Money and Events Last Week
The Bond Market
U.S. Treasury bonds continued in a growth phase last week that started at the end of the previous week. Quotations on American government ten-year bonds rose by 0.64 percent and the income on them decreased from 4.49 to 4.42 percent per annum. However, on Thursday/Friday, their prices fell to previous levels after the publication of statistics on the number of new applicants for unemployment benefits. Russian Eurobonds grew a little too last week (Russia-30 from 103.75 to 104.75 percent). That growth was conditioned not only by the dynamics of American interest rates, but also the preliminary results of the vote of the Paris Club on the redemption of its debt by Russia. According to ITAR-TASS, Germany is withdrawing its demand for an additional premium for early payoff of the debts, and the final response of the Paris Club is expected to come at its next regular meeting on May 10. But, on Friday, after the U.S. Treasuries fell, Russian bonds also lost values (Russia-30 to under 104 percent), so that the final outcome for the week was insignificant.
From our point of view, the success of negotiations with the Paris Club may have a very strong positive reflection not only in the narrow market for Russian securities, but also on the macroeconomic level. The solution of its debt problem will allow Russia to introduce a convertible ruble. The economic effect of this will be incommensurate with the effect of obtaining an investment rating, since it really does open the doors to foreign investment.
On the secondary market for ruble-denominated state bonds, the Finance Ministry continued to place a new federal loan bond. The placement was made at premium for the market, and so quotes fell a little on Wednesday. Nonetheless, by the end of the week, they had returned to their former level. On the whole, the Finance Ministry is behind schedule with its 2005 placements; supply exceeds demand for those securities. Inflations remains high (5.3 percent for three months, according to the latest indicators released). Therefore, we expect that the interest rate will remain the same for the next month, and federal loan bonds will remain at low liquidity.
There was no news on the market for ruble-denominated corporate bonds, except several small auctions. The only exception may be the issue of new seven-year Nizhnekamskneftekhim bonds with a four-year buyback option worth 1.5 billion rubles. They were successfully placed with 10.2-percent annual interest, which is not high at all for such a long-term bond.
There were big events on the sub-federal loan market, however. On Tuesday, Moscow Region placed its fifth, unprecedented in size, bond emission (12 billion rubles). While the announcement of the auction last week led to a collapse in quotations on the issuer's bonds, they had returned to their former level before the placement. After that exceptionally successful placement (in spite of the complex structure of the amortization of the debt of the security, its income was on par with the maturing fourth emission, that is, 9.16 percent) quotations rose noticeably. On Wednesday, Moscow held two auctions to place 3.5- and 2.5-year bonds. Originally, the auctions were to be held at the end of March, but they were delayed because of unfavorable market conditions. It was worth the wait for them. The week before last, the market picked up considerably, demand at the auction exceed supply by twice and the placement was made at market price, the premium for the banks participating in the auction was only an underwriting commission of 0.3-0.5 percent.
At the end of the week, the index on corporate RUX-Cbonds rose by 0.24 percent, the index on municipal Cbonds-Muni rose by 0.29 percent and the federal loan bond index rose by 0.12 percent. The market did not react, by and large, to the confirmation of the ratings of Moscow and St. Petersburg, although they provided indirect evidence of the market's basic potential for growth concentrated in sub-federal issues of the second echelon. Budget reforms and greater taxation discipline increase the predictability of the income and credit-worthiness of federal subjects, while there is an obvious lack of borrowers on the corporate market with informational openness and a lack of liquidity on the federal level.
The Stock Market
The beginning of the week was interesting for investors, who wondered whether or not the market was able to continue growing. We saw the answer on Tuesday evening, when the RTS index closed near the important level of resistance of 692 points. Breaking that barrier made further growth possible. Nonetheless, events forced investors to temper their expectations somewhat. First, Minister of Economic Development and Trade German Gref announced that the tax base of ferrous and non-ferrous metals enterprises needed to be reexamined because they are receiving huge profits because of the favorable international conditions. Second, statisticians released data on inflation, which led the administration to raise the annual level from 8.5 to 10 percent.
Nonetheless, hope pushed the market above 700 points of the RTS for the second time this year on Wednesday to close less than 2 percent below the year high. The market began rising in the morning, gaining on the announcement by U.S. Federal Reserve Board chairman Alan Greenspan's prediction of a reduction in the volatility pf the world oil market due to increased reserves. World markets received this news extremely well. Deputy Minister of Economic Development Andrey Sharonov stated that a draft decree would soon be introduced to the administration on the privatization of the state holding in Svyazinvest. In addition, the news of the agreement on the early payoff of Russia's debt to the Paris Club could stimulate a raising of the country's rating by the rating agencies. Gazprom chairman of the board Alexey Miller told The Financial Times that the decision to merge with Rosneft had been made and the transaction would be performed in July. Thus, there is a chance that Gref's promise to liberalize the market for Gazprom shares fully in 2005 would be kept.
On Thursday, the market continued to grow, and the RTS index hit 715.76 points. But a new year high was not reached. Investors seemed to have evaluated the week's information more soberly and decided to lock in their profits, at least partially. By the end of the day, the index was at 710.75 points. In the first half of the day on Friday, the index was practically frozen and trading volume insignificant. Everything changed in the afternoon and practically all stocks started top rise again. The RTS index added 1.26 percent and closed above the old year high.
Ivan Guminov, Director of Securities Funds, Pallada Asset Management; Ruslan Buslov, Director of Stock Funds, Pallada Asset Management
All the Article in Russian as of Apr. 11, 2005
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