FINANCIAL ANALYSIS
by Chris Weafer
No prizes for guessing what will dominate global market sentiment again today. Investors are still firmly of the opinion that US legislators will agree a new debt deal before the deadline but the closer it gets to that deadline, the greater the level of nervousness affecting all markets. Asia's markets have followed the US indices lower this morning, but again it is a case of a low volume drift rather than a sell-off. Nobody wants to be caught out when the (hoped for) relief rally comes. Moscow's bourses will again follow the global trend today, albeit investors should watch for possible positive news flow from the WTO meeting in Geneva (see below).
Gold is at a new record of $1,626.6 per ounce, up 0.5%, while silver is 0.8% better today. That again bodes well for stocks such as Polyus Gold and Polymetal. However, a debt-deal relief-rally elsewhere will likely hit gold and gold stocks later this week.
The dollar is again lower as more serious questions are now being asked about the longer-term role of the dollar as the major world transaction and reserve currency. The current dollar-euro rate is at $1.4527, down from under $1.44 yesterday morning. The ruble will make further gains against the dollar again this morning, boosted by the combination of strong oil and the weak dollar trend.
The price of crude is holding very well as reports circulate of increased trader bets for higher oil in the autumn and because of the sliding value of the dollar. The price of one-month Brent is currently at $118.4 p/bbl and WTI is at $99.44 p/bbl. That provides a generally positive backdrop for the Russian equity and ruble markets and sets them up to lead the relief rally when it comes. The US Dept of Energy will publish its weekly oil inventory and usage report later today. Only a big move in either direction will affect the oil price in the current environment.
Severstal will issue a 2nd Qtr trading update this morning.
The weekly inflation update will be published today. The hope is that the recent trend of zero weekly price growth can be extended. Finance Minister Kudrin said yesterday that he hopes this year’s annual inflation rate can be held between 7.0-7.5%. Year to date the inflation rate is at 5.1%. Holding the rate at or below 7.5% would place the Central Bank in a better position to avoid any further interest rate rises this year as the government tries to boost economic growth.
The US Energy Dept will release its weekly inventory and oil usage report later today.
Investors get another US economic data point today with the June durable goods report. A small dip over the May figure is expected. The Fed will release its monthly Beige Book but with concerns very focused on the potential “game-changing” debt deal investors will hardly be bothered with the details in the book.
The main 2nd Qtr earnings report will come from Conoco Philips, albeit nothing major is anticipated.
WTO Entry
General Council of WTO meets for two days from today. Apart from the debt talks in the US the other event with potential interest to investors in Russia is the start of the two-day meeting of the General Council of the WTO in Geneva. This is the highest decision making body in the WTO and Russia’s admission process will likely feature high on the agenda. President Medvedev has made no secret of his desire to bring an end to the seventeen-year negotiations and to have Russia join either later this year or early in 2012. Membership of the WTO is seen as very important, if not critical, if Russia is to succeed in boosting investment capital flows and investor participation in the economy.
Russia now needs to join. This time it really is different. Growth over the past ten years has been driver, or funded, by oil wealth. Almost regardless of where oil moves from here that phase is now at an end and without a major increase in investment spending in the economy Russia’s GDP growth rate will be lower than the targeted 5-5.5% over the coming decade. Russia now needs the investment flows and to achieve that it needs to be part of the WTO. Any signal that an agreement is close will provide a very positive boost to the equity market, especially to the banks and other domestic sectors.
Some sticking points. The two potential sticking points are Russia’s insistence on maintaining subsidies to key industries, such as agriculture and the auto manufacturers and Georgia’s insistence on monitoring the border between Russia and the break-away states of Abkhazia and South Ossetia. The subsidies issue should be resolved with a lengthy concession period while Moscow hopes that Washington and Brussels can persuade the Tbilisi government to be flexible. In theory Russia may be admitted to the WTO by a simple majority of member votes but that has never happened before and Moscow would be reluctant to join without the usual unanimous approval.
Politics
United Russia needs more time. United Russia has postponed its annual congress from early September to the weekend of September 23-24. The congress is when the party selects its list of candidates for the December 4th Duma elections and approves the election programme. Prime Minister Putin will address the congress and will declare whether he will again lead the party into the election. One obvious reason for the postponement is because United Russia's popularity has slipped significantly in national opinion polls since the start of the year. The party, and its leaders, are expected to mount a very intense campaign over the next two months to try and reverse that slide. Putin is the leader of the party but is not actually a member. Hence, it is his decision whether to sponsor the party at the Duma elections or not. In early May Putin announced the formation of the All-Russia Popular Front as a mechanism to bolster support.
UR is slipping in the opinion polls. The latest opinion poll from state-run VTsIOM polling company asked people about their Duma voting intentions if the elections were held this month. United Russia would win 58.3% of the vote (compared to a 64.3% share at the last election). The Communist party would get 14.7% (11.6%), LDPR would get 9.8% (8.1%) and A Just Russia would get 7.3% (7.74%). None of the other three registered parties would get more then the threshold 7% to allow them take a proportionate amount of seats in the Duma. Parties that get between 5 and 6% of the vote can take one Duma seat and parties that get between 6% and 7% can take two Duma seats. The wild card for the Duma election is how A Just Cause (or Right Cause) will fare under its new leader Mikhail Prokhorov. Undoubtedly the party will be a lot more active from now and will pick up a bigger share of the vote than current opinion polls suggest.
Other news
Bad Corporate Governance news. According to Gazeta.ru, the Federal Arbitration Court yesterday rescinded a decision by lower courts that had obligated Rosneft to present confidential documents to minority shareholder activist Alexei Navalny. In April the Ninth Arbitration Appellate Court ordered Rosneft to make available to Navalny minutes of board meetings that had taken place in 2009. But, in early July, Rosneft, Transneft, Surgutneftegaz and TGK-2 requested that Deputy Prime Minister Igor Sechin revoke a recently passed bill which increased the rights of minority shareholders to obtain such information.
Trading Yesterday
Another quiet session on Moscow’s bourses as investors remained sidelined while watching the US debt talks. The indices moved within a tight trading range which saw the RTS close up 0.4%, at 1,987.8, and MICEX close down 0.3% at 1,722.1. The blue chips moved more or less with the index. Polymetal was one of the exceptions, rising 3.0% as the price of gold and silver pushed higher.
The ruble gained against both the dollar and the euro as oil traded higher and investors moved back into emerging market currencies in Asia. The ruble added 17 basis points against the dollar to close the MICEX session at 27.557, and added 11 basis points against the euro to end at 39.93.
The London GDR market was just as quiet and the IOB Index closed 0.3% better at 1,103.9. Polymetal (+3.0%) and Polyus Gold (+0.7%) rose with the gold & silver price, O'key Group (-1.9%) extended its recent slide and X Five Group added 1.8%. Most other stocks traded close to the index level.
In the US, Russian stocks bucked the negative trend on Wall Street. While the Dow fell 0.7% and the S&P lost 0.4%, MTS and VimpelCom rose 3.% and 1.6% respectively. Mechel added 1.7% and Yandex was again the strongest Russian name with a closing gain of 2.4%.
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