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Commodities are holding the line on China’s credit expansion


The markets are trying to switch into risk on mode after China’s upbeat March lending data, which has shown a rapid expansion of credit: 1Q12 new loan totalled RMB 2.46tn (up 9% YoY from the RMB 2.26tn in 1Q11) and paving the way back to being on track to meet full-year the target of RMB 8tn. Meanwhile, today’s 1Q12 GDP data from China has printed at 8.1% (vs. expectations of 8.4%), almost reaching the historical troughs of c8%, and combined with a recovery in lending could be an inflection point, with China bottoming out in 1H12 and boasting growth closer to 8.5%. And this does not look unachievable, given the proactive stance from China’s authorities towards softening the landing. Asian equities are getting better traction this morning, albeit some profit-taking was seen after the GDP news hit the wires.

Yesterday’s price action in commodities was mostly driven by the positive tone set by China (Copper +2.2%, Nickel +3.3%, Gold +1.0%), while commodity driven currencies were notably stronger: NOK +0.8%, CAD +1.0%, AUD +1.3% and BRL +0.5%. Of more immediate significance for Russia, Oil (dated Brent) bounced yesterday, adding 1.3% and returning above the magic USD 121/bbl support level of recent weeks. RUB was also stronger yesterday, gaining some 0.8%. However, oil remains aligned with the lower-end of the corridor and the risks of de-rating remain tangibly higher than a couple of weeks ago with the negative momentum continuing to build up. The OPEC March production data indicates to us that the market is transitioning from a two year period of undersupply to one of substantial oversupply.

Closer to the Russian equity market, the broad-based recovery in commodities and the improved risk sentiment has lifted the laggards higher, with Mechel (+6.6%, 0.7x 1M average daily turnover) and CEDC (+10.2%, 1.5x) at the helm. Petropavlovsk (+4.9%, 1.2x) managed to find a better bid after its reassuring 1Q12 operating data update, while TNK-BP (+2.7%, 2.2x) and Alliance Oil (+2.5%, 1.7x) were the strongest performers in Energy. Otherwise, ENRC (+3.0%, 1.0x), Kazakhmys (+3.5%, 0.9x) and Ferrexpo (+2.4%, 1.5x) were also stronger.

This morning, EPFR reported the first outflows from the Russian equities in 2012 for the week ending 11 April. They amounted to USD 71mn vs. the average inflow for the last four weeks of USD 98mn. Outflows were mainly channelled through Russia-dedicated funds, which lost USD 40mn, while EMEA funds added USD 19mn to the pain. Globally, weekly outflows for all EM funds stayed at USD 860mn, mainly concentrated in the Asia Ex-Japan funds (-USD 600mn) with GEM (-USD 117mn) and LatAm (-USD 110mn) funds also weak.

Today, on the corporate news flow side, watch the 1Q12 trading updates from Polymetal and IRC, as well as the Indian high court’s examination of the appellation from the national government concerning the court’s decision to withdraw licences from 11 mobile operators, including Sistema subsidiary SSTL. On the global calendar we have March CPI in Germany, US and Italy as well as April University of Michigan Confidence and Italy February industrial output.

Alexey Zabotkin, Sergey Galkin, Anastasia Markina
VTB Capital analyst

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