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Risk aversion carries on


Global developments. Risk aversion triggered by concerns over China’s credit risk, EM currency pressures and some US earnings disappointment weighed on the global equity markets at the end of last week. The S&P500 index closed the week down 2.6%. The VIX index, Wall Street’s ‘fear gauge’, jumped to its highest level since mid-October. Germany’s DAX fell 3.6% and the French CAC-40 slid 3.8%. The MSCI EM equity market index is now 5.3% down since the start of the year, though the Shanghai Composite rose 2.47%. Risk aversion was seen in FX, with JPY dropping two yen over the week as EM currencies such as the ARS and TRY hit record lows. Gold was a two-month high at USD 1,272/oz. The US 10-year Treasury yield fell 10bp on the week to 2.73%. US natural gas moved above USD 5 for the first time since 2010.

The S&P500 index is some 3% off its recent record high. Since the equity market low in 2009, US market corrections have been in the order of 5–10%. Last year’s taper correction was 7.5%, so there is scope for corrective activity to continue this week for both EM and DM markets. Risk aversion favours fixed income, especially US Treasuries (the taper low was 2.45% on the 10-year last September) and this level provides a benchmark for a near-term reduction in yields. The next US jobs report in early February is a key test for the Fed’s monetary stance, as a cold weather rebound in jobs plus the effect of a lower labour participation rate in lowering the unemployment rate could throw the Fed’s forward guidance strategy into turmoil.

Russia (RTSI -1.3% / -2.3% WoW @1,364, RUB -0.9% / -2.6% WoW @34.46). Russian equities took the largest hit on the week among the major CEEMEA markets, as risk aversion took its toll. Better oil prices, with Brent (+2.2%, USD 109/bbl.) advancing on the week, were of little help.

Alexey Zabotkin, Neil MacKinnon, Olga Danilenko, Akin Tuzun, Digvijay Singh, Sergey Galkin, Ilya Piterskiy
VTB Capital analyst

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