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P. Trunin Financial MarketsTF FPT P In June the situation in the Russian financial market was rather stable. In the background of growth of oil prices and leading stock indices in the international market, there was an upsurge observed in the Russian stock market. The situation was less favorable in the debt market, highly dependant on the dynamics of the US securities, which were getting down in price in view of prospective tightening of credit and monetary policy. Only by the end of the month the US market got stabilized. The restricting factor to further downfall of the Russian debt instruments was the high liquidity in the banking sector.

Government securities market As of June results, in the Russian foreign currency debt market there was observed a noticeable growth, largely due to the dynamics of the US debt market.

Thus, earlier this month the yield of US Treasury securities have significantly grown in the background of the peak maximum values, achieved at the US stock market, what caused the inflow of assets from less risky instruments to the more risky ones. That dynamics was supported by macroeconomic statistics information, confirming the economic stability, accompanied by explicit inflation risks. The Russian market has reacted to the situation by a decline of Eurobond yield, though the decline was rather smooth. However, while the decrease of the Russian Eurobonds yield at the beginning of the second week of the month was smooth, it has speeded up by the end of the week. In the absence of significant news from USA, the investors, apparently, were attracted by the raised rates in European zone.

At the beginning of the second part of the month the US Treasury bonds were growing in the background of tentative probability of upgrading of the basic interest rate. However, due to the publication of unfavorable inflation statistics, the quotations were restored. After the long holiday weekend, Russian Eurobonds were offered for sale only at the second half of the week and avoided the expressed downfall, experienced by the US bonds. By the end of the month, the profitability of American bonds was stabilized due to an absence of noticeable macroeconomic statistics publications in view of the expectations of investors for the results of the US IRS meeting. In that background the volatility of the Russian bonds even lower.

As of June 22, the Russian Eurobonds RUS 30 yield to maturity made 6.15 per cent per annum, RUS- 6.20 per cent per annum. As of the same date, the yield to redemption of the Russian Eurobonds made: for the eight tranche of external currency debt bonds 5.34 per cent, seventh tranche bonds 5.85 per cent, fifth tranche bonds 5.52 per cent..

PT TP TPIn the course of preparation of the survey, there were used analytical materials and surveys published by the Zenith Bank, investment company ATON, MICEX, and the materials presented at web sites of Russian issuing companies.

FIG 1.

Minfin bonds' yields to maturity in April-June 7.0% Tranche 5 Tranche 8 Tranche 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% FIG. 2.

Yields to maturity of the Russian eurobonds with maturity in 2030, 2018 and 2007 in April - June RUS-2030 RUS-2007 RUS-6.3% 6.1% 5.8% 5.6% 5.3% 5.1% 4.8% 4.6% 4.3% The tendencies in the government debt ruble market at the beginning of the month were rather negative.

Upon considerable growth at the end of May, a smooth price decrease was observed within the limits of technical adjustment. The ruble liquidity was restraining the downfall. However, by the middle of the month the rate of quotations downfall were speeded up by higher liquidity in the external market, partially due to the Ministry of Finance statement to make a placement of considerable amount of its bonds. In the second part of the month variable trends were prevailing in the market. While the beginning of June was marked 02.04.05.04.11.04.16.04.19.04.24.04.27.04.03.05.08.05.14.05.17.05.22.05.25.05.30.05.04.06.07.06.13.06.18.06.21.06.02.04.05.04.11.04.16.04.19.04.24.04.27.04.03.05.08.05.14.05.17.05.22.05.25.05.30.05.04.06.07.06.13.06.18.06.21.06.with further decrease together with the US bonds and Russian Eurobonds, by the end of the month the situation was stabilized and quotations were partially restored.

In the period of June 1 to 22 the total turnover in the secondary market of GKO-OFZ made about RUR 305.9 bln, with an average daily turnover at the level of RUR 3.4 bln.(as compared with RUR 58.1 bln with an average daily turnover at the level of RUR 3.4 bln. in May). Several auctions on OFZ additional placements were held during the month. Thus, on June 13 three auctions were arranged for placements of OFZ series 25061, 46018 and 46020 with the issue volumes of RUR 8.22 and RUR12 bln accordingly. The actual average weighted yield of those placements were at the level of 6.11, 6.55 and 6.88 per cent per annum accordingly.

As of June 27, the GKO-OFZ market amounted to RUR 995.61 bln at face value and to RUR 1007.9 bln at market value. The duration of the GKO-OFZ market portfolio was 2086.89 days.

Equity Market Stock market situation In June there was observed a noticeable upgrading of the basic indices in the stock market. At the beginning of the month the Russian market started with a smooth upgrading. Oil prices were fairly favorable, what boosted the demand for oil and gas securities. Moreover, oil securities were lagging behind the rest of the market indicators of the preceding months, so there were good grounds for of investors growing interest to this sector. In addition, external economic environment remained favorable: key stock markets of the developed and developing countries have demonstrated an explicit growth.

However, the beginning of the second part of the month was marked with the upgraded basic market indices. Among the factors of growth, there should be noted the publication of the Beige book in the USA, which positively evaluated the growth prospects of the American economy, encouraging American and European stock markets. Oil prices have also explicitly grown as a result of the strike of trade unions in Nigeria, as well as low stocks of fuel in the United States.

Late in June the indices were variable. Herewith, the market value of a number of blue chips at the end of the month were making for downgrading oil and gas sector quotations, while the positive corporate news of the beginning of 2007 supported positive forecasts. That grown was based on increased oil prices in the international market, as well as quite favorable situation in the basic international stock markets. Among the securities, that made a positive impact on the quotations, there should be mentioned Nornickel, which bonds were growing in line with the upgrading of prices for basic metals in the international market. In general, the lack of an expressed trend could be caused by the investments expectations for the results of the US IRS session, appointed to June 28.

FIG. 170 2 075.160 The total volume of trading ($) 2 000.The RTS Index 150 1 925.140 1 850.130 1 775.120 1 700.110 1 625.100 1 550.90 1 475.80 1 400.70 1 325.60 1 250.50 1 175.40 1 100.30 1 025.20 950.10 875.800. points mln US dollars s 03.04.19.04.06.05.25.05.13.06.29.06.17.07.02.08.18.08.05.09.21.09.09.10.25.10.13.11.29.11.15.12.10.01.26.01.13.02.02.03.21.03.06.04.24.04.14.05.30.05.18.06.In general, within the period of June 1 to 26, the RTS index has increased by 3.71 per cent in absolute terms and made 67.8 points. At the same time the period of turnover of sales on shares, included in the RTS index, made about USD 835.2 mln at the average daily turnover at the level of USD 49.2 mln (as compared with about USD 649.2 mln at the average daily turnover at the level of USD 38.2 mln in May). Therefore, the investors activity in the stock market in June has been noticeably increased as compared with the preceding month. The indicators of maximum and minimum turnover in the market trades in June made USD 105.1 mln (as of June 1) and USD 21.9 mln (as of June 25), accordingly.

As of monthly results (from May 25 trough June 26), practically all blue chips have shown a growth.

Thus, utmost upgrading rates were demonstrated by Gazprom Neft and Nornickel, which made 15.14 % and 14.9 per cent accordingly. Somewhat lower growth rates were demonstrated by Gazprom (9.73 per cent), Sberbank of Russia (8.19 per cent), Rostelecom (7.8 per cent), RAO UES of Russia (7.16 per cent).

Lower growth was demonstrated by LUKOIL (by 4.67 per cent), while the cost of Mosenergo did not change in July. Negative dynamics as of monthly results were demonstrated by "Surgutneft" and Rosneft" securities, which have downgraded by 3.07 and 1, 25 per cent accordingly.

FIG. 4.

Dynamics of the Russian Blue Chips from May 25 to June 26, 17.5% 15.0% 12.5% 10.0% 7.5% 5.0% 2.5% 0.0% -2.5% -5.0% Change in price (%) In May the RTS turnover leadersF7F were: RAO UES of Russia (29.5 per cent), Sberbank of Russia (21.6%) and Norilsk Nickel (13.1 per cent each), LUKOIL (8.5 per cent), Gazprom (7.9 per cent) and Transneft privileged bonds (1.3 per cent). The total share of trades with the above companies has accounted to 81.7 per cent of the total RTS trading volume.

In terms of capitalization, as of June 26 the top five leaders of the domestic share market wereF8F: Gazprom (USD 238.96 bln, Sberbank of Russia (USD 84.08 bln), Rosneft (USD 84.04 bln), LUKOIL (USD 66.22 bln), R UES of Russia (USD 54.82 bln),, Norilsk Nickel (USD 39.85 bln).

Futures and options market In June the investors activity on the RTS futures and options market (FORTS) has increased as compared with the preceding month. Thus, from June 1 to 26 the total turnover on the RTS futures and options market amounted to approximately RUR 416.33 bln (743,3 thousand of transactions, 10.18 mln of contracts) against RUR 300,6 bln (625,6 thousand of transactions; 7.65 mln of contracts in the relevant period of May).

PT TP On the classical market.

PT TP According to RTS data.

Tatneft GMK LUKoil Rosneft Russia Gazprom Russia NorNikel RAO UES Mosenergo Rostelekom Sberbank of Gazprom neft Surgutneftegas The greatest demand, as before, was for futures: the volume of trading in futures in the period under review was RUR 344,56 bln (722,7 thousand of transactions, 8.5 mln of contracts). Options enjoyed a far lower demand, with the volume of trading at about RUR 71.8 bln (20.6 thousand of transactions and 1.7 mln of contracts). The highest level of trading in the futures market was RUR 45.6 bln (as of June 15), the lowest was RUR 12.03 bln (as of June 9).

Corporate bond market Corporate debt market in June remained relatively stable, which enabled it to show some growth as of monthly results. At the beginning of the month, the signs of technical adjustment were observed in the market after an explicit upsurge within the preceding two weeks, though the quotations remained within a narrow range, which was based on high liquidity in the banking sector. The stability of the market was confirmed by the results of primary placements, where the bond issuers of high credit quality were quite successful. While the decline in quotations was rather smooth early in the week, the downgrading by the end of the week has considerably speeded up due to the trends of the US stock market. The highest level of sales was observed in the most liquid securities.

From June 1 to 26 the price index of corporate bonds traded on MICEXF9F went up by 0.06 points (plus 0.06 per cent), while the index of the ten most liquid corporate bonds grew up by 0.1 points (plus 0.09 per cent). From June 1 through 22 the total turnover on the MICEX corporate bond section amounted to RUR 36.68 bln, with an average daily turnover of RUR 2.45 bln (about RUR 45.1 bln with an average daily turnover of RUR 2.65 bln in the relevant period of May). Therefore, the investors activity has explicitly decreased in June.

FIG Dynamics of corporate bond indices 122.ZETBI-Corp ZETBI-Corp120.118.116.114.112.110.108.External factors behind Russian stock market dynamics The situation in the international oil market was quite favorable in June. While at the beginning of the month the quotations were quite stable, by the end of June they were replaced with a growing trend, having resulted in Light Sweet growth by 4.1 per cent. The grounds for the growth were the tensed situation in the Middle East and the trade union strike in Nigeria. The situation with the US fuel stocks also encouraged purchases.

PT TP The calculation was based on indices of corporate bonds traded on MICEX. The indices were produced by the Zenit bank.

03.04.19.04.06.05.25.05.13.06.29.06.17.07.02.08.18.08.05.09.21.09.09.10.25.10.13.11.29.11.15.12.10.01.26.01.14.02.05.03.23.03.10.04.26.04.16.05.01.06.20.06.The trends of the international stock markets were also positive in June (see Table 1). While the European stock markets have reached only the zero (or some downgraded) rate by the end of the month (see Table 1), the basic stock indices of the developed and developing countries were distinguished with explicit growth.

FIG. 6.

140% Dow Jones Industrial Average NASDAQ Composite The RTS Index 120% 100% 80% Corporate News U LUKOILU LUKoil has made placement of Eurobonds for the amount of USD 1 billion. The bonds are split into two equal tranches with maturity terms of 10 and 15 years respectively. The annual coupon rate of the ten-year tranche for USD 500 million is 6.356 per cent with a spread of 145 basic points as to the US Treasury bonds, for the fifteen-year tranche of the same amount, 6.656 per cent with a spread of 175 basic points as to the US Treasury bonds.

Credit Suisse and Deutsche Bank were the sponsors of Eurobonds placement. An application is made for enlisting the bonds with London Stock Exchange. These bonds have the highest rating among all securities, ever issued by a private Russian company. After successful international road show Eurobonds were positively accepted and were globally placed at the market. The demand for the securities has exceeded USD billion. LUKoil intends to use the funds for general corporate purposes, including debt refinancing and capital investment.

On June 28 LUKoil has disclosed consolidated financial reporting for the first quarter of 2007 in accordance with US GAAP.

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