Another Day in Paradise

Breaking news this morning is that President Medvedev held "crisis" talks

  with Potanin and Deripaska to discuss developments in the sector.

  Vedomosti newspaper reported that plans for a merger between Norilak,

  RusAl and Metaloinvest have been dropped. The President's economic

  advisor told Bloomberg yesterday that the government may soon start to

  buy physical metals in order to support the market and the main metal

  companies in Russia. The metals industry right now is no place for

  "widows and orphans".

  Otherwise, the main domestic news will be the comments from the First

  Deputy Prime Minister, Igor Shuvalov, and other Ministers scheduled to

  speak at the Krasnoyarsk Economic Forum today. In recent years that forum

  has provided a platform for the government to announce major economic

  initiatives. Krasnoyarsk has a +4 hour time difference with Moscow so

  news should emerge from the conference early today. Shuvalov is Prime

  Minister Putin's main economic advisor and the person in charge of

  coordinating the government's anti-crisis efforts.

  Expect little conviction in markets this morning, albeit with a positive

  tendency in Russia due to oil and the ruble.

  Asian markets are trading higher (MS Asia Pacific Index is up 1.2%) this

  morning. That bounce reflects the fact that most global markets are now

  moving within a narrow range and is little more than reversing an equally

  small drop in recent days.

  China's CSI Index is off 2.4% - more on profit-taking after the local

  bourses started the year so strongly. Shanghai's A shares are up 17% year

  to date while the B shares are up 24%.

  The price of crude is less than $1 p/bbl lower in Asia trade today. That

  is partly some profit taking after the strong rise earlier this week but

  also because the latest macro indicators in Japan confirm a rapid slowing

  in demand.

  Copper and other base metals are trading lower again as hopes for a quick

  recovery in demand evaporate.

  The euro is down a little against the US dollar, last trading at $1.2713.

  The latest fund flow data shows that investors are still avoiding making

  any investment decisions in emerging markets. Reported flows in all

  categories are low, although the negative stance against eastern Europe

  and Russia continues.

  Oils and banks likely to lead. Oil and the ruble continue to be the main

  drivers of sentiment in the Russian market. The price of crude rose

  strongly again yesterday, with Brent closing at $46.5 p/bbl. While the

  price is off slightly in Asia trade this morning, the current price is

  viewed as favourable for the investment case for cheap Russian oils. The

  prospect of a repeat of January's gas dispute with Ukraine, after Gazprom

  set a deadline of March 7th for arrears to be cleared, may temporarily

  boost the gas price in Europe and, along with it the price of Novatek.

  Banks should also move better today after strong sector gains in the US

  yesterday and evidence that investors, globally, are now moving gingerly

  back into the theme with the hope that the "worst" may now be known and

  priced in.

  Big tax payment due Monday. The ruble looks set for another relatively

  better day as companies prepare for a 60 bln ruble tax payment due

  Monday. International markets are not expected to provide any major

  directional influence today with Asian markets up this morning and the

  late fall in the US last night led by more domestic factors.

  Investors mainly avoiding emerging markets. The latest fund flow data

  from EPFR Global confirms that the trend of relatively low money outflows

  from emerging market funds continues. In the week to Wednesday, the GEM

  and BRIC category funds reported outflows of $134 mln and $16 mln each.

  China funds lost $687 mln, India funds reported outflows of $38 mln while

  Brazil funds took in a modest $9 mln. The most negative region remains

  Eastern Europe, with regional funds reporting an outflow of $132 mln and

  Russia funds lost $27 mln.

  Higher oil pushes market. At the risk of sounding like a broken record,

  the local markets moved higher again yesterday because of the favourable

  combination of stronger oil and a further gain in the value of the ruble.

  The added boost came late in the session when the US markets opened with

  a big jump and pulled global investor sentiment with them. The RTS closed

  up 1.8% while MICEX, with a longer period of overlap with the US, closed

  6.3 % better. The oil stocks were the main driver, albeit trade volume in

  all names was very light. Gazprom Neft led the charge with a gain of

  14.3%, followed closely by LUKoil with a gain of 11.2% on MICEX. Gazprom

  was also a big gainer, up 6.0%, despite the growing threat of another

  dispute with Ukraine over delayed payment for gas. Gazprom has set a

  deadline of March 7th for the arrears to be cleared and may start cutting

  supplies from May 8th if not cleared. Norilsk Nickel rose 7.3%, boosted

  partly by a comment from the President's Economic Advisor, Arkady

  Dvorkovich, that the government may use budget funds to buy metals in

  order to support the producers. Polymetal was one of the few losers on

  MICEX, closing down 2.1% as the price of precious metals eased back due

  to the more positive global market optimism. In London GDR trade, the

  focus was also on the oils and metal sector stocks. LUKoil rose 11.7% and

  Rosneft added 8.4% as the higher oil price attracted buyers. Severstal

  led the steel names with a 9.0% gain while Evraz recorded a more modest

  6% rise. In the US, Mechel bucked the positive steel name trend with a

  drop of 11.0% as investors react to the acquisitions news. Vimpelcom lost

  2.6% and MTS rose 2.9%, also in relatively quiet trade. .

  Brent above $46 p/bbl. The price of oil is trading slightly lower in Asia

  trade today but still comfortably in the mid $40's p/bbl. WTI for April

  is trading at $44.46 p/bbl, down $0.86 p/bbl today but after rising $2.72

  p/bbl yesterday. Brent crude for April settlement last traded at $46.06

  p/bbl. The price of oil rose steadily yesterday, reaching the highest

  level in a month on Nymex, as traders followed the trend in the equity

  market and reflected favourably on the weekly crude and gasoline

  inventory data released by the US Energy Dept on Wednesday. That reports

  showed a smaller than expected gain in crude oil stocks (up 717,000

  barrels instead of 1.25 million) and a very big drop in gasoline stocks.

  The inventory of gasoline fell 3.32 mln barrels and while that was partly

  offset with a lower refinery utilization figure, there was also a small

  increase in consumer usage. In such an environment, even a small reversal

  in the declining trend is a reason for optimism.

  US markets reverse earlier optimism. US equities fell into the close

  yesterday as investors reacted to some of the provisions in the Obama

  budget. Earlier in the session the markets were up strongly, ignoring

  some very bad economic reports, as optimism towards the banking sector

  encouraged buyers. But having been up almost 2% in the morning, the S&P

  500 ended the day down 1.6% and the Dow lost 1.2%. The health care sector

  led the retreat while banks held up well. Economic news in the US was

  again bad and below the consensus expectations. Sales of new houses fell

  10.0% in January to an annual rate of only 309,000, the lowest level

  since record keeping started in 1963. The median price of new houses fell

  13.5%, also the biggest drop since the 1960's. The January durable goods

  report showed a drop of 5.2%, i.e. more than twice as bad as economists

  had expected. The weekly jobless report, i.e. of people on unemployment

  benefit, showed a jump to 5.1 million according to the Labor Dept.

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