Liquidity Crisis: West to Report on Impact
// Russian stock markets are waiting for US economic figures
Prices on the Russian stock market this week will be determined by news from the West. Economic figures from the US and yearly financial reports from local companies will show how seriously the economy was hit by the liquidity crisis. As long as the results are not extremely negative, the Russian stock market will see moderate growth.
Smooth Sailing
Experts view the Russian stock market with measured optimism. There are several reasons for this ranging from favorable conditions on foreign financial and trade markets to an overall positive news backdrop.
“The Russian stock market will see a slight growth by the end of the week,” according to Broker Credit Service Senior Financial Advisor Yevgeny Tupikin. “The RTS index is close to is historical maximum. Things also seem positive on the foreign markets: the majority of world indices have seen highs for this year; Brazilian, Chinese and Indian indices have recently seen significant growth, reaching all-time highs. Oil and precious metal prices are high. The falling dollar is stimulating an increase of quotes on the currency sections of the stock exchange, including the RTS.”
“It’s likely that the RTS index will reach another record high in the coming days,” Pallada Asset Management Analyst Yevgeniya Kanakhina said. “Optimism came from outside Russia: Western markets are growing on a wave of positive feelings that the crisis has already passed and that the worst is behind us. Even skeptic Allen Greenspan supports this point of view. There wasn’t enough liquidity on the Russian market to reach any new peaks. But the re-evaluation that’s come with the crisis may bring a new flow of foreign investment, which would drive growth.”
Kirill Tremasov, head of the analytical department of The Bank of Moscow, also notes domestic political events that have been positive from a market stand point. Not the least of which is Vladimir Putin’s announcement on Monday that he would head the party list for United Russia and possibly become prime minister. Tremasov believes that as elections near similarly positive announcements will be made. However, he feels that foreign factors will be more influencial. In that sense he is slightly more pessimistic than his colleagues.
“I don’t have any strong expectations for the Russian market in the near future,” notes Tremasov. “Despite the Fed’s interest rate decrease and world bankers’ willingness to give the market as much money as it needs, the main issue remains unclear: will the US economy have a “soft landing” or will there be a more serious shake-up.”
Disturbers of the Peace
By the end of this week or the beginning of next week experts will be able to form some conclusions about whether or not the world will outgrow the liquidity crisis.
“Friday’s publication of the US labor market report will be an important event,” Tremasov said. “If jobs have decreased, that will be an important indicator that the US economy is heading for a crisis. A similar report a month ago spooked the Fed into lowering interest rates. A rate cut, and the speculative gaming that accompanies it, would be possible again this time around, but the market’s first reaction will be negative.”
Ilya Fedotov, an analyst at Veles Capital, is betting on a negative outcome and lists several circumstances that could lead to falling prices on the Russian market. “We’re expecting the US report to have a negative tone to it, which doesn’t add to the optimism of US stock market participants, which directly reflects on Russian stocks,” he said. “I’d also like to point out that hurricanes in the Gulf of Mexico brought a rise in oil prices on the world market. The forces of the elements are on the decline now and that may bring a drop in prices. This also has a negative side for the Russian stock market, especially on the oil sector. We feel that the coming week will be negative for the Russian market.”
Kanakhina, on the other hand, thinks that the American report will be positive. “After the catastrophically weak numbers from August, anything will seem good for September,” she notes. Of course, there is still the potential for danger in these reports. “The stock market in the last few days was held up by bad news. The worse the report, the more likely the Fed will cut rates again,” Kanakhina reasons. “In that sense a positive report could have a negative reaction on the stock market and by next week we could see a correction.”
Tupikin also noted technical factors that limit growth on the Russian stock market. “By the end of this week or the beginning of next week the Russian stock market will reach the 2140-2150 level on the RTS and will use up its short-term growth potential, he said, “After that they’ll need to take a break.” He also called attention to one more factor that could gauge the likelihood of a global recession: “Next week American companies will publish their fiscal year reports. Of course this will only be a beginning, but we’ll be able to make some preliminary conclusions about the scope of the liquidity crisis on the world economy.”
Another important even this week will be the Central Bank publications of England and the European Union regarding their interest rates. According to Kankhina, “Its likely that the rates will remain the same, but in the future the European Central Bank may rise interest rates due to the risk of inflation in Europe. The Bank of England may lower rates. Any rhetorical changes from authorities may have a significant effect on stock prices for the Euro zone and Britain.” Tupikin agrees that these publications may seriously effect liquidity, the exchange rate of the dollar and the dynamic on the stock market.
The Coming Battle
As for stocks that may rise or fall in the next week, experts are in agreement, or at least their logic is similar.
According to Kanakhina, “Getting past the liquidity crisis means that threats to the financial sector are decreasing. The big winners in this are banks. News about the future political arena will have a positive effect on state company stock prices. The planned division between Mikhail Prokhorov and Vladimir Potanin won’t hold back Polyus Gold’s stock prices anymore.”
“The market will move in different directions,” Tupikin said. “The problematic area are energy and, to some degree, oil sectors. Also, I think that stocks for companies close to the state and Kremlin (Surgutneftegaz, Transneft, Norilsk Nickel and fixed-line telecommunications companies) will also turn out.”
“Oil securities will probably perform worse than the market, both because of fears of falling prices and because of their old age. Some telecommunications stocks may turn out to be protected due to investor interest,” Fedotov commented.
Tremasov recommends looking at metal sector stocks since they are less likely to be influenced by foreign conditions since metals are supported by domestic investment, and of course by increases in demand.
One step forward, two steps back
Despite the lackluster situation on the money market after tax payments (MICEX rates dropped from 10% to 7-8% annually), the general feeling on the market of ruble-denominated bonds continues to be negative. Even the Central Bank’s intervention, buying about $500 million, didn’t seem to help.
In the last week “a large buyer” (some participants think that it was one of the state banks) disappeared from the government bond sector, putting stock prices back 15-25 points, to the level before last week’s spike.
Just as government bond purchases supported the blue chip sector, a drop in government security quotes caused a similar drop in the corporate sector. Gazprom’s eighth offering, for example, the fifth and sixth offerings of Russian Railways and Lukoil’s third and fourth offering prices dropped between 20-60 basis points. Second tier stocks are also dropping, although less dramatically, about 20 basis points.
Mikhail Galkin, an analyst at MDM-Bank said, “With the exit of the ‘mighty shopper,’ the trade volume in the government bond sector dropped below 500 million rubles a day and prices dropped by nearly 15-25 points. The situation in the corporate sector can best be described as a ‘step back,’ because that’s exactly what the majority of liquid offers are doing.
Pyotr Rushailo, Pavel Chuvilyaev
All the Article in Russian as of Oct. 03, 2007
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