Russian Markets Research. June, 2007 in Brief
The Central Bank of Russia decreased its discount rate to 10% on June 19, 2007, down from the previous level of 10.5% per annum.
Released economic data again showed that Russian economy continues to grow. However the state’s inflation forecast now seems not as accurate as it was considered before. Inflation risks are on the upside.
The liquidity on the Russian money market fell by the end of last month considerably, but it is still pretty high and doesn’t strongly affect overnight rate.
US Treasury yields started to break the upward trend. We are waiting for the breakout of UST10 yield below 5,00%. UST10 closed the month with 5,03% yield. The psychological level of 5% is very close now.
The dollar was trading at RUR 25.77 on MICEX at the very end of the month.
It seems that Russian stock market found solid support. RTS rose by 3,73%, MICEX rose by 1,80%, Russian oil stocks grew by 2,09%, SEP future on RTS rose by 1,96% and closed the week above RTSI last month.
DOW was very hec-tic with several big rallies up and down by 200-400 points and closed the month at 13.403.
Last month oil prices advanced at a fast pace. Brent, Urals, and WTI rose by 5,73%, 10,17% and 8,27% respectively. Stock prices of Russian oil companies rose by 2,09% last month but from the beginning of the year they fell by more than 10%.
Last month world indices showed mixed results, but lower trend was most common. Winners of the month were Japanese Nikkei225 (+1%) and TOPIX (+0,4%). Losers of the week were: SWISS (-3,38%), S&P500 (-2,15%), DJI (-1,9%).
Russian Economic Update
Russia’s GDP went up by 7.7% from January to May 2007
According to Economy Minister German Gref, from January to May 2007 Russia’s GDP grew by 7.7%, and in May 2007 it grew by 7.9%, told reporters. In the first five months of last year Russia’s GDP increased by 6%.
Bank of Russia cut its discount rate
The Central Bank of Russia decreased its discount rate to 10% on June 19 2007, down from the previous level of 10.5% per annum. The previous time the Bank of Russia cut the rate was on January 29, 2007, from 11% to 10.5%.
Russia’s industrial production went up by 6.7%
Russia’s industrial production went up by 6.7% in May 2007 and by 7.4% in January-May 2007. Industrial production increased by 0.9% compared to April 2007.
Russia’s foreign trade went up 18.5%
According to Rosstat, Russia’s foreign trade went up by 18.5% to $158.6bln in January-April 2007 compared to the same period a year earlier. Exports increased by 8.4% to $99.1bln and imports climbed by 40.4% to $59.5bln. Trade surplus amounted to $39.6bln compared to $49bln in January-April 2006.
An increase of the liquidity on money market for the last 1-2 months is due to YUKOS bankruptcy auctions and the initial public offerings by Russia’s two largest banks, Sberbank and VTB.
The Economy Ministry reported earlier that Russia’s entry into the WTO could be completed by the end of 2007. Russia held talks with 57 WTO countries, securing their support. Problems remain with Georgia and Poland.
Russian officials again said that the inflation for 2007 will be within planned 8%. According to the Finance Minister Alexei Kudrin, Russia’s inflation in June 2007 may exceed the figure in June 2006, however, he added that the annual inflation would not exceed the forecast for 2007. The World bank does not share this opinion. According to John Litwack, World Bank Chief Economist for Russia, inflation could rise to 9-10%, which will not be a surprise.
Economic trends
Rumors
Russia’s inflation stood at 0.6% in May 2007.
There will, probably, be applied changes in taxation for unit investment funds to encourage longer-term investments.
Business confidence index in services sector fell to 56,4 in May from 57,4 in April.
Russia will simplify import licensing procedures.
Real ruble’s appreciation slowed.
Russia will, probably, decrease custom duties to import of mobile phones, digital cameras, and primary aluminum.
Russia’s domestic debt went up by 11.64% to $44.46bln as of June 1, 2007.
Net foreign capital inflow to Russia will exceed $70lbn in 2007.
State regulation
The average wage amounted to $459,7 in January-April 2007.
President Putin said presidential term could be extended to 7 years.
Russia will increase the output of bird meat by 16% in 2007.
Tax reform will continue in Russia. It had not yet been decided whether tax rates should be reduced or budget spending increased.
Russian monetary policy’s top priority for 2008 is to decrease inflation to 6-7%.
Government is going to get a loan from IBRD for court reform.
Russian small IT businesses will to grow and the number of trade companies will fall by 2020.
FCSM gave first termless licenses of professional participants of the stock market.
Bank of Russia reported higher assets (+49,59% compared to a year earlier).
A new state tanker corporation on the basis of the Russian shipping company Sovcomflot and Novorossiysk Shipping Company (Novoship) will be created in Russia. According to the merger plan, the new company would have nearly $5bn in assets and become a leading global tanker corporation.
Russian bankers hope for further growth of the domestic lending market, especially in terms of mortgages, car loans and credit cards. Before the end of this year Russia’s retail lending market will grow by $25 billion, rising over $110 billion.
The CBR forecasts that consumer crediting will grow by 60-65% in 2007.
International Cooperation
Russia faced the lack of gas.
Russia is currently looking into the possibility of extending a loan to Belarus ($1bln and $500mln in 2007 and 2008, respectively).
CBR attracted record amount of deposits from credit organizations in May 2007.
Ukraine cut oil purchases from Russia.
Russia will join top five economies by 2020.
Electricity supply to Russia from Ukraine is cut in June 2007.
Gold and foreign currency reserves grow fast but the growth rate decelerated.
Russia abandoned all supplies of rice from India from May 1, 2007.
Sweden showed interest in supplies of energy directly from Russia.
Russia showed higher mobile subscriber numbers.
Moldova posted higher trade deficit with Russia.
Russia increased the production of vodka by 32,2% for the first five month of 2007.
Oil output climbed by 3.7% in May 2007.
The World
Fixed investment in Russia surged by 23.1% to $17.96bln in May 2007.
Oil of Rebco brand and futures on it will be traded in Russia.
Natural gas production decreased by 1.8% in May 2007.
OPEC does not plan to increase the supply of oil.
According to MTS forecast, Russia’s mobile services market will grow 2.3 times to $34.1bln by 2012 compared to 2006.
De Beers waits for supply increase for diamonds.
According to the Finance Minister Alexei Kudrin, the oil price may amount to $61 per barrel in 2007.
Governors of NYMEX consider the probability to sell the bourse.
In nearest several years Moscow could join top 5 world economies and become fifth or sixth world financial center.
Atomstroyexport and Vietnam talks on joint project to construct the first nuclear power station in the Republic.
According to Mineconomsvyaz, the volume of Russian export in IT and communications will grow to $5,8bln by 2010.
According to The Wall Street Journal, Pearson PLC (issuing The Financial Times) is looking for partners to buy Dow Jones&Co. Rupert Merdok, the owner of News Corp., also wants to buy Dow Jones&Co for $5bln.
Gold reserves in the State’s reserves of the Russian Federation decreased by 0,27%.
PM disappointed about the development of small businesses in Russia.
Sources: The Central Bank of Russia, Reuters, Cbonds, The Finance Ministry
Russian Money Market
Last month overnight rate lay in the band of 2,54–4,56%; for one week rubles could be found at 2,90-5,23%; and for one month at 3,10-5,34%. Overnight rate closed the month at 3,28%.
In general the liquidity increased on the money market last month compared to the previous month.
Balances on C/A opened the month at 451,50bln rubles and closed it at 499,90bln rubles. Bank deposits with the CBR opened the month at 1229,60bln rubles and closed it at 774,90bln rubles. Bank deposits with CBR decreased considerably last week, by almost 300bln rubles. This is quite common for the end of the month. A part of this fall in liquidity could be attributed to really aggressive buying of dollars on Thursday and Friday last week, probably Rosneft initiated that situation, because the Company bought much dollars to pay back dollar denominated short-term loan that it took to take over part of Yukos assets.
Still overnight rate was quite low at the end of the month because the level of liquidity is still quite high.
The total flow of balance on C/A and deposit accounts with CBR increased by 0,122trln rubles last month compared to previous month. The average total liquidity balance per day increased to 1631,44bln rubles compared to 1422,43bln rubles in previous month.
GOLD AND FOREIGN CURRENCY RESERVES:
CBR reported that Russia’s gold and foreign currency reserves amounted to $406,6bln as of June 15, 2007, stepping up by $1,6bln or 0,4% from their previous level. 3
The Economy Ministry’s forecast (will rise by): $90-95bln in 2007, $48,3-71,3bln in 2008, $23,6-51,5bln in 2009, and $14,44-25,5bln in 2010. However, since January 1, 2007, the reserves have already expanded by $103,6bln or 34,19%.
Gold and foreign currency reserves
US Treasuries market was on focus for the whole last month. June 7, 2007 was the worst day on world’s debt markets since the spring of 2004. Per one day the yield of UST10 rose by 18bps from 4.97% to 5.15%, the following week it reached to 5,29%. It was attributed to sales by US mortgage agencies. Mortgage agencies hedge their assets from rates rise. The volume of three largest mortgage agencies approximately equals the volume of Treasuries market. They balance the duration of assets and liabilities because they face gaps sometimes. When interest rates rise, the growth rate of early payments on debts decreases, and the duration of mortgage portfolios increases. In this case mortgage agencies sell Treasuries to compensate the growth of duration. But these sales do not have speculative background.
Most affected by sales from US mortgage agencies were “long papers†which are traditionally used for hedging. Many people associate the fact that yield was above 5,10% for quite a long time because of new mortgage agencies’ salesThe growth rates of the Russian corporate bond market and corporate Eurobond market increased considerably in May 2007 compared to April 2007.
US Treasury yields market started to break the upward trendUST10 closed the month with 5,03% yield. The psychological level is very close now.
RUSSIA’s FX OUTLOOK
USD/RUB:
The pair was traded in the band of 25,77–26,06 and decreased by 0,5% last month. The trade volume on USD/RUB lay in a band of $2,2-6,0bln on the Russian currency market. Still trade volume decreased slightly last month compared to the previous month. The dollar was trading at RUR 25.77 on MICEX at the very end of the month.
Movement: EUR/USD fell from 1.35 to 1.33 in the first half of last month and showed low at 1,3262 on June 13, 2007. The pair was able to keep near 1,33 for only four days, and then EUR/USD rose till the end of the month. The pair closed the month at 1.3541.
EUR/USD was traded below 1.3300 for only several days. For that period traders rebuilded mid-term and long-term long Euro positions and then Euro started recovering boosting bullish hopes again.
At present, trading above 1.3515/25 will support short-term Euro long positions. Breaking below 1.3490 will, most probably, return the pair to 1,3415. The pair closed the month at 1.3541, which is very close to the month high. If economic data does not spoil the picture, then we could touch 1.3615/25 very soon. The currently perspective range of 1,3515-1,3615 looks good for short-term trading.
The rate differential still continues to move in favor of the Euro.
Russian Stock Market
MARKET PERFORMANCE:
RTSI steadily fell last month but started to rise at the very end of the month with increasing trading volume on rising. RTSI rose by 3,73% last month. All market sectors showed an increase last month. Oil and gas, Telecom, and Retail grew by 2,09%, 1,79%, and 4,14% respectively. Winners of the month were Metal&Mining and Industrial which showed 5,70% and 6,76% gain, respectively. September future on RTS tagged its base asset and was trading above it for the whole month. It closed the month at 1906,6 (+1,96%). MICEX and MICEX COMP indices closed the month at 3236,20 (+1,80%) and 1665,96 (+2,84%) respectively. Last month oil prices advanced at the fast pace: Brent, Urals, and WTI rose by 5,73%, 10,17% and 8,27% respectively. Stock prices of Russian oil companies rose by 2,09% last month but from the beginning of the year they fell by more than 10%. RTSI closed the month at 1897. 8
FINANCIALS: OGK-1 (net profit $224mln in 2006 compared to $2.21mln a year earlier), Gazprom Neft (net profit surged by 30.5% to $3.66bln in 2006), VolgaTelecom (net profit dropped by 14.8% in 2006 to $82.44mln compared to 2005), Aeroflot - Russian Airlines (net profit climbed by 36% to $258.1mln in 2006 compared to a year earlier), GAZ Group (net profit soared by 94% to $232mln in 2006 compared to a year earlier), TNK-BP (net profit surged by 40% to $6.629bn in 2006 compared to a year earlier), Polyus Gold (net profit went up 10.3 times to $1.157bln in 2006 compared to $112mln a year earlier), Inter RAO UES (net profit soared by 76% and exceeded $65.79mln in 2006 compared to a year earlier), Norilsk Nickel (net profit climbed 2.5 times to $5.965bln in 2006 compared to a year earlier), Comstar - UTS (net profit climbed by 12% to $43.7mln in Q1 2007 compared to the same period a year earlier), SIBUR Holding (net profit almost doubled to $822mln in 2006 compared to a year earlier), Rosneft (net profit dropped by 24.94% to $602mln in Q1 of 2007), Magnitogorsk Iron and Steel Works (net profit surged by 41.1% to $350mln in Q1 of 2007 compared to the same period a year earlier), Polymetal (net profit surged by 32% to $59.2mln in 2006 compared to a year earlier), RTS Stock Exchange (net profit more than doubled and amounted to $2.65mln in 2006), Novolipetsk Steel (net profit dropped by 16% to $456.6mln in Q1 of 2007 compared to the same period a year earlier), CenterTelecom (net profit amounted to $71mln in 2006 compared to a net loss of USD55mln a year earlier), Uralsvyazinform (net profit dropped by 56.5% to $31.91mln in 2006 compared to a year earlier), TGK-1 (net profit went down by 5.9% to USD62mln).
ISSUES, ACQUISITIONS & INTENTIONS: TransCreditBank plans to float shares by 2010. VTB 24 plans to make an additional issue. Rostelecom and Deutsche Telekom signed a memorandum on strategic cooperation. Norilsk Nickel has received approval of its proposed purchase of a controlling stake in LionOre Mining International Ltd. from Australia’s Federal Treasury. Gazprom Neft and Norwegian oil and gas company Statoil signed an agreement on cooperation in exploration and oil production projects in Russia and abroad. The rapid increase in Rostelecom’s preferred shares may be attributed to speculative media reports about Svyazinvest’s restructuring. LUKoil has used the $1bn it raised in a debut Eurobond issue on June 7, 2007 to refinance a significant part of its $1.9bn syndicated loan facility secured in December 2005. Rosneft is not planning to make a secondary public offering. VTB looks into selling stakes in ALROSA and European Aeronautic Defense and Space Company (EADS). Sberbank is planning to offer shares on the London Stock Exchange (LSE) soon. TGK-4 shareholders discuss additional share issue. The State’s stake in Rosgosstrakh may be lowered. Analysts optimistic about Transneft’s Eurobonds issue. OGK-1 shareholders decide on share issue. RAO UES gives go-ahead for OGK-4 sale. According to Gennady Melikyan, First Deputy Chairman of the Russian Central Bank, at least three privately owned Russian banks will float shares as part of initial public offerings by the end of 2007, though he declined to reveal the names of these banks. The central banker stated that each bank would float around 25-30% of their shares, stressing that they expected to raise considerable proceeds. Melikyan revealed that these three banks were among Russia’s 50 largest banks in terms of capital, and two of them were in the top 30. Gazprombank boosted its stake in Mosenergo’s share capital from 5.08% to 10.09 %.
It seems that Russian stock market found solid support. RTS rose by 3,73%, MICEX rose by 1,80%, Russian oil stocks grew by 2,09%, SEP future on RTS rose by 1,96% and closed the week above RTSI.
Source: Reuters.
US Stock market. Oil Prices. World’s Indices.
DOW: DOW was very volatile last month. It closed the previous month near its all-time high with prospective to go further up. But on the first week of the last month it fell by 400 points, on the second week it rallied up again and almost touched its all-time high. Then it went down again by almost 400 points by the end of the month. In the last couple of days of the last month it started to rise again slowly but confidently. DOW closed the month at 13.403. All-time high was registered on June 1, 2007 at 13.691. Last month DOW reached 13689 on June 15, 2007.
US ECONOMIC DATA PUBLISHED: Factory orders April 0.3% vs. 2,8% March. ISM services index May 59.7 vs. 56 April. Unit labor cost (Q1) revised 1.8% vs. 0.6%. Productivity (Q1) revised 1.0% vs. 1.7%. Wholesale inventories April 0,3% vs. 0,4(0,3)%. Consumer credit April +2,6bln vs. +14,0(+13,5)bln. Import April 188.0bln vs. 190.1bln March. Export April 129,5bln vs. 126,2bln March. International trade April -58.5bln vs. -63.9 March. Federal budget May -67,7bln vs. April 177,1bln.Import prices May 0,9% vs. 1,3% April. Retail sales excluding auto May 1,3% vs. 0,0% April. Retail sales May 1,4% vs. -0,2% April. Export prices May 0,1% vs. 0,3% April. Business inventories April 0,4% vs. 0,1% March. PPI May Y/Y 4,1% vs. 3,2%. PPI May 0,9% vs. 0,7% April. PPI excluding food and energy May Y/Y 1,6% vs. April. PPI excluding food and energy May 0,2% vs. 0,0%. Redbook sales for Jun 9: somewhat mixed. NY Fed Empire State manufacturing index May 25,8 vs. 8,0 April. CPI excluding food and energy May Y/Y 2,2% vs. 2,3%. CPI excluding food and energy May 0,1% vs. 0,2%.CPI May Y/Y 2,7% vs. 2,6%. CPI May 0,7% vs. 0,4%. Current account Q1 -192,6bln vs. -187,9bln. TICS long-term April +84,1bln vs. +51,2bln March. TICS April +111,8bln vs. +30,1bln March. Capacity utilization May 81,3 vs. 81,5 April. Industrial production May 0,0% vs. 0,4%. Michigan sentiment index June preliminary 83,7 vs. 88,3 May. Building permits May 1.501mln vs. 1.457mln April. Housing starts May 1.474mln vs. 1.506 April. Leading indicators May 0.3% vs. -0.3% April. Philadelphia Fed index June 18.0 vs. 4.2 May. Existing home sales May 5,99mln vs. 5,99 April. Consumer confidence June 103.9 vs. 108.5 May. New home sales May 915K vs. 930K. Durable goods orders excluding defense May -3.2% vs. 0.6% April. Durable goods orders excluding transportation May -1.0% vs. 1.5% April. Durable goods orders May -2.8% vs. 0.6% April. GDP (Q1) final Y/Y 0.7% vs. 0,6%. Help-wanted index May 27 vs. 29 April. Personal income May 0.4% vs. -0.1% April. Personal spending May 0.5% vs. 0,5% April. Chicago PMI June 60.2 vs. 61.7 May. Construction spending May 0.9% vs. 0.1% April. Michigan sentiment index June final 85.3 vs. 83.7 May.
HIGHLIGHTS FROM LAST WEEK’S SPEECHES:
FED’s Bernanke: Upside price risks. Housing weakness has not spilled into other sectors of the economy. Inflation remains elevated and should gradually weaken. US econ should advance at a moderate pace. Long-term interest rates are relatively low. A quicker Yuan rise is in China’s interest. The housing market is likely to drag on the economy more than has been expected. ECB, Trichet: (1) Macro/financial environment of EMU is robust, (2) Favorable economic outlook in EMU, (3) The main target is to keep financial stability, (4) Short-term profile of inflation is still determined by energy price. ECB’s Weber: Monetary and economic analysis show upside price stability risks. FED: Estimated inflation target is 1.8%. Inflation has been trending lower. ECB Quaden: ECB has not said tightening cycle is over or that a rate hike is needed. ECB action in H2 will be data dependent.
Dallas Fed’s Fisher: Fed can keep inflation down. Strong world growth may be raising inflation risks. Sees some encouragement in inflation data but “we are not there yet. 10
OIL PRICES: Last month oil prices advanced at the fast pace: Brent, Urals, and WTI rose by 5,73%, 10,17% and 8,27% respectively. Stock prices of Russian oil companies rose by 2,09% last month but from the beginning of the year they fell by more than 10%. US EIA oil data showed some consecutive rises in inventories by approx. 1-2mln barrels per week. At the end of the month it posted an increase by more than 6mln. OPEC: OPEC does not plan to increase the supply of oil. If prices will continue to rise then the correction of supplies will be done, but for today OPEC needs to do nothing. According to OPEC the rise of oil prices is due to geopolitical factors and not due to low supply to the market. It is necessary to remember that OPEC reduced supplies to 2-year lows, which puts additional pressure on oil prices.
WORLD INDICES
Last month world indices showed mixed results, but lower trend was most common. Winners of the month were Japanese Nikkei225 (+1%) and TOPIX (+0,4%). Losers of the week were:
SWISS (-3,38%), S&P500 (-2,15%), DJI (-1,9%).
Sources: The Central Bank of Russia, Reuters, Cbonds, Ministry of Finance
RTS
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