What happened in global markets?
During the week, including the May holidays, which are celebrated in Russia and China, prices for raw materials and Russian assets mainly grew. Raw materials have risen in price against the backdrop of another speculation about the embargo on oil and gas imports from Russia to Europe, as a result, prices for European gas rose by 40%, for oil – by 4%.
Since April 29, prices for Russia’s external ten-year foreign currency bonds have risen by 39%, the entire curve has increased by 28% after the news that the payment agent Citibank NA has resumed settlements with holders of Russia’s external debt by order of the US Treasury.
The unexpected news came a few days before the technical default, which was supposed to come today, May 4th. The largest international clearing houses have received and processed payments on Eurobonds maturing in 2022 and 2042 (coupons). It is likely that the channel for payments will be closed again, especially since the geopolitical situation is not improving. But the failure to redeem Russian bonds is primarily a blow to American funds. We consider it justified to buy Russian bonds of short and medium duration.
In addition to higher bond prices, Russian stocks jumped 10%, albeit in the absence of positive news, and the ruble gained another 4%. Following the Russian market, share prices of Chinese companies, especially IT and online retailers, rose after the CCP leadership’s regular comments about supporting the market and the economy due to the severe consequences of the zero-tolerance policy for the coronavirus and the tightening of business regulation, which led to the depreciation of most of the market.
The People’s Bank of China held a meeting on April 29 to discuss financial injections into the economy and policies to stimulate the development of technology platforms, the regulator said in a statement.
The Central Bank of China pointed to the need to increase financial support for technology innovation providers and ensure the stable operation of capital markets. Approved measures must be implemented faster, regulator concludes.
On the US stock market, oil and gas (+7%) and steel companies became the growth leaders following the rise in prices for raw materials.
Thanks to Russia and China, the emerging markets index (+3%) and European indices (+1.5%) increased.
Due to a 10% fall in US Internet stocks (although the overall IT sector grew by 2.5%), the US market added 0.5%. The number of outsiders for the week included non-ferrous metals, in particular aluminum and nickel (-7%). The global bond index (-2%), grains and the Brazilian stock market are also in the red.
The impact of the decision of the Central Bank of Russia on the key rate
The ruble bond market at the end of last week almost did not react to the reduction of the key rate by the Bank of Russia immediately by 300 bp, to 14%. This was expected after the previous weeks’ rally, during which investors have priced in significant monetary easing over the coming year. Moreover, despite the fact that the key rate cut exceeded the market consensus forecast, the regulator’s decision was accompanied by a cautious moderately soft commentary. The Central Bank points to high pro-inflationary risks and raises the inflation forecast for this year to 18-23%.
The new signal is that “with the implementation of the underlying forecast, there is room for further rate cuts.” At the same time, the updated medium-term forecast assumes that the average value of the key rate in 2022 will be 12.5-14%. Thus, until the end of the year, the rate may either remain unchanged, at the level of 14%, or fall into the area of single digits (9-9.5%), which will be determined by operational statistics on consumer price dynamics.
Our baseline forecast continues to assume that the cost of lending will rise to 12% by December 2022. Such a development of events is already fully reflected in the OFZ market, so it is hardly worth expecting significant fluctuations in it in the near future. So far, we prefer OFZ with a floating coupon, as well as a short inflation linker. Also interesting are corporate bonds of quality issuers both in the secondary market and in the recently revived primary market.