MOSCOW: Now that we’re a few weeks past the drama of the U.S. sanctions bill I wanted to take a look at the situation in Russian equities to see if there have been any adverse effects. It’s been two months since the bill first made headlines passing through the Senate. It created a lot of worry that capital would flee the country if the U.S. cut off investors from the market. But that marked the bottom in the Russian MICEX Index, not the beginning of the end. Since then the Russian stock market has risen 200 points (11.2%) and has resumed its uptrend from a monthly perspective. This has occurred even though Gazprom (MCX:GAZP, OTC:OGZPY), one of its biggest contributors (15% of weighting) has gotten killed. This should underscore for you just how strong the situation is in Russian equities. Trade volumes for July were up across the board, year-over-year. I would be looking for a move above 2044.24, the May high, between now and the end of August as further confirmation that the long-term uptrend in Russian stocks has resumed.
The quarterly chart is still bearish. It would take a September close above the April high of 2058.11 to negate the breakdown on the quarterly chart that occurred in Q1. This is well within the realm of possibility if the MICEX closes above 2000 in August. Also, it has been two months since the Bank of Russia cut rates to 9.0%. Another rate decision is due soon. Given that inflation is now firmly below the 4% target, wages are rising and the credit markets are healthy, the Central Bank has the room to cut rates further and allow for greater growth of the domestic ruble lending market versus the dollar markets, which are still substantial. Since the last rate cut the overnight interbank rates have fallen steadily. On the day of the last rate cut, June 16th, the ruble overnight rate was 9.24%. Bank of Russia President Elvira Nabullina felt things were stable enough to drop rates to 9.0% then. Today, conditions are more favorable. In fact, the market is screaming for a rate cut with the overnight market closing on the Wednesday at 8.4%, having traded below 9.0% for most of August. Moreover, looking at the weekly bond auction filings for 5-year, 7-year and 15-year government securities, the auctions have all gone off at far lower rates than the Bank of Russia’s benchmark rate.
