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Financial MarketsN. Burkova, E. Khudko In February the Russian financial market dynamics was determined by both, the situation in the global financial market, as well as national news background. Positive financial results for the year of a number of international companies, positive reaction of international investors to the plans of France and Germany in terms of national economies stabilization, RUR strengthening in the twocurrency basket during the first half of the month, and general growth trend in the world oil prices, changes in the pricing mechanism of the Russian repo auctions in order to increase liquidity in the banking sector contributed to positive trends on the Russian stock market. However, information on the net loss of the major banks Credit Suisse, UBS and Deutsche Bank AG, as well as Japanese automobile company Mitsubishi Motors Corp., negative macroeconomic data from the U.S., as well as the shortage of bank ruble liquidity have resulted in the investors motivation in the second half of February and the quotations downfall in the market. Positive trends were expressed in the activity growth of investors in the short-term MICEX and RTS markets, as well as the Russian stock market (grown quotations of the majority of blue chips).

In February, the volume of the domestic corporate bond market has declined again, virtually there were no primary placement of bonds. However, the growth of corporate bonds index and, consequently, reducing in the securities effective yield, the increase in investor activity in the secondary securities market, as well as the significant increase in the number and aggregate amount of newly registered corporate bond issues can help to expand the domestic debt market in the current year again.

Government securities market Within February, the growing inflation, continued policy of the Bank of Russia in terms of ruble gradual downgrading, as well as liquidity problems were decreasing the investment attractiveness of the RF government bonds in both, primary and secondary debt market at the background of growing dynamics of Eurobonds and Minfin bonds in the market.

As of February 23, 2008, the Russian Eurobonds RUS-30 yield to maturity has increased as compared with the level of January 26 from 9.51 to 9.66 per cent per annum (by 1.58 per cent), RUS-28 from 9.58 per cent to 9.83 per cent per annum (by 2.51 per cent), RUS-18 from 7.17 to 7.66 per cent per annum (by 6.83 per cent) and RUS-10 from 2.56 per cent to 3.24 per cent per annum (by 26.per cent). As of the same date, the similar trend was also observed in the yields of external currency debt bonds. Thus, the yield to redemption of the seventh tranche of external currency debt bonds has grown from 4.60 to 4.78 per cent per annum (by 3.91 per cent) (see Figs 1-2).

Within the period from January 27 to February 23 the total turnover of GKO- OFZ secondary market amounted to approximately RUR 5.78 billion with an average daily turnover of RUR 0.3 billion.

(about RUR 9.96 billion with an average daily turnover of RUR 0.59 billion in January), what demonstrated a decline of average monthly turnover by 50 per cent.

Like in preceding month, only one auction for OFZ placements was arranged in the period from September 27 to October 23. Thus, an auction on additional placement of OFZ series 25064 was held on January 28 for the amount of RUR 5.19 billion, actual placement made RUR 0.02 billion with an average weighted yield of 12.86 per cent per annum. Therefore, despite the average weighted yield for additional OFZ placement was higher than that of other government bonds, mentioned above, the actual placement made only about 0.4 per cent of the offer (25 per cent versus the level of preceding month).

As of February 23, the GKO-OFZ market amounted to RUR 1145.85 bln at face value and to RUR 930.0 bln at market value. The duration of the GKO-OFZ market portfolio was 1779.05 days, having decreased (by 12.17 days) as compared with preceding month (as of November 26).

In the course of preparation of the survey, there were used analytical materials and surveys published by the Interfax, MICEX, RTS, RF Central Bank and the materials presented at web sites of Russian issuing companies.

Fig. 1. External currency debt bonds yield to maturity in December 2008 February 2009.

Fig. 2.Yields to maturity of the Russian Eurobonds with maturity in 2010, 2018, 2028 and December 2008 February 2009. Stock market Stock market situation Some improvement in the internal and external news background due to the sucessful financial performance of a number of international companies, an upward movement of quotations of the world oil prices in early February, the revival in the world markets after January holidays, as well as antiinflationary measures taken by the Government of the Russian Federation (including the CBR upgrad ing of credit and deposit operations and transactions of direct REPO rates since from February 10), occasional ruble strengthening in the two-currency basket have significantly increased the investors activity in the Russian stock market in February. However, the lack of liquidity, increasing inflationary expectations, the withdrawal of bank licenses due to the banks inability to repay their liabilities on time, reducing oil price in the world markets, the weakening ruble, the initiation of court proceedings by the Federal Antimonopoly Service against Lucile, TNK-BP, Gasprom petroleum and Rosneft provoked downgrading of the market quotations in the second part of the month. Moreover, the Fitch Ratings Agency has downgraded the long-term credit rating of Russia from BBB+ to BBB with negative forecast, as well as the short-term rating in foreign currency from F2 to F3 and the RF country threshold from A- to BBB+.

All those volatile factors have urged the upgrading of the most liquid securities in the Russian stock markets (up to 26 per cent) and a decrease in the other part of securities quotations (up to 13 per cent), as well as a general upgrading trend in MICEX and RTS markets stock indices growth over 2 per cent as of results of the month.

Throughout February a general upgrading dynamics was observed in the Russian stock market, accompanied by irregular downgrading trends (See Fig. 3). Thus, at the first half of the month, a general trend to growth in the MICEX index was observed, which was replaced by a downgrading trend after February 13. The MICEX index has reached the minimum value on February 5, having downgraded to 623.29 points (which is by 553.62 per cent less than the relevant indicator for the preceding month).

The maximum value of the MICEX index has reached on February 13, i.e., 732.21 points (versus 655.16 points a month before).

Fig. 3 MICEX and Trades Volume Dynamics In general, within the period from January 27 to Fenbuary 23, the MICEX index has upgraded by 4.77 per cent, what makes about 14.22 points in absolute terms (within the year, from February 24, 2008 to January 26, 2008, the MICEX index has downgraded times 2.7 times). Over the same period the turnover of trades in shares, included in the MICEX index, made about RUR 599.14 bln at an average daily turnover of RUR 31.53 bln. (against RUR 285.24 billion with an average daily turnover of RUR 16.78 billion in the preceding period). Therefore, the investors daily activity in the stock market in February has significantly grown as compared with the preceding period (more than twice). The indicators of maximum and minimum daily turnover in the market trades in February made, accordingly, RUR 54.94 bln. (as of February 11) and RUR 18.77 bln on February 5.

As of monthly results (from December 27 through February 23), the blue chips have shown a volatile trend. The leaders of downgrading rates were GMK "Nornickel, Tatneft and Surgutneftegas shares, the value of which has increased by 26.20 per cent, 21.07 per cent and 18.85 per cent, accordingly. The lower growth rates were demonstrated by Gasprom Neft by 10.10 per cent. Some lower growth rates were observed about the shares of Rosneft (by 2.61 per cent), Gasprom (by 1.91 per cent) and, Mosenergo (by 0.23 per cent). At the same time, the VTB Bank and Sberbank of Russia shares demonstrated on the contrary, the decline by 13.10 per cent and 11.44 per cent, accordingly. Far lower decline rates were observed about the shares of LUKOIL and Rostelecom (by q.27 and 0.per cent accordingly) (See Fig. 4).

Fig. 4.Dynamics of the Russian blue chip from January 27 to February 23, 2009.

In February the MICEX turnover leaders were: Gasprom(32.80 per cent of the total turnover),, Sberbank of Russia (20.88 per cent), LUKOIL (12.88 per cent), GMK Nornickel (8.7 per cent), and Rosneft (5.58 per cent). Total share of transactions with the above five companies equities (blue chips) made about 80.71 per cent (all blue chips 86.68 per cent) of the gross turnover in the MICEX stock market in the period from January 27 to February 23.

According to MICEX information, as of February 23, the top five leaders of the domestic stock market in terms of capitalization, estimated on monthly average results, were: Gasprom RUR 2,591.3 bln, (RUR 2,613.56 bln in January), Rosneft 1,067.73 bln, (RUR 1,067.83 bln in preceding month), LUKOIL - RUR 903.81 bln, (RUR 810.41 bln in preceding month), Surgutneftegas - RUR 536.71 bln, (RUR 618.02 bln in preceding month), and Sberbank of Russia - RUR 396.98 bln (against RUR 482.25 bln).

Futures and Options Market In February, the activity of investors in the short-term MICEX market has increased by 80 per cent as compared with the previous month. Thus, in the period from January 27 through February 23 the total turnover in the MICEX futures market made approximately RUR 69.29 bln. (2,186 transactions, 1.69 mln of contracts), against RUR 38.30 bln. (1,690 transactions, 1.02 mln of contracts) in January.

Herewith, the largest volume of trading in January, as a month earlier was observed in the futures RUR/USD, amounting to RUR 64.81 billion. (240 transactions, 1.68 million of contracts); the turnover of trades with those futures has decreased in the period under review twice as compared with the preceding month. Herewith, prices of futures contracts, concluded in the current month in RUR/USD in the short-term MICEX market were made within 35.5-37 RUR/USD for March, 37 RUR/USD for April, within 38-39 RUR/USD for July and 40-41 RUR/USD for September. The greatest number of transactions (1,905) within the month was made with commodity futures, the volume of trades in which has reached RUR 4.47 billion. Trading volume of transactions in futures on the MICEX index was RUR 4.5 million, whereas an average value of the MICEX index in March was estimated at points. There were no bids for interest rates and for RUR/Euro futures in February.

A similar situation was noted at the RTS FORTS short-term futures market, where the investors activity in February has significantly grown (more than twice) as compared with the preceding month.

Thus, in the period of January 27 through February 23, the total turnover in the RTS futures and options market made approximately RUR 551.34 bln. (4.271 thousand of transactions, 24.82 mln of contracts), against about RUR 269.62 bln (2,387 thousand of transactions, 12.24 mln of contracts) in January. Like before, futures enjoyed the greatest demand: the volume of trades in the period under review made RUR 533.41 billion (4,217.21 transactions, 23.91 mln of contracts). Herewith, prices of futures contracts, concluded in the current month in RUR/USD in the RTS FORTS for the first quarter of 2009 were within 36-37 RUR/USD and RUR 37-38 for the second quarter, while the average RTS index in the first quarter was estimated at 530 points and within 540-550 points in the second quarter.

Options enjoyed far lower demand; the turnover amounted to about RUR 17.93 bln (53.38 of transactions, 0.91 mln of contracts). The maximum daily turnover in the short-term RTS futures market amounted to RUR 42.98 billion in February (as of February 18), and minimum RUR 18.14 bln. (on February 5).

External factors behind Russian stock market dynamics In February the Russian financial market dynamics, as a month earlier, was dependant on the situation in the world financial markets, characterized by periods of sharp decline due to the negative news, as well as by periods of more optimistic investors behavior, urged by recurrent oil prices growth, positive financial information on some largest international market leaders performance, as well as by measures, taken by governments of a number of countries to restore financial systems stability.

Among the basic factors of the adverse global market conditions, affecting the Russian market in February, one should mention:

negative macroeconomic statistics, published in the U.S., in particular on the growing unemployment, reduced activity in the US primary housing market in January;

the need to attract surplus funds by American automotive corporations General Motors and Chrysler;

information on the net losses of Credit Suisse within 2008 results in the amount of Euro 5.billion, USB bank in the amount of Euro 13.09 bln, as well as the losses of the largest German bank Deutsche Bank in the amount of Euro 3.9 bln;

information on the net loss of Japanese automotive company Mitsubishi Motors Corp. Within the 9 months of 2008-2009 fiscal year in the amount of USD 53 million;

American automobile corporation General Motors plans on the staff reduction by 10 thousand employees;

Reduced oil prices in the second half of February.

However, the following events contributed to the growth of the global financial markets:

Increased net profit of Swiss company Nestle as of 2008 results to 69,4 per cent (up to SFH 18.04 billion), growth of the consolidated net profit of the Austrian banking group Raiffeisen International by 16.8 per cent (up to Euro 982 million), as well as the 2/1-fold growth in the net profit of the French bank Societe Generale S.A.

Information on decline of the British bank Barclays net profit in 2008 only by 0.8 percent (to Euro 5.06 billion rubles);

French government plans to allocate Euro 6 bln to support Renault and Peugeot Citroen automotive producers;

Approval of Germans amended plan for support national economy in the amount of Euro 5 bln;

Reduced the interest rate by 0.5 percent points (to 1 per cent).

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