On the Russian stock market, the observed correction to the previous growth in the main indices of the Moscow stock exchange has chances to deepen. The decline in interest in Russian assets is due to a number of factors.
First, last week was marked by a rather sharp decline in oil prices. The growth of the previous 6 weeks has been completely leveled in just the last two weeks. And if earlier support for prices provided a sharp decline in production in Venezuela, then, at the moment, the planned launch of the future oil contracts, nominated in RMB, is of paramount importance on March 26 this year. Thus, China will have a greater impact on pricing. And since it is the largest consumer, keeping low prices will be beneficial for the Middle Kingdom. It is these expectations that reduce interest in speculative purchases of black gold. And this, in turn, puts pressure on commodity currencies, including the Russian ruble. Over the past week, the ruble has already fallen in price to the US dollar by 3.3%.
Secondly, the western stock markets are beginning to correct. Such dynamics is explained by the end of the period of super soft policy of the Fed. On the one hand, the persistence of indecision, Janet Yellen, before leaving the post of the head of the Fed could indicate uncertainty about the prospects for the US economy, and on the other hand, the replacement of Jerome Powell, on the contrary, will be accompanied by expectations of an active rate hike. For the American economy, this will mean a rise in the cost of borrowing, which will put pressure on business performance. In this regard, future reports of leading companies may not be so impressive.
The unfavorable external background and the continued deterioration of the commodity market conditions will primarily affect more risky assets (such as stocks). And the weakening of the Russian currency will reduce the interest of foreign investment. And although internal processes in Russia continue to testify to the restoration of the economy and the improvement of monetary conditions, in particular, Friday's reduction of the key rate by 25 bpts is worth noting. up to 7,5%, these measures, probably, will not allow to break the general course of things. In addition, the potential for further rate cuts is getting smaller, with a target of inflation of 4%, the key rate may drop at best to 6-7 %%. Moreover, the Bank of Russia press release mentions that this year the transition from a moderately strict to a neutral monetary policy can be made, which can be interpreted as a possible end to the trend to reduce the rate. Thus, as a third factor in favor of continuing the correction, we can note the elimination of the driver in the form of expectations of continued easing of monetary policy.
Fourth, additional pressure on prices will be provided by lower inflation expectations. Now inflation at a record low level (2.2%) and according to the forecasts of the mega-regulator this year it will remain below 4%. Its increase is expected only in 2019-2020.
Finally, the central event of the 1st quarter in Russia, of course, is expected to be the election of the President. This event carries additional risks for investors, so many assets can continue to be traded at a discount before it.
Oliver Gilbert, analyst of company
Foto: © Reuters. Is there a risk of continued decline in the financial markets?