Russian Markets Research July 1-8, 2007
World oil prices approached higher levels!
International Olympic Committee (IOC) has chosen Sochi as the host city of the XXII Winter Olympic Games.
Russia’s Inflation in June 2007 is higher than expected. Some regions posted inflation of more than 2%. Inflation risks are on the upside. Russia’s foreign trade surplus shrinked. Russian state and domestic debts increased, stabilization fund rose.
The liquidity decreased on the Russian money market and the overnight rate fell considerably last week compared to the previous week.
Against expectations of many analysts the yield of UST10 started to increase last week. The yield of UST10 advanced from 4,99% to 5,18% last week. The high at 5,29% and psychological level of 5,00% are in focus for the coming trading days.
The Fed is on hold. The European Central Bank is still in tightening mode. The interest rate outlook moves against the dollar. As it was widely expected, ECB left its key rate unchanged at 4.00% on Thursday following hike last month. As also expected, the Bank of England on Wednesday announced a 25bps rate hike to 5.75%.
The U.S. currency is under pressure. EUR/USD advanced by 0,64% during last week and closed at 1,3626.
RTS grew by 4% during last week. The week was closed without noticeable profit taking.
DOW again was very volatile last week. More or less definite mid-term trend disappeared. Range of 13.250 – 13.700 is in focus. Breaking this trend will show further movement. Nobody is surprised with movements by 200-300 point any more after latest sharp flies of the Index. DOW advanced by 1,51% last week and closed it at 13.611.
Last week oil prices advanced again at a fast pace. Brent, Urals, and WTI rose by 5,95%, 1,62% and 3,31% and closed the week at $77,62, $73,32, and $72,80 respectively. Stock prices of Russian oil companies have been rising for two consecutive weeks. Last week they rose by 4,18% but from the beginning of this year they fell by 6,54%.
Last week world main market indices showed a positive growth. Winners of the week were NQCOMP (+2,43%), S&P500 (+1,8%), DJI (+1,51%), FTSE (+1,24%). Again the USA and Great Britain are ahead of the others.
Global liquidity is rising!
Russian Economic Update
Russia posted 6 month inflation
According to the CBR, Russia’s inflation amounted to 5.7% in the first half of 2007 compared to 6.2% in the same period a year earlier. Consumer prices grew by 1% in June 2007 against 0.3% in June 2006. Such a high inflation in June could be attributed to a seasonal increase in fruit and vegetable prices. Consumer prices grew by 2% or more in six Russian regions. The Chairman of the CBR Sergei Ignatyev again assured that the inflation would not exceed 8% despite a 1% rise in inflation rate in June 2007.
International Olympic Committee (IOC) has chosen Sochi as the host city of the XXII Winter Olympic Games
A figure of approximately USD11.69bn was announced for the state’s coming expenditures for the federal target program of Sochi’s development as a mountain climatic health resort. The Finance Minister also stated that even if Sochi would not have won, 90% of all the facilities planned for the Olympic Games would have been built anyway, and Russia would again present Sochi as candidate for the 2018 Games in 2011.
According to the CBR, Russia’s state debt surged by 31.3% to $339.3bn in Q1 2007 compared to the same period a year earlier. Russia’s new government debt decreased by 4% to $33bn. Foreign banks’ loans amounted to $5.3bn, including a $4.6bn loan offered by IBRD. Other loans stood at $2.4bn. The former USSR debt undertaken by Russia dropped 3.8 times to $8.9bn in January-March 2007 compared to the first three months of 2006. Russia’s long- and short-term liabilities stood at $280.6bn and $58.7bn, respectively.
According to the Russian Finance Ministry, Russia’s domestic debt climbed 12.9% to USD45.12bn as of June 2, 2007.
Russia posted higher proceeds from customs duties. The Russian Federal Customs Service contributed a total of USD54.57bn in the first six months of 2007, which is 8% more than in the same period a year earlier.
Russia will hike oil export duty once more
According to Alexander Sakovich, head of the Customs Payments Office of the Russian Finance Ministry, Russia’s oil export duty will amount to $223.9 per tonne from August 1, 2007. Sakovich also said that the duty on oil products will be raised and amount to $163.2 and $87.9 per tonne of light and heavy refined products, respectively.
Russia’s foreign trade surplus shrinks
The Economy Ministry’s survey of Russia’s economic situation Russia’s foreign trade surplus dropped by 18.6% to $51.5bn in January-May 2007 compared with the same period a year earlier. The import growth rate was estimated at 40.1%, well above the export growth rate of a modest 8.7%. Slower export growth compared with the previous year’s figure is largely attributed to a decline in fuel and energy exports. Russia’s exports were worth $128.9bn, while imports stood at $77.4bn. Russia’s foreign trade totaled $206.3bn, or 18.7% above the same figure in 2006. Exports claimed 62.5% of the total, and imports accounted for 37.5%.
Russia hiked oil exports
According to Transneft, Russia boosted its oil exports to non-CIS countries by 3.2% to 107.588m tonnes in January-June 2007.
Russia’s Stabilization Fund grew
According to the Russian Finance Ministry’s official statement, Russia’s Stabilization Fund stood at USD121.68bn as of July 1, 2007.
Russia will regulate gas prices after joining WTO
Russia will still be able to regulate foreign countries’ access to Russia’s natural resources, as well as control gas prices, after it joins the World Trade Organization (WTO).
Economic trends
International Cooperation
A poll held by ROMIR Monitoring held in May 2007 showed that 57% of Russians believe that the young generation will be better off than their parents are now.
Russia and China will discuss the repayment of China’s debt to Russia of $8bn on the next meeting of the Russia-China intergovernmental trade and economic talks.
Russia and Uzbekistan are looking into the possibility to construct new gas transportation systems. The two countries also discuss enrichment of uranium, produced by Uzbekistan, in Eastern Siberia.
Russian Money Market
Last week overnight rate lay in the band of 2,15–2,64%, for one week rubles could be found at 2,29-3,55%, and for one month at 2,78-3,61%. Overnight rate closed the week at 2,64%.
The liquidity decreased on the money market last week compared to the previous week. Overnight rate fell considerably last week compared to previous week.
Balances on C/A opened the week at 528,6bln rubles and closed it at 489,70bln rubles. Bank deposits with the CBR opened the week at 758,60bln rubles and closed it at 849,50bln rubles. Bank deposits with CBR increased by almost 90bln rubles last week.
The total flow of balance on C/A and deposit accounts with CBR decreased by 513bln rubles last week compared to previous week. The average total liquidity balance per day decreased to 1331bln rubles compared to 1434bln rubles in previous week.
GOLD AND FOREIGN CURRENCY RESERVES:
CBR reported that Russia’s gold and foreign currency reserves amounted to $406bln as of June 29, 2007, stepping down by $0,6bln or 0,15% from their previous level.
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 $103bln or 33,99%.
The liquidity decreased on the money market last week compared to the previous week. Overnight rate fell considerably last week compared to previous week.
US Treasuries market was again in focus for the whole last week. The yield of UST10 rose by 20bps from 4,99% to 5,19% last week.
There were no considerable changes in Russia30 price last week. Positive data on USA did not lead to growth of UST quotes. Inflation in the USA is within the US state’s planned targets and the Federal Reserve is satisfied with this data. Yields of European benchmarks also grew last week following the UST. Emerging markets on the opposite practically did not changed last week.
In Russian domestic market spreads were very volatile in the beginning of the week because of instable situation with UST10. On Tuesday and Wednesday the liquidity fell, but at the end of the week activity rose. Activity was slow on the domestic bond market before Independence day in the USA and before payrolls data.
On Monday yield of UST10 fell to 5,00%, which was pretty tight moment. On Tuesday UST10 yield was not able to break below 5,00% and started to grow again. After holidays traders on UST continued to close long positions which they opened on Monday and previous Friday expecting the breakout of UST10 yield below 5,00%, which led to the rise of UST10 yield.
Before payrolls UST10 yield grew a little. We observed interesting changes in volume of bond markets in June 2007 compared to May 2007: volume of GKO-OFZ market fell by 13bln rubles, corporate bond market rose by 60bln rubles, sovereign Eurobond market fell by 2bln rubles, corporate Eurobond market grew by 6bln rubles.
Russian FX Market
RUSSIA’s FX OUTLOOK
USD/RUB:
The pair was traded in the band of 25,65–25,75 and decreased by 0,08% last week. The trade volume on USD/RUB lay in a band of $0,9-3,2bln on the Russian currency market. Trade volume decreased considerably last week compared to the previous week. The dollar was trading at RUR 25.75 on MICEX at the very end of the week.
EUR/USD:
Major: The U.S. currency is under pressure. This week was not expected to bring not as much news as a week before, but the events were expected to be market-moving. Focus was on central banks’ rate decisions and on Friday Payrolls report. The Fed is on hold. The European Central Bank is still in tightening mode. The interest-rate outlook moves against the dollar.
Technical view: Bids $1.3585/1.3615, offers $1,3565/75, stronger $1.3715/25.
Movement: The dollar continued to lose ground further last week. On Monday it flew from 1,3530 to 1,3630. On Tuesday and Wednesday some correction made the pair to flow within the range of 1,3585 – 1,3630. On Thursday EUR/USD advanced and posted 1,3659 then fell to 1,3585 again. Next attempt to rise happened on Friday when the pair printed 1,3642. EUR/USD advanced by 0,64% for the last week and closed it at 1,3626.
RATES: As it was widely expected, ECB left its key rate unchanged at 4.00% on Thursday following hike last month. As also expected, the Bank of England on Wednesday announced a 25bps rate hike to 5.75%. Interest-rate futures suggest investors are betting the ECB will raise interest rates once more this year. There are still inflationary risks in the EU economy. Evidence of elevated service sector activity and rising output and input prices in June maintains pressure on the ECB to raise interest rates by a further 25 basis points to 4.25% in September 2007.
Only a major setback in the markets or a big slowdown will let the Fed shift its bias or begin to cut rates.
The interest rate change expectations play in favor of the Euro.
The core inflation has decelerated but the Fed needs additional evidence of the weak economic growth to consider a change in the monetary policy.
The higher US ISMs recorded over the past couple of months have been at the foundation of the improvement in sentiment about US economic activity. Whether or not these higher ISM levels have been sustained will be the key for market thinking about the US. The jump in the manufacturing ISM index will lead to further acceleration in GDP growth.
Russian Stock Market
MARKET PERFORMANCE: RTS strived upwards from the very beginning of the week. On Wednesday 1944 was the key resistance, on Thursday 1973. The growth of Index was considerable and Friday started as if many of those who were buying before decided to take profit, which pushed RTS down to 1964, but then the Index again slowly but confidently climbed to 1973. Upward mid-term and long-term trends are still in force. Taken expected high inflow of foreign capital into Russia and lots of coming IPOs and the general growth of the Russian Economy. Moreover, 2000 is the key level and if traders will not fix their profits again near 2000 as it was last time, and then 2000 will become a strong support, opening further road up. For that RTS should keep above 2000 for considerable time. 8
September future on RTS tagged its base asset and was trading above it for the whole week. It closed the week at 1989,75 (+4,36%). MICEX and MICEX COMP indices closed the week at 3360,65 (+3,85%) and 1734,63 (+4,12%) respectively. Last week oil prices advanced again at the fast pace. Brent, Urals, and WTI rose by 5,95%, 1,62% and 3,31% and closed the week at $77,62, $73,32, and $72,80 respectively.. Stock prices of Russian oil companies have been rising for two consecutive weeks. Last week they rose by 4,18% but from the beginning of the year they fell by 6,54%. RTSI closed the week at 1974,66.
FINANCIALS: Severstal (net profit surged by 82.5% to $396m in Q1 2007 against $217m in the same period a year earlier), Gazprombank Group (net profit surged by 109% to almost $1.331bn in 2006), Transneft (net profit dropped by 10.1% to USD654min Q1 2007 compared to the same period a year earlier), Techsnabexport (net profit climbed by 15% to USD101m in 2006 compared to a year earlier).
ISSUES, ACQUISITIONS & INTENTIONS:
# Novolipetsk Steel (NLMK) has sold a 50.08% stake in its subsidiary Lipetskcombank to Bank Zenit. The transaction value is about $44 million. Deutsche Bank acted as NLMK’s consultant.
# The Board of Directors of Russia’s largest carmaker AVTOVAZ approved plans to issue new stock as part of the company’s share split program.
# The Russian management company Leader, acting on behalf of Gazfond, has purchased a 25,000004% stake in SIBUR Holding.
# Rosneft has sold 50% in Tomskneft VNK to Vnesheconombank.
# The Board of Directors of TGK-2 has approved a RUR4bn (USD155.46m) bond issue. TGK-2 will place bonds with a 3-years maturity at an annual coupon rate of no more than 8.5% and a coupon period of no less than six months.
# LUKoil’s President Vagit Alekperov has purchased 2.16% of LUKoil’s share capital, for a total of nearly $1.401bn. Alekperov owns (directly and indirectly) a 16.899-% stake in LUKoil, while the company’s Vice President Leonid Fedun has an 8.3% stake.
# The Board of Directors of Rosneft approved at a meeting on June 25, 2007 the placement of bonds worth $5bn.
# The Russian steel and mining company Evraz Group has extended its offer to purchase a stake in Highveld Steel and Vanadium Corporation Limited.
# The Board of Directors of OGK-2 has approved an additional issue of 12bn common shares with a face value of RUR0.3627 each. The shares will be placed by public subscription, the Russian power generation company reported today. The Board will set the offer price after OGK-2’s shareholders have exercised their preemptive right. OGK-2 hopes to raise USD813m. According to the company’s investment program till 2010, OGK-2 needs to secure USD1.55bn for its investment projects.
RTS grew by 4% for the last week. The week was closed without noticeable profit taking. MICEX rose by 4,12%, Russian oil stocks grew by 4,18%, SEP future on RTS rose by 4,36% and closed the week above RTSI.
US Stock market. Oil Prices. World’s Indices.
DOW:
DOW again was very volatile last week. On July 4 the USA celebrated its Independence Day, so markets were closed. More or less definite mid-term trend disappeared. Range of 13.250 – 13.700 is in focus. Breaking this trend will show the further movement. Nobody is surprised with movements by 200-300 point any more after latest sharp flies of the Index. DOW advanced by 1,51% last week and closed it at 13.611. All-time high was registered on June 1, 2007 at 13.691. Last month DOW reached 13.689 on June 15, 2007. DOW closed the week at high levels and stared again to its life-time highs.
US ECONOMIC DATA PUBLISHED:
ISM index June 56,0 vs. 55,0 May.
Factory orders May -0,5% vs. 0,3% April.
04.07.2007-Independence Day. Markets were closed.
Jobless claims (week to 30.06) 318K vs. 316K.
ISM services index June 60,7 vs. 59,7 May.
Nonfarm payrolls June 132К vs. 190К May.
Unemployment rate June 4,5% vs. 4,5% May.
Average hourly earnings June 0,3% vs. 0,4% May.
Average workweek June 33,9 vs. 33,8 May.
HIGHLIGHTS FROM LAST WEEK’S SPEECHES:
GERMANY, Industry Assoc. Head: Not worried about current Euro FX rate. But will begin to worry if Euro reaches $1.40.
ECB, Trichet: (1) Stronger than expected upside inflation risk, (2) In longer term there are downside risks to EU growth, (3) Risks to EU growth outlook balanced over short term, (4) EU growth potential around 2.25% still
OIL PRICES:
Last week oil prices advanced again at the fast pace. Brent, Urals, and WTI rose by 5,95%, 1,62% and 3,31% and closed the week at $77,62, $73,32, and $72,80 respectively. Stock prices of Russian oil companies have been rising for two consecutive weeks. Last week they rose by 4,18% but from the beginning of the year they fell by 6,54%.
On Monday crude futures were trading lower in Asian trade on profit-taking. WTI August contract was 31 cents lower at $70.37.
Iran oil minister reportedly said that current oil price is “appropriate”, and added that he sees no need to change OPEC output.
US EIA oil data showed some consecutive rises in inventories by approx. 1-2mln barrels per week. U.S. commercial crude oil inventories rose 3.1 million barrels to 354.0 million barrels last week. The growth rate of US commercial oil inventories increased. Oil prices gained in early trading after the EIA’s report on U.S. fuel inventories.
RISING: On Thursday WTI Nymex crude oil broke above $71.50 - hit highest level since September 2006. On Friday Crude oil continued to be traded above $72.35 - the highest level since August 25, 2006.
WORLD INDICES
Last week world main market indices showed the positive growth. Winners of the week were NQCOMP (+2,43%), S&P500 (+1,8%), DJI (+1,51%), FTSE (+1,24%). Again the USA and Great Britain are ahead of the others.
This Week’s Agenda
July 09
USA: Consumer Credit May
ISSUES: FinanceBusinessGroup to sell RUB 3 bio of domestic bonds with a 3-years maturity.
July 10
USA: ICSC-UBS Store Sales
USA: Redbook
USA: Bank of Canada Announcement
USA: Wholesale Trade May
ISSUES: Makromir-Finance to sell RUB 1,5 bio of domestic bonds with a 5-years maturity and a put option from par at the end of the 1-year.
ISSUES: Proviant Finance to sell RUB 1 bio of domestic bonds with a 3-years maturity and a put option from par at the end of the 1-year.
ISSUES: IKS 5 Finance to sell RUB 9 bio of domestic bonds with a 7-years maturity and a put option from par at the end of the 3-year.
July 11
USA: MBA Purchase Applications
USA: EIA Petroleum Status Report 07/06
July 12
USA: International Trade May
USA: Jobless Claims 07/07
USA: EIA Natural Gas Report 07/06
USA: Chain Store Sales
USA: Treasury Budget June
ISSUES: RosT-Line to sell RUB 1 bio of domestic bonds with a 3-years maturity and a put option from par at the end of the 1-year.
ISSUES: Domocentr to sell RUB 1 bio of domestic bonds with a 3-years maturity and a put option from par in the middle of the 2-year.
ISSUES: Energocentr to sell RUB 3 bio of domestic bonds with a 3-years maturity and a put option from par in the middle of the 2-year.
July 13
USA: Import and Export Prices June
USA: Retail Sales June
USA: Business Inventories May
USA: Consumer Sentiment (p) July
Sources: The Central Bank of Russia, Reuters, Cbonds, Ministry of Finance
RTS
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