Hoping For a Sanity Claus(e)

December 5, 2011


Political sanity can drive markets higher this month

After last week’s global market euphoria, the hope is that events this week can validate the return of optimism and sustain a market rally across the Christmas and New Year period. Whether that is possible or fails will principally depend on Europe’s politicians and China’s growth indicators. Both will come to a head on Friday. Before that, today’s meeting between the German and French leaders will set the tone ahead of the EU leaders’ meeting on Friday. Commentators in the weekend media were equally split as to whether the proposed actions are ambitious enough or are even politically possible. But most agreed that the right comments from politicians this week could push asset prices a lot higher through December.

Duma election close to consensus

News from Europe will be the main driver of the Russian markets today even as the news of the Duma election result will dominate the domestic headlines. With the full voting results now counted, United Russia has held onto an absolute Duma voting majority, albeit just barely. That was the consensus expectation among investors, so it should have little direct impact on where Moscow’s bourses and the ruble trade today.

China numbers important for commodities

On Friday, China will publish its macro report for November. China’s growth numbers are particularly important for commodity prices and commodity producers, i.e. for Russian markets. The fact that China’s equity market fell last week (the fourth week in a row), while all other major markets rose strongly, is a cause for concern. Investors also took most money out of China funds last week. A negative surprise with the November report cannot therefore be discounted.

Oil tension rising

Troika Dialog’s Strategy Monthly report issued last week highlighted the positive case for Russian equities in 2012 based on strong domestic drivers and outlined a generally supportive backdrop for the oil price. If anything, the quickly unfolding events in Iran and Egypt – and the consequences for Saudi Arabia and oil supply security – suggest that price appreciation is much more of a risk over the near term than any significant weakness. In particular, the US Senate passed a bill that proposes greatly increased penalties for a larger number of international banks that have any dealings with Iran’s Central Bank from July. That bill, if supported by the White House, would make it much more difficult for Iran to sell oil.

Europe to dominate 1Q12 but strong market is expected

It is not surprising that our view of the expected market trend over 1Q12 is dependent on how the events in Europe unfold. Over the course of the year, we expect the RTS Index to end near 2,200, or 30% better than Friday’s close, but the chance of further weakness is also outlined based on Europe risk.

This Week: EU politics and China macros

Franco-German summit today

This week, the main drivers of market sentiment will be the political commentary ahead of and at Friday’s EU summit. Optimism that the EU countries can quickly agree terms for the union was directly responsible for last week’s rally. This week will provide the evidence to support or dispel that positive mood. Comments from the major EU leaders – as they hold bilateral talks almost every day ahead of Friday’s summit – will directly impact market sentiment. Today, the French and German leaders will meet, and the outcome of those talks will have a major impact on global market sentiment.

China numbers on Friday

The second part of the market equation is economic growth in the US and China, the latter being of greater importance to the oil market and sentiment toward Russia. On Friday, China will publish its macro report for November with updates for inflation, industrial production and consumer activity. The consensus is that inflation has fallen to 4.5% y-o-y in November from 5.5% in October and that industrial production growth eased only a little to 12.6% y-o-y from 13.2% the previous month. Anything much worse on either of those numbers in particular will have a negative impact on sentiment toward risk assets.

Sentix survey is important

Before that, there are several updates in the US and Europe that regularly impact market sentiment. The US data starts off today with the October factory orders (a 0.3% drop is expected versus the 0.3% rise the previous month) and the ISM non-manufacturing index. In Europe later today, the Sentix investor confidence survey and Eurozone October retail sales reports will be issued. Other reports this week include 3Q11 Eurozone GDP, German industrial production, and Eurozone CPI and PPI updates.

ECB policy meeting

On Thursday, just ahead of Friday’s summit, the European Central Bank (ECB) and Bank of England policy committees will review respective interest rates. Both are expected to have plenty of harsh warnings for politicians about the consequences should they fail to reach a new deal.

Russian macro remains good

In Russia, apart from the post-mortem after the Duma elections, there are few macro updates with any significance. The November inflation report is already known and will confirm the monthly rate at 0.5% and the YTD rate at 5.8% at month end. The full-year rate is expected to be close to 6.5%. The monthly new vehicle sales update for November should confirm the y-o-y growth at 26%.