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Rewind 48 hours; are good news now bad news?


Having enjoyed a bounce after the strong ISM data from the US, risky assets were again routed by the not-so-easy talk from central banks. The magnitude of the reaction to what are actually slight nuisances in the policy pronouncement highlights how accustomed the markets have become to the ongoing injections of base-money (or quasi-base money) by the DM central banks.

In this context good news (i.e. better growth traction in the US) might be bad news for bond yields and stock market valuations, as the warmer economic activity is shifting the monetary stimulus option closer to the edge of the proverbial table (even if not entirely off this table). The majority of asset prices have already retreated to the levels registered 48 hours ago, but developments in the Eurozone and commodities are more worrisome. The thin demand at Spain’s bond auction (EUR 2.6bn vs EUR 3.5bn targeted) catapulted its 10Y yields to 5.70%, well above the 5.5% threshold which was a major resistance level in 1H11. The risk-off pushed other peripheries sharply wider as well (5Y CDS: Portugal +41bp, Spain +26bp, Italy +21bp), while Bunds (2bp tighter) benefited from the flight to quality. And Oil touched USD 122/bbl overnight (Brent), but bounced off it for now.

As for individual stocks and sectors, Materials were the laggard yesterday, with Evraz (-7.4%, 1.3x 1M daily average volume) and Petropavlovsk (-7.1%, 2.2x) continuing to suffer from a de-rating of the 2012 outlook. Polymetal Intl. (-5%, 1.3x) also weak on softer Gold (USD 1,623/oz as we type, overnight printed at a 2½ month low), but Polyus Gold Intl. (-1.5%, 2.4x) remained resilient. On the positive side, we note KTK (+3.1%, 2.2x) which was the only name in the black among Steels & Bulks after the publication of an ahead-of-expectations set of FY11 numbers (in our recent Steel & Bulks update, we highlight it as the cheapest of the names in the sector valuation-wise). Otherwise, Alliance Oil (-4.5%, 1.4x) was weak, presumably, in anticipation of its 1Q12 trading update (to be reported today). C.A.T. oil (+0.5%, 1.2x) bucked the sector trend on positive 1Q12 operating data (see story inside). Elsewhere, O’Key (-1.1%, 1.7x) looked stronger among Food Retailers; VTB (-4.9%, 1.5x) and NOMOS (-6.3%, 1.3x) both underperformed sharply in the Financials space.

As we go to print, the Asian stock indices are mostly down, but mostly within 1% (Indonesia is actually +0.5%). S&P500 closed 1% down, with drops across all sectors, and closed below the almost religiously watched 1,400 mark, but off the session’s lows (which were still a whisker above the lows of the 29 March morning drop). EUR is consolidating at 1.315 after a 2+ figure move down in the previous 36 hours. 10Y UST at 2.22%, 8bp tighter than 2.30% peak recorded yesterday.

Otherwise, on the Russian corporate agenda we have the FY11 IFRS results from, 1Q12 trading updates from Uralkali and Alliance Oil (this one will be of special interest in light of the Kolvino production deceleration); LSR is to hold an AGM. Today’s’ global calendar is occupied by China’s March PMI services, UK February industrial production, German February industrial production, BoE policy announcement and US initial jobless claims. 

Alexey Zabotkin, Sergey Galkin, Anastasia Markina
VTB Capital analyst

oil, gold

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