Russian market battered as global markets wilt

The Russian equity market posted its biggest loss in more than a year on Thursday
Russian markets have been caught up in the global selloff which has seen the Dow Jones close 4.3% lower overnight with the FTSE 100 in London down 3.4%. In Moscow, the MICEX was 3% lower at 11.00 AM after opening 4% down.

Friday trade has seen Asian markets continue to slide with Australia down more than 4%, Hong Kong down 4.7% and Tokyo down 3.6% with concerns over the global economy ranging from Eurozone sovereign debt fears, to weak U.S. growth figures, to inflation in China dogging investors who have seen sentiment reverse since spring.

In Moscow the MICEX has opened 4% down after taking a 2.1% hit on Thursday.Brent Crude is holding at around $107/bbl, with the WTI price in the saturated U.S. market falling further to $85.56/bbl at the close of U.S. trade – its lowest in 5 weeks.Most industrial metals are lower with gold trading at $1660/oz and beyond as far vas an all time high of $1684.90/oz.

The nerves weighing on investors globally after the U.S. debt ceiling negotiations of last weekend, were frayed further with ECB President Jean Claude Trichet revising his outlook for the Eurozone economy at the same time as European Commission President Jose Manuel Barroso called for a deepening of the Eurozone bailout mechanism, adding he had ‘deep concerns’ about Italy and Spain.The comments reverberated through Euro markets in Thursday trade and set the scene for heavy falls in the U.S. overnight.

Otkrytie FC head of analysis, Vladimir Savov, says the volatility has set in.

“I don’t expect this volatility to finish in the coming days, and Russian markets will remain volatile as long as there’s uncertainty both in the US and European markets. National economies have become so interdependent thatturmoil in one of them will with no doubt affect others. So, huge doubts whether economic growth is possible in the USA in the coming months, coupled with continuing debt crisis in Europe makes Russian markets shaky.”

Savov added that Russian markets got off lighter than expected on Thursday, on the back of sound macro’s but that if global volatility continued apace then Russia would feel the chill.

“Yesterday Russian stock market performed a bit better than others, as it’s still underestimated compared to other emerging markets. Russia doesn’t have debt problems, neither on a corporate nor a State level, and it has reserves, that are growing. But this advantage is relative, of course, because, as I said, Russian economy can’t avoid the influence of global markets.”

Mikhail Korolyuk, Head of Investment Management and Analysis IFK Solid, says the fears over the global economy, coupled with the seeming inability of Europe to do anything to substantially address its sovereign debt issues, means that investors are adopting a risk off position. 

“The negative trend on Asian markets is due to investor concern over the instability of U.S. and European economies. In the U.S. the downward trend is due to increased fears that the global economy is weakening. All 10 groups of the S&P 500 have lost 1.8%. All that consequently led to a drop of energy companies’ shares, commodity and industrial stock markets. In Europe, investors see little progress of ECB in combating the EU's debt crisis. The Russian market starting positive, suddenly fell following the global stock markets and oil markets. The stock markets certainly mirrors the macroeconomic situation and the crisis of 2008 will continue with next possible recession hit us in 2012.

­ Mikhail Korolyuk, Head of Investment Management and Analysis IFK Solid, says the fears over the global economy, coupled with the seeming inability of Europe to do anything to substantially address its sovereign debt issues, means that investors are adopting a risk off position. 

“The negative trend on Asian markets is due to investor concern over the instability of U.S. and European economies. In the U.S. the downward trend is due to increased fears that the global economy is weakening. All 10 groups of the S&P 500 have lost 1.8%. All that consequently led to a drop of energy companies’ shares, commodity and industrial stock markets. In Europe, investors see little progress of ECB in combating the EU's debt crisis. The Russian market starting positive, suddenly fell following the global stock markets and oil markets. The stock markets certainly mirrors the macroeconomic situation and the crisis of 2008 will continue with next possible recession hit us in 2012. "

Korolyuk says the meltdown has structural origins, beginning with debt levels in the developed world.
“What we have is a structural crisis not a typical cycle crisis which could be resolved by keeping the stocks and trying to prevent overproduction. The structural crisis needs system transformation and the root of this is US and European over consumption backed by cheap credits. The people turned to consumption on credits to lift up their welfare which was threatened by other markets and developing economies in a wake of Globalization. During that period of globalization many countries have lost their industrial and manufacturing competitiveness and became main consuming economies giving a boost to Asian markets."

Korolyuk added that the contagion will be transmitted to Russia through the oil price, with a major equity selloff possible.

"In connection to Russia if oil slumps it could possibly fall to $40 per barrel and in this case Russia will drawn in recession with the rest of the world because Russia is still heavily dependant on energy exports rather than on export of other products with added value such as steel companies and so on.  The MICEX stock will continue to slide 3 fold down. The financial markets will fall and investors who have already began selling off their equities will lay down and wait for the next sign of improvement. This means that we will see a further big sell off of equities but investors will probably hold on utilities shares, telecoms, medical manufacturers and agricultural industry."