By Chris Weafer, chief strategist at UralSib Capital
Asia’s equity markets are trading, on average, 1.0% lower in early afternoon trade after an initial steeper decline was moderated by a small bounce in the US equity Futures and a 1.0% gain for China’s Shanghai Index. That was because of measures announced to boost low income housing. The Nikkei is the worst of the major Asian markets as the yen continues to rally against the dollar (last at 86.695) and puts export competitiveness at risk.
The dominant factor in all global markets is again the concern that the global recovery is stalling. The case for the bears received a boost on Friday with a big drop in a US consumer sentiment survey and worse than expected results from GE and two big Wall Street banks. The bulls have been quick to point out that, albeit less than expected, there is still good underlying growth and that, realistically, recovery was always going to be patchy rather than straight line. Most investors will continue to take the view that, through the mid summer period at least, they are better off on the sidelines and holding onto relatively high cash positions until the trend becomes clearer.
In isolation, the case for Russian equities and the ruble remains positive with growth continuing to build and corporate reports strong enough to support the view that assets are cheap relative to global emerging market peers. But the dominant driver will remain the global environment for some time. That means opening weakness to reflect the 2.9% drop for the S&P, i.e. more than twice the decline when Moscow’s bourses closed on Friday, and a weaker trend for the ruble to follow the weaker trend in Asia’s developing economy currencies today.
The dollar-euro rate last marked at $1.2902 and the price of gold is at $1,192.40 per ounce. Industrial metals are staging a small rally after Friday’s big sell-off with, e.g. copper up 1.0%.
But, that opening weakness will be a mark-down rather than a sell off as the US Futures are indicating a small opening bounce and the price of crude oil is still generally resilient to growth fears. WTI for August last traded above $75.50 p/bbl and Brent is also above $75 p/bbl. So long as oil stays above $70 p/bbl then, while Russia will not bounce in isolation of global trends, it will avoid a sell-off.
The trend towards safer domestic themes was evident in the US market on Friday and also in Russian ADR trade. Mechel closed down 5.9% while Vimpelcom gained 0.2%. That trend may also be more pronounced in Moscow trade while waiting for global market recovery.
The dispute involving Polyus Gold in Kazakhstan is turning increasingly nasty with fresh allegations made by the Assaubayev family that sold 50.1% of KazakhGold to Polyus last year and whom Polyus is suing for $450 mln.
Vedomosti newspaper, citing unidentified officials, claims today that the government will impose a gas extraction tax of 10% to 15% from 2011. The tax reform debate will likely be the most important policy discussion in government over the next year and will give rise to lots of speculation about possible tax changes and about which industries may be targeted. The question of a gas extraction tax has been debated for many years and, so far, has not been supported by cabinet. The bottom line being that Gazprom’s capex programme is so large that it needs the cash flow.
Today is a light day for economic reports with only a housing market index scheduled for the US and some May reports due in Europe. The 2nd Qtr earnings season picks up pace this week with a large number of S&P companies scheduled to report every day this week. As always, a good series of positive numbers will reverse Friday’s nervousness while some more big misses will compound it.
The full end June macro report for Russia will also be published this week, showing the trend in retail sales, unemployment, construction spending, etc. Last week’s industrial production report was less than expected and not strong enough to support the more optimistic GDP growth indicators. It will need to pick up from here. Retail sales growth is expected to pick up to an annualized 5.9%, from 5.1% at end May, and the unemployment rate is forecast to drop from 7.3% to 7.2%.
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