with a drop of 17% since the start of the year. Most other base metals are showing double digit year to date gains, e.g. zinc is up 15% and platinum is up 22%. Gold lost 1.8% on Friday again as a reaction to the dollar move, to close the week at $925.3 per ounce. Year to date, gold is up a modest 4.7% while silver has gained 18%.
Funds Flow: Investors respond to rally
Investors put big money in emerging markets. Russia funds reported inflows for a second week, up to last Wednesday, according to EPFR Global. Possibly a sign that Investors are now starting to respond to the strong performance of the market over the past two months. Russia funds reported inflows of $49.9 mln, up from the inflow of $7.4 mln the previous week. The big money flows last week were into GEM Balanced funds with almost $2 bln being invested into this category. Russia has a weighting of 5.3% in these funds and, therefore, will get an allocation of approximately $106 mln. Eastern Europe funds continue to report redemptions, albeit the pace of withdrawals has lessened considerably. Last week these funds lost only $4.2 mln. But that was the eleventh straight week of redemptions. Amongst the country funds, Brazil remains the favourite commodity play. These funds reported inflows of $239 mln for the week to Wednesday. China funds lost $49 mln and India funds lost $25 mln, i.e. their tenth straight week of outflow.
Russia flows were light in 1st Qtr. Over the course of the 1st Qtr, Russia funds were largely ignored by investors. Selling pressure eased to almost zero as most international funds reduced their weighting to neutral, or below, by the end of 2008. The strong market since January 24th has not persuaded many to add new cash as the prevailing view is that the 2nd Qtr will be tough for the economy, the banks and most other businesses. But, while volumes were low, Russia funds reported outflows in eight out of the twelve weeks. The total value of redemptions was only $68 mln. That was a much better result than the $180 mln taken out of China funds and the $123 mln withdrawn from India funds. Brazil was the favoured country fund with reported inflows of $669 mln. GEM Balanced funds did have a good quarter, thanks mainly to last week’s $2 bln inflows, with total new money of $3.5 bln. BRIC themed funds took in only $78 mln. East Europe funds lost a total of $746 mln from redemptions in the period. Russia accounts for about 40% of the structure of that fund category and that adds up to almost $300 mln, i.e. much more than the $186 mln that the Russian market will have received as its share of the GEM receipts.
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