Summary: The economic recovery in the developed economies is supported by the very expansive monetary policies, lower austerity pressure on the government front and among banks, and the fallen oil price. Growth rates remain moderate. In the emerging markets we can see signs of low-level stabilisation at best. The possible default of Greece, excessive interest rate hikes in the USA, a further decline of productivity, and continued economic weakening in the emerging markets are the main risks the markets are faced with.
The upcoming parliamentary elections on Sunday in Turkey could force Erdogan to postpone his plan for a new constitution and could lead to new political leaders in the Ministry of Finance and the Ministry of Economics. This would trigger an increase in uncertainty and consequently a higher degree of volatility for the Turkish Lira and the Istanbul stock Exchange.
The dynamics of the economy and the markets have declined. Global economic growth is down on a quarter-on-quarter basis, the two most important trends of the past months (appreciation of the US dollar and falling oil price) have come to a halt, inflation is not falling anymore, and the US Fed has put a damper on the expectations of interest hikes. One important exception: the Eurozone has been picking up speed.
The driving topics on the financial markets are the stabilisation of the oil price, mixed economic indicators globally vs. positive economic indicators for the Eurozone, the temporary decline in escalation risk, and the expansive central bank policies.
The oil and gas sector is the backbone of the Russian economy. It contributes roughly a quarter to the Russian GDP, and it accounts for almost two thirds of exports. Oil and gas companies represent almost 60% of the market capitalisation of the Moscow stock exchange. It therefore makes sense to analyse the performance of the Russian equity market in connection with the level and development of the oil price. For a long time, the “oil x 20” rule of thumb would suggest that the fair value of the RTS, the Russian equity index, was 20 times the price of crude oil (as measured in US dollar per barrel of Brent). Especially equity strategists – always suckers for simple marketing ploys – would take a liking to this relation.
The environment has become a bit brighter in the past weeks.
In addition to the improvement of the economic environment in the Eurozone and Japan, more and more central banks loosened their monetary policies. For example, on 12 February the central bank of Sweden (Riksbank) surprisingly cut its key-lending rate to -0.1% and announced to buy small volumes of government bonds. The reason behind this measure is the same as for similar steps taken by other central banks: the risk of falling short of the inflation target has increased. The markets reacted in a textbook-fashion with falling yields and a depreciating currency (krona). Both are supportive to the economy. On the financial markets the continuously falling and partially even negative yields of government bonds have pushed investors into securities with a higher expected yield (bonds with longer maturities, bonds with a higher default risk, bonds in foreign currencies, shares).