FINANCIAL ANALYSIS
by Chris Weafer
Although investors are still clinging to the belief that because the consequences of a default are so disastrous, a deal will be done even at one minute to midnight on Tuesday. But, the longer we wait for the deal the greater the level of nervousness. That was reflected in US market trading last night and across Asia again this morning where most equity indices are off between 0.5% and 1.0%. Expect a similar pattern on Moscow's bourses this morning and, likely, for most of an expected quiet session. A majority of traders will simply stay away until the US uncertainty is resolved.
Weekly equity fund flows. (see more detail below). The total volume of money invested into emerging market (EM) funds last week was relatively low, even for mid summer, as investors prudently remained on the sidelines while waiting for a resolution of the US debt talks. But, although low, the net flow remained positive as a majority of investors expect a deal ahead of the default deadline. Russia funds reported a small ($13 mln) outflow for the week bring the net loss for July to a modest $158 mln. Year to date, Russia funds are still well ahead of other big EM country funds with a net inflow of approx $3.2 bln while others are still showing net redemptions.
Today.The dollar continues to fall against the yen, Swiss France and other "less troubled" currencies. It is higher against the euro, at $1.4297, as investor dears over the US and eurozone debt threats are interchangeable. The price of gold is at $1,615.9 per ounce and one month Brent last traded at $117.27 p/bbl (WTI at $96.97 p/bbl). The stronger dollar is the cause of the slight oil and gold price weakness.
As US legislators battle to find a solution to the debt and deficit debate ahead of Tuesday’s deadline, investors will have the first of a weak long stream of important economic indicators to digest. The big number will likely be next Friday’s nonfarm payroll number while, today, the headline number will be the advance reading of 2nd Qtr. A small dip to +1.8% is expected (+1.9% in Q1). In addition, investors usually pay attention to the Chicago PMI update and the University of Michigan consumer sentiment survey, both of which will come out later.
In the absence of any breakthrough deal in the US, these numbers will dictate where global equities, the dollar and oil trade in the afternoon and by extension, where Moscow's bourses and the ruble close into the weekend.
Later today, the annual gathering of Central Bankers, economists and business leaders will start today at Jackson Hole, Wyoming. No doubt what will be the main topic of conversation this weekend. Expect a steady stream of commentary and words to the wise from the meeting and, hopefully, some practical measures as to how the US may stop digging deeper into the fiscal and budget hole in which it finds itself.
WTO. The head of Russia’s delegation to the WTO General Council meeting, held in Geneva last week, said that the plan is to have all remaining issues relating to Russia’s entry into the organization wrapped up by the next meeting in mid December. Discussions between Russia and Georgia, which can block a unanimous vote to admit Russia, are continuing with Switzerland as mediator. Prime Minister Putin is reported to have discussed some of the outstanding issued with the EU Commission President on Thursday, i.e. a measure of just how eager the government is to wrap up the seventeen-year dialogue before the next government is put in place.
Politics: Greater Cynicism
A survey carried out by Levada showed that a majority of people – 75% - support the reinstatement of the “against all” option on ballot papers. This option was removed in 2006 but people say that they are so fed up with party politics in Russia that they want to register a protest vote. Several web sites have been set up to suggest create ways for people to register a protest vote rather than simply abstain. There is no minimum voter turnout required to validate the elections in Russia.
The survey also showed an increase in cynicism amongst the population. 59% of those polled said that they see the Duma elections as no more than “a struggle between bureaucratic clans for access to the state budget”. 49% of people said that they would prefer to see the current 7% minimum threshold lowered so that more parties may be represented in the parliament. 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. Below 5% you get nothing.
Trading Yesterday
Moscow’s bourses responded quickly to the better than expected US jobless and pending home sales numbers, reversing a deteriorating trend in mid afternoon to close the session with a small gain. MICEX finished 8 basis points better, at 1,720.4, while the RTS closed 45 basis points higher at 1.985.1. Gazprom and the oils led the turnaround, finishing between 0.7% and 1.0% better respectively, as oil moved higher after the US data. Rostelecom, which is merging its various share types, lost 2.4% in “technical” trading.
The ruble reverted to type yesterday, moving with the changes in the dollar-euro rate. The better than expected US economic indicators provided some relief for the beleaguered dollar, pushing it back towards $1.43 against the euro as Moscow closed. That pushed the ruble 15 basis points lower against the dollar, to 27.595, and 21 basis points higher against the euro to close the MICEX session at 39.525.
In London, the IOB Index of GDRs managed a closing gain of 11 basis points. The house builders were the best theme after better than expected numbers from PIK. It closed 2.6% higher and LSR added 1.3%. Mail.ru was the session laggard, closing off 3.1% as Yandex’s numbers disappointed. Pharmstandard also disappointed analysts with its trading update and its GDRs closed 2.3% lower.
In the US ADR market, Yandex initially fell by almost 7% after releasing its results statement. Te stock found some support into the close, however, and ended the session off a more modest 2%. Mechel and the mobiles each lost just under 1.0% and in keeping with the average trend in the market. CTC Media was the standout, rising 4.9% into the close with a small persistent buyer.
Weekly Equity Fund Flows: Investors Remain Optimistic and Sidelined.
The total volume of money invested into emerging market (EM) funds last week was relatively low, even for mid summer, as investors prudently remained on the sidelines while waiting for a resolution of the US debt talks. But, although low, the net flow remained positive as a majority of investors expect a deal ahead of the default deadline. Russia funds reported a small ($13 mln) outflow for the week bring the net loss for July to a modest $158 mln. Year to date, Russia funds are still well ahead of other big EM country funds with a net inflow of approx $3.2 bln while others are still showing net redemptions.
Investors are on the sidelines. The weekly equity fund flow report from EPFR Global showed that a total of $266 mln was invested into the EM asset class for the week ended Wednesday. That is a big improvement over the net redemption of $1.1 bln the previous week but still a relatively modest sum compared to the average weekly intake. Investors are clearly hopeful that the US debt default will be avoided but are taking the prudent approach while waiting. The total invested into EM in July was $1.39 bln, down from the $1.87 bln invested in June and the $11.1 bln invested in the best month, which was April.
Playing the fund selection safely. Investors continue to adopt a safety first approach and are concentrating most new money into the EM Balanced fund category. Last week these funds attracted $388 mln. That was better than the $484 mln redemption of the previous week but less than the $1.13 bln the week before that. Through July, the total invested in this category was $1.8 bln, down from the $2.1 bln of June. BRIC theme funds are almost dead as an asset class having reported redemptions in every week of 2011 bar one.
Russia's relative strength provides little comfort. Amongst the country specific funds, Russia funds reported a small outflow of $13 mln. That was, however, the third straight week of redemptions and the fifth out of the past six weeks. The improving macro backdrop, high oil revenues and cheap valuations provide no comfort against the threat of global recession should the US default on its debt. The hope is that, once the debt issues are resolved, investors will again focus on the fiscally stronger and faster growing developing economies, such as Russia, and inflows will resume. For now, we wait on the sidelines. Russia funds lost $158 mln in July and that was better than the net redemption of $470 mln in June.
Flows elsewhere were equally modest. China funds lost $99 mln last week (inflow of $188 mln in July and +$684 mln in June) and India funds lost $98 mln (-$251 mln in July and -$484 mln in June). Brazil country funds reported a positive flow for the first week in six, attracting $73 mln last week to cut the net loss in July to $135 mln. Turkey funds were almost flat last week with a net inflow of $3 mln to cut the net redemption for July to $15 mln (-$115 mln in June).
In the absence of any breakthrough deal in the US, these numbers will dictate where global equities, the dollar and oil trade in the afternoon and by extension, where Moscow's bourses and the ruble close into the weekend.
Later today, the annual gathering of Central Bankers, economists and business leaders will start today at Jackson Hole, Wyoming. No doubt what will be the main topic of conversation this weekend. Expect a steady stream of commentary and words to the wise from the meeting and, hopefully, some practical measures as to how the US may stop digging deeper into the fiscal and budget hole in which it finds itself.
WTO. The head of Russia’s delegation to the WTO General Council meeting, held in Geneva last week, said that the plan is to have all remaining issues relating to Russia’s entry into the organization wrapped up by the next meeting in mid December. Discussions between Russia and Georgia, which can block a unanimous vote to admit Russia, are continuing with Switzerland as mediator. Prime Minister Putin is reported to have discussed some of the outstanding issued with the EU Commission President on Thursday, i.e. a measure of just how eager the government is to wrap up the seventeen-year dialogue before the next government is put in place.
Politics: Greater Cynicism
A survey carried out by Levada showed that a majority of people – 75% - support the reinstatement of the “against all” option on ballot papers. This option was removed in 2006 but people say that they are so fed up with party politics in Russia that they want to register a protest vote. Several web sites have been set up to suggest create ways for people to register a protest vote rather than simply abstain. There is no minimum voter turnout required to validate the elections in Russia.
The survey also showed an increase in cynicism amongst the population. 59% of those polled said that they see the Duma elections as no more than “a struggle between bureaucratic clans for access to the state budget”. 49% of people said that they would prefer to see the current 7% minimum threshold lowered so that more parties may be represented in the parliament. 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. Below 5% you get nothing.
Trading Yesterday
Moscow’s bourses responded quickly to the better than expected US jobless and pending home sales numbers, reversing a deteriorating trend in mid afternoon to close the session with a small gain. MICEX finished 8 basis points better, at 1,720.4, while the RTS closed 45 basis points higher at 1.985.1. Gazprom and the oils led the turnaround, finishing between 0.7% and 1.0% better respectively, as oil moved higher after the US data. Rostelecom, which is merging its various share types, lost 2.4% in “technical” trading.
The ruble reverted to type yesterday, moving with the changes in the dollar-euro rate. The better than expected US economic indicators provided some relief for the beleaguered dollar, pushing it back towards $1.43 against the euro as Moscow closed. That pushed the ruble 15 basis points lower against the dollar, to 27.595, and 21 basis points higher against the euro to close the MICEX session at 39.525.
In London, the IOB Index of GDRs managed a closing gain of 11 basis points. The house builders were the best theme after better than expected numbers from PIK. It closed 2.6% higher and LSR added 1.3%. Mail.ru was the session laggard, closing off 3.1% as Yandex’s numbers disappointed. Pharmstandard also disappointed analysts with its trading update and its GDRs closed 2.3% lower.
In the US ADR market, Yandex initially fell by almost 7% after releasing its results statement. Te stock found some support into the close, however, and ended the session off a more modest 2%. Mechel and the mobiles each lost just under 1.0% and in keeping with the average trend in the market. CTC Media was the standout, rising 4.9% into the close with a small persistent buyer.
Weekly Equity Fund Flows: Investors Remain Optimistic and Sidelined.
The total volume of money invested into emerging market (EM) funds last week was relatively low, even for mid summer, as investors prudently remained on the sidelines while waiting for a resolution of the US debt talks. But, although low, the net flow remained positive as a majority of investors expect a deal ahead of the default deadline. Russia funds reported a small ($13 mln) outflow for the week bring the net loss for July to a modest $158 mln. Year to date, Russia funds are still well ahead of other big EM country funds with a net inflow of approx $3.2 bln while others are still showing net redemptions.
Investors are on the sidelines. The weekly equity fund flow report from EPFR Global showed that a total of $266 mln was invested into the EM asset class for the week ended Wednesday. That is a big improvement over the net redemption of $1.1 bln the previous week but still a relatively modest sum compared to the average weekly intake. Investors are clearly hopeful that the US debt default will be avoided but are taking the prudent approach while waiting. The total invested into EM in July was $1.39 bln, down from the $1.87 bln invested in June and the $11.1 bln invested in the best month, which was April.
Playing the fund selection safely. Investors continue to adopt a safety first approach and are concentrating most new money into the EM Balanced fund category. Last week these funds attracted $388 mln. That was better than the $484 mln redemption of the previous week but less than the $1.13 bln the week before that. Through July, the total invested in this category was $1.8 bln, down from the $2.1 bln of June. BRIC theme funds are almost dead as an asset class having reported redemptions in every week of 2011 bar one.
Russia's relative strength provides little comfort. Amongst the country specific funds, Russia funds reported a small outflow of $13 mln. That was, however, the third straight week of redemptions and the fifth out of the past six weeks. The improving macro backdrop, high oil revenues and cheap valuations provide no comfort against the threat of global recession should the US default on its debt. The hope is that, once the debt issues are resolved, investors will again focus on the fiscally stronger and faster growing developing economies, such as Russia, and inflows will resume. For now, we wait on the sidelines. Russia funds lost $158 mln in July and that was better than the net redemption of $470 mln in June.
Flows elsewhere were equally modest. China funds lost $99 mln last week (inflow of $188 mln in July and +$684 mln in June) and India funds lost $98 mln (-$251 mln in July and -$484 mln in June). Brazil country funds reported a positive flow for the first week in six, attracting $73 mln last week to cut the net loss in July to $135 mln. Turkey funds were almost flat last week with a net inflow of $3 mln to cut the net redemption for July to $15 mln (-$115 mln in June).
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