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Russian equities presage oil prices moving lower?


Back to the office after ten days of enjoying the sun, sea and winds of the Florida Keys and Dry Tortugas, and in the absence of GPRS or GSM coverage, we are impressed by the latest leg in the global risk rally, in which Russian stocks participated keenly last week. Their decoupling yesterday from the more mixed, but still positively biased, moves in global credit and stocks, is equally impressive.

We note that last year, Russian stocks acted as a leading indicator to the midyear rout in risk assets. Indeed, the RTS Index peaked on 8 April, three weeks before global stocks and Oil turned decisively south at the start of May. The most remarkable feature of the price action of the past ten days was not the ongoing rally in equities (and, to an even greater extent, in credit) but the sharp selloff in core rates. As we type, 10Y UST is at 2.38%, some 40bp wider than the November-February average. This might be seen as a manifestation of the fact that the latest leg up in risk assets has been driven entirely by the rotation out of bonds as central banks’ liquidity injections have come to an end (at least for now). In the last 4½ years, markets and the global economy have struggled every time they were disconnected from the central banks’ IV.

As for oil per se, this one has been plateauing in the neighbourhood of USD 125/bbl (Brent) for almost a month now. The risk of oversupply is rising and is likely to turn crude prices tangibly lower in the coming quarters, as the erosion of demand and recovery of supplies overwhelm the Iran-related worries (which by themselves are already adequately reflected in the current prices).

Yesterday’s 2.5% selloff across Russia’s main Energy names might be telling just this story, even as other sectors provided a much better return on balance. Thus, among blue chips index heavyweight Gazprom (-2.9%, 1.3x) put the main drag on the gauges, while the most liquid Sberbank (-0.4%, 0.9x) managed partly to smoothen the decline on the back of the relatively good performance from the Financial sector overall (both in Russia and globally). Materials even ended slightly in the black, with UC RUSAL (+4.4%, 2.4x) and Severstal (+1.9%, 0.8x) on the brighter side. Elsewhere, we point out some profit-taking in Utilities where MRSK Holding (-2.1%, 0.9x) corrected most visibly. There was little reaction from investors to Etalon’s (unch, 0.1x) good FY11 numbers (see story below). In the less liquid space, we note demand for several Industrials: KamAZ (+6.4%, 7.x; see the story on the Daimler deal below), Global Ports (+2.9%, 0.9x) and NCSP (+2.2%, 0.7x). Overall trading activity in the Russian market contracted to USD 4.3bn (still 10% above the average for the last 30 days).

As for today’s news, Bank of Georgia and MHP are to release their 2011 results in our part of the world. Elsewhere, the US February housing data is of most significance. 

Alexey Zabotkin, Andrey Amelin, Sergey Galkin
VTB Capital analyst

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