by Chris Weafer
That is the big headline this morning. The implications for the ruble-dollar rate and for investor sentiment are obviously bad and will dominate the market today. The outlook for the dollar remains positive over the medium-term (bad for oil and commodities), i.e. at least until end year, but prospects for a significant weakening from early next year are also growing. President elect Obama has already indicated that he is prepared to increase state spending (e.g. his call to bailout the auto industry) and a looser fiscal policy will start to weaken the dollar. A more hopeful note for oil is that fact that OPEC producers do appear to be actually cutting production and the organization has indicated that it may call an early meeting to agree deeper cuts. The fact is that countries such as Saudi and Iran need a price average of around $70 p/bbl (Brent) to fund their social programmes while others (Dubai, Qatar) have massive infrastructure programmes to fund. Along with evidence of much lower oil deliveries by Russian producers to Transneft, we may be close to a better support price for oil. But short term it looks more likely to trade even lower.
Re-testing recent lows. Asian equities are following the weaker US markets with losses across the region this morning. In mid-afternoon Asia trade the MSCI Asia-Pacific Index was down 5.4%. A worse than expected industrial growth number in China is being interpreted as evidence of a significant cooling in that economy and that is also hitting the price of most commodities. The price of Brent traded at $50.6 p/bbl in Singapore this morning and Urals has just traded at $49.7 p/bbl. The last time it traded that low was January 2007 and will likely have a big psychological impact on the market. A sub-$50 p/bbl price piles on the pressure against the ruble and encourage speculators to increase bets for further weakening. The weekly update of Russia’s foreign exchange reserves is due out this morning and a big drop over the past week, as the Central Bank has certainly had to raise the level of its daily support from the previous average of around $3 bln per day, will also raise expectations of ruble weakness. Many traders take the view that the Central Bank realistically could not let the level of reserves fall to $400 bln because that would risk the sovereign credit rating and would even more seriously undermine the prospects for the economy in 2009. If the cost of support raises to $5 bln per day then the government will face some critical decisions within weeks.
Risk of another market close. Yesterday’s statement by Raspadskaya about falling sales and poor account settlement re-enforces worries about a rapidly slowing domestic economy. Anecdotal and firm evidence from many companies all point to a near collapse in order flows and an emerging problem with account settlements. One construction company is reported to be trying to settle its debt by bartering unsold apartments. Put all those factors together and the only question about today’s trading will be how long it will be before the local bourses breach break limits and close again. A re-testing of the late October low of 549.4 for the RTS is very likely. Traders will however hope that we get another speculative bounce in the US equity market of the sort that we have seen in recent weeks whenever the markets have been sold off heavily (two steps down and one back) but the trend remains downward. The S&P 500 Index closed just above the 850 level yesterday and, according to technical analysts, a break below that mark will leave the next big support level at 600 or almost 30% lower. A reports of a $100 bln redemption from global hedge funds in October has also raised investor fears.
ADRs fall heavily. At the opening today, weakness is expected across all sectors with the oils, metals and banks likely to fall fastest. In US trade last night, the price of Wimm_Bill_Dann fell 27.4%, Mechel was down 15.2% and Rostelecom lost 21.6%.
Big falls in Russian GDRs. Most of the action in Russian names yesterday was in London as MICEX remained closed and the RTS traded for only half a session. It opened in a downward trend and fell 12.5% before it too was suspended for the rest of the session. That collapse was led by the oils (LUKoil fell 11.4%), metals (Norilsk Nickel ended 12.9% lower), Gazprom (-10.6%) and Sberbank (-8.5%). Polyus was the big faller in the GDR market with a price drop of 28% as speculation continues over the companies strategic objectives. Rosneft and VTB were also big fallers, down 24.7% and 23.3% respectively. Uralkali bucked the trend and reversed early session weakness after the First Deputy Prime Minister comments. In the US, the S&P fell 5.1% to end just above the technically important 850 level. A close below that line indicates next support at 600. The reason for yesterday’s fall was a combination of the growing problems at General Motors, a profit warning from one of the country’s biggest electrical goods retailer and the reversal of the government’s plans to bail out mortgage assets. The TARP fund will now concentrate on a consumer credit rescue, a move interpreted as indicating a much bigger problems in that sector than previously thought.
Ruble pressure intensifies. The ruble fell even as the Central Bank raised the refinancing rate by 1% to 12%. The Bank remains defiant that it will not devalue the ruble but the continually weakening oil price is piling on the pressure, reflected in the fact that the Bank raised the refinancing rate at a time when most Central Banks around the world are cutting rates. The statement that it will widen the target range for the basket that the ruble trades against had the same effect as dropping some blood into a shark tank. Traders sense an opportunity to make money against a falling currency and as Urals crude has now dropped below the psychologically important $50 p/bbl the cost of defending the ruble may well become too expensive for the Central Bank to fight against. The determination of the government to keep the ruble stable is understandable. It fears a loss of confidence in the financial system could lead to huge cash outflows and a collapse in the economy. But moving the “line in the sand” back by 1% at a time is a very risk strategy and further undermines the equity and bond markets. A prayer for higher oil would not go amiss right now.
Pressure piles on the US market. US equity markets fell for a third straight session this week. The S&P 500 closed down 5.2% and the Dow Industrials Index lost 4.7%. The S&P 500 ended just above the 850 level, a close below which indicates next support at 600. The level of nervousness amongst investors continues to increase, reflected in the gain of the Chicago traded VIX Index to 66.5, up over 8% yesterday. The reason for yesterday’s market weakness was a combination of bad news events. The main negative was the announcement that the US government is no longer considering a bailout of distressed mortgage assets and instead it is to focus the resources put into the Troubled Assets Relief Programme (TARP) towards the consumer credit segment. Investors interpreted that to mean that the problems in this area are much worse that previously thought. That fear was reinforced with the profit warning from one of the country’s biggest electrical retailers that there is a “seismic” slowdown in spending. The problems in the US auto sector with a rescue plan for GM and Ford now expected. The collapse in the price of oil also pulled the energy stocks lower.
Brent close to $50 p/bbl. The price of oil continued its slide yesterday as fears over demand destruction continue to grow. An International Energy Agency official said that the agency is very likely to cut the demand outlook for 2009 when it publishes its next monthly report. A US credit card company reported a 4.2% drop in gasoline purchase in the US last week and that is expected to be reflected in higher inventory numbers when the US Energy Dept publishes its weekly report later today. At the close on Nymex, the price of WTI was down 5.3% at $56.16 p/bbl while Brent ended its ICE session at $51.17 p/bbl, down 6.5%. In Asia trade today, WTI was down a further $1.49 p/bbl at $54.67 p/bbl and Brent traded at $50.60 p/bbl. Urals closed its session yesterday at $50.55 p/bbl, down 5.9%, and the indications from Asia trade point to a sub-$50 p/bbl price this morning.
Base metals fall. The strength of the US dollar and the deteriorating outlook for demand also weighed on most metal prices. Copper closed down 0.5%, at a three year low, and nickel fell 1.8%. Zinc bucked the trend with a gain of 4.4%. The price of gold closed at $713.7 per ounce as a counter-balance move to the rise in the dollar.
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