FINANCIAL ANALYSIS
by Chris Weafer
Russian equities and the ruble face another battering today after US markets and commodities reacted very negatively to the US Fed decision and that weakness has been extended across Asia trade this morning. Most Asian indices are trading between 2% and 3% lower in afternoon trade. Brent is at $108.65 p/bbl, down another $1.7 p/bbl, and copper is 3.4% lower. The price of gold is off 1.9% ($1,773.9 per ounce) and silver is down 2.7%. The dollar-euro rate is at $1.3547.
There is nowhere to hide this morning as investors will adopt a prudent sideline approach until they see how the US markets follow through, later today, from yesterday's big fall. The usual high-beta global themes, such as steels and mining sector stocks, will again lead the losses today. The banks will also be weak as US banks led the fall on Wall Street after Moody's cut the rating of three US banks and the Fed specifically highlighted "strains in global financial markets" as the major cause of concern. The weaker oil price will also undermine the oil producer shares.
Russian ADRs were amongst the worst performers on Wall Street as investors fled risk assets again. Mechel, which was off 2.% before the Fed decision, lost 6.8% into the close. MTS and VimpelCom each lost more than 3%.
Fed decision. The US Fed delivered the expected "operation twist" decision at the end of its two-day FOMC meeting. yesterday. But while that should have stabilized markets the introduction of the word "significant" to its view of economic risk rattled investors and led to sizeable losses in equities and commodities by the close. The S&P 500 had been hovering just below neutral before the Fed announcement but closed the session down almost 3.0%. The price of one-month Brent had earlier gained more than $1 p/bbl, with the better than expected weekly US inventory report, but it too succumbed to investor fears and ended the day down $1.4 p/bbl at $109.14 p/bbl. WTI ended at $84.7 p/bbl. Traditional haven assets offered no sanctuary with gold down 1.3% ($1,785.6 per ounce) and silver off 1.1% by the US close. The dollar was one of the few assets to gain, rising to $1.3569 against the euro and that despite the undertaking by the Fed to keep interest rates where they are until mid 2013.
Today: While investor focus is firmly on the Fed statement and the warning from the IMF on Tuesday, it seems that today's economic updates will either reinforce recession fears, i.e. if bad numbers, or, if good numbers, be ignored. Amongst the updates in the US will be the weekly jobless claims report and the monthly Leading Indicator. In Europe a regular confidence report will be published. In Russia, the value of FX reserves will be updated. A decline is expected because of the weakness in the euro relative to the dollar and also because the Central bank has been buying rubles to slow the rate of depreciation. The main effect will, however, be seen in next week's update.
Oil. The weekly oil inventory report in the US had earlier given cause for optimism in the oil market after the US Energy Dept reported a 7.34 million barrel drop in crude reserves. That brings the volume of total reserves back to the level of last mid winter. More encouragingly the Energy Dept reported that the refinery capacity rate was up 1.3% points to 88.3%. That is a positive sign of increased consumer usage, i.e. possibly as distributors build up ahead of winter. But the Fed announcement undermined oil along with other commodities. Brent had been at $112 p/bbl (WTI at 87.53 p/bbl) but closed a $109.14 p/bbl ($84.7 p/bbl) as all economically sensitive assets fell hard.
Optimistic PM. Three days ahead of Saturday's United Russia congress, prime Minister Putin was in optimistic mood as he told a government meeting that there will be no budget deficit this year and that the deficit will be managed at 0.7% of GDP by 2014. He forecast that because of faster growth in the non-extractive industries the share of budget revenue from oil & gas will fall from 47% currently to 43% in 2014. He also told the cabinet that the budget will spend 2 trillion rubles ($64 bln) to promote economic growth in 2012. The allocation for road building will be 1.3 trillion rubles ($43 bln) over the next three years he said.
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