The second week of May Russian stock market showed weak activity due to the long holidays. The USD-nominated RTS fell by 2.4% while the Ruble-nominated MICEX unchanged to the end of the week due to the weakening of the ruble against the USD, although it fell on Monday to the region of 1350, which corresponds to levels of mid-December. External background continued to deteriorate - the political crisis in Greece with an increased risk of exiting the eurozone, the deterioration of the EC forecasts for the Spain economy and budget deficits, weaker than expected statistics from China, the trading loss of JP Morgan at $ 2 bln. Among the positive news only unexpected increase in the U.S. consumer sentiment. Oil prices continued to slump, eliminating all growth since the beginning of the year (WTI futures fell by 3,1%, Brent – by 1.2%). Risk aversion led to the increase in the outflow of global funds from emerging markets stocks, particularly weekly outflow from Russia amounted to $ 189 mln, a record this year.
Domestic news flow was rather sluggish due to the long holidays. The unexpected provocations and violence during the opposition meeting on May 6, new forms of street protest activity could cause foreign investors to be more cautious, but as a whole the market is rather resilient to this news now. Some of the expectations are associated with the announcement of the new Russian government, although significant changes are not expected, and with a new strategy for the state privatization program.
Ex-dividend dates for Gazprom and Lukoil took place last week, as a result, these stocks lost 3.7% and 1.5%, respectively. Among the best performing stocks of the week were Mechel prefferreds (+12.4%) - BoD recommended the dividends at 31.28 rubles per share, which at current market prices corresponds to the 15.4% dividend yield, the record date - May 22. The company finally released its financial results under IFRS for 2011 and held a conference call, during which it was announced the intention to sell the least efficient assets to reduce debt burden, which was perceived by investors with cautious optimism. The utilities markedly decreased - investors were disappointed with the news that Federal grid company will get control over IDGC Holding and the holding may be liquidated.
Bank "Vozrozhdenie" stocks last week updated record low price since 2009, falling on May 7-8 below 500 rub./share. On Friday it was announced that the major beneficiary of the bank and the permanent CEO D. Orlov intended to head the BoD and to convey the operational management to the deputy president A. Dolgopolov. The market initially took the news as moderately negative, as a possible signal for future change of ownership (D. Orlov in the next year will celebrate 70 years of age), but then the paper slightly corrected upwards. Vozrozhdenie is very cheap - the expected 12FY P/BV is 0.6, which seems unreasonably low even taking into account moderate ROE and the risk of a change in control ownership in the future. In addition, the reallocation of operating control while maintaining the maximum continuity of policy rather reduces current risks to investors.
On Saturday, while the global markets were closed, the Russian market was first to react on the People's Bank of China decision to cut the reserve requirements for Chinese banks by 0.5 percentage points since May 18. While in the morning the MICEX fell down by more than 1%, after Chinese news the losses were pared: the market has received a signal that the regulator is ready to act to prevent a "hard landing" of China's economy, which would be very negative for the commodity markets. However, the lack of foreign markets reaction hampered the positive response of the Russian players. At the end of the day, the MICEX fell by 0.4% and the RTS lost 0.7%. The most liquid securities showed mixed performance. Lukoil retreated by 2.8% due to a technical correction after the record date yesterday.
On Sunday, new piece of negative news came from Europe - according to exit polls, the A. Merkel’s CDU party, suffered a serious defeat in regional elections in the most populated region of Germany - North Rhine-Westphalia, receiving slightly over 25% (the worst result for the post-war history) while the first prize won by the Social Democrats. In Greece radical left party SYRIZA refused to enter into a coalition government, now the final attempt to form a government will take the President, who will provide consultations today with the leaders of four political parties. If he fails, the country will get new elections, where, according to opinion polls, the first place can take SYRIZA, requiring to cancel the terms of agreements with the EU-IMF, which is equal to sovereign default and exit from the eurozone. In Spain mass demonstrations against unemployment and methods of overcoming the economic crisis took place on the weekend.
This morning, the global markets dynamics is slightly negative for the Russian market - Asian markets opened lower on negative news from Europe, but then went into a positive zone due to the PBOC easing reserve requirements. The EUR / USD fell to a 3-month low, oil prices declined slightly compared with the closing on Friday. U.S. futures are traded in a weak minus. We expect Russian trade opening slightly below the close on Saturday. The main events of the day - the President of Greece consultations with the leaders of four parties, the beginning of a two-day meeting of EU finance ministers, record date for Tatneft, Surgutneftegaz, TNK-BP, the publication of Rusal financial statements 1Q12 IFRS. From the statistics, the data on industrial production in the Eurozone will be released today.
This week news is expected to be very intensive which will determine the high markets volatility. On May 14-15 - Meeting of EU finance ministers, on 15 May - the first meeting of German Chancellor Angela Merkel with the new President of France F. Hollande, where it may be an attempt of convergence in the EU's anti-crisis policy. Another significant expected event for global markets - Facebook IPO (May 18). According to media reports, the company expects to be valued at the Mcap of $ 77-96 bln, which should be a record-high IPO valuation of a hi-tech company in the history. On the night on May 15-16 MSCI will publish the rebalancing of its indexes, which will come into force on 1 June. On May 15, Russian Prime Minister Dmitry Medvedev is expected to present a list of candidates for the new government.
On the macro data side, large block of the U.S. economy data will be released this week (Tuesday - retail sales, CPI, Empire Manufacturing index, TICs, the NAHB index, Wednesday - housing starts, industrial production, the protocol of FOMC meeting, Thursday - leading economic indicators). The market expects a seasonal slowdown in retail sales, stabilizing housing and accelerating growth in industrial production, the data may support the market.
Among Russian corporate news this week, we note the record dates: Bashneft and Severstal (May 15), M. Video, Federal Grid (May 16), Kamaz (May 18). Financial statements - TNK-BP (1Q12, GAAP, May 16), Transneft (2011, IFRS, May 17).
The focus remains the crisis in Europe, where in addition to the deteriorating economic situation the uncertainty associated with policy decisions has increased. For Russia, traditionally the main focus is the oil market, where concerns arise. Although in the short-term measures of the People's Bank of China to stimulate the economy may have a positive impact on commodity markets, recent data (report of OPEC, oil reserves in the U.S., yesterday's statement by Saudi Arabia's oil minister) tend to show excessive current oil supply over demand, partly due to the weakness of the European economy. On Sunday, the minister of Saudi, the biggest oil producer, said that the price of Brent should fall to $ 100/barr (at closing on Friday it was $ 111.7 / bbl).
Since the global news and demand on risky assets continue to deteriorate, opening positions now makes sense only as a bet on a short-term rebound. The situation can reverse, provided the European risk reduction and / or the appearance of signals that Fed or the ECB are ready for new measures of quantitative easing.
Olga Belenkaya, Deputy Head of Research Department
