Europe’s reliance on Russian gas is a good illustration of the important trading relationship between Russia and Europe. Gazprom estimate they supplied up to 34.7% of the gas consumed in Europe in 2017; Germany is the largest individual market. This it implies Europe’s approach to sanctions is necessarily different to the US. Although it is a different industry, last week the US eased the recent sanctions on Rusal, given the knock-on effects on European businesses, by extending the deadline to October for compliance. US Treasury Secretary Steven Mnuchin commented: ‘Given the impact on our partners and allies, we are issuing a general license extending the maintenance and wind-down period while we consider RUSALs petition.’
Russian Q3 GDP grew 1.8% yoy which was down from growth of 2.5% yoy in Q2 and slightly weaker than market expectations of 2%. Elvira Nabiullina, the Central Bank Chief, is reported as saying she expects growth to reach 1.8% for 2017 as a whole although the Central bank has been guiding to 1.7-2.2% range, and the Finance Ministry projection has been at the upper end of the range. Moody’s estimate 2017 GDP growth at 1.5%. But all projections represent a significant improvement from GDP growth of -0.2% in 2016.
In what is the first state visit to Russia by a Saudi ruler, King Salman bin Abdulaziz today will meet Vladimir Putin to discuss oil markets, investment deals, the Syrian war and to deepen the nascent friendship between the two largest oil producers in the world. The delegations are tabling $3bn worth of energy deals with the possibility of a collective $1bn energy investment fund and a $1bn Sibur plant in Saudi Arabia; there’s talk of Gazprom Neft and Saudi Aramco establishing joint research projects; and interminable rhetoric on the “promising areas for bilateral co-operation.”
On 22 September Fitch affirmed its rating on Russia’s long-term foreign debt at BBB- and upgraded its outlook to positive from stable.
One of the reasons cited for the positive outlook revision is the improvement in the policy framework underpinned by the flexible exchange rate, ‘strong commitment to inflation targeting’ and a ‘prudent fiscal strategy’ reinforced by the recently approved budget rule. The budget rule uses a conservative oil price of $40 (real) and one positive aspect is that revenues in excess of the budget will be used to rebuild Russia’s fiscal buffers. The external and fiscal position is robust, Fitch estimate the net foreign asset position at a healthy 28% and the economic backdrop has improved: Fitch forecast 2% GDP growth for 2017 and 2.1% for the 2017/2018 period. Although he is still to affirm his candidacy, Vladimir Putin is expected stand for another term as President in the March 2018 elections implying policy continuity.
The U.S. government's Countering America's Adversaries Through Sanctions Act was signed into law by Donald Trump on August 2. For S&P it ‘has no immediate implications for Russia’s sovereign credit rating’ of BB+ positive on a foreign currency basis. Moody’s see the codification of the sanctions into law as credit negative for Russia as their reduction or removal will require congressional approval and may discourage FDI, although they have made no change to their Ba1 (stable) rating. They also see sanctions law as credit negative for Russia’s energy sector and Gazprom (Ba1 stable). The market has also taken a pretty sanguine view of events; at the time of writing US dollar denominated Russian Federation 4.25% 2027 and Gazprom 8.625% 2034 are trading higher on a month to date basis.
Over the course of the week a number of Fed speakers have taken to the wires. Perhaps one of the more interesting speeches was from William Dudley, the New York Fed President, who spoke yesterday on ‘The importance of Financial Conditions in the Conduct of Monetary policy.’ This is of interest as while the Fed has increased the Fed Funds Rate by a total of 50 bps since December 2016 ‘financial conditions’ in the marketplace have eased to offset this. For Dudley there are ‘five key measures: short- and long-term Treasury rates, credit spreads, the foreign exchange value of the dollar, and equity prices.’ For example, the US Dollar Index has retraced close to half the gains made since the election of Donald Trump.
Late last week Moody's Investor Services raised Russia’s outlook to stable from negative adding Russia’s strategy ‘reflects an ambitious fiscal consolidation strategy incorporating conservative spending and revenue assumptions’. Russia’s Economy Minister Maxim Oreshkin, said there are ‘objective grounds’ for a ratings upgrade.
Moody’s cited an improvement in the economy as well as a fiscal consolidation strategy that should help wean the country off its dependence on oil. That means that all three major agencies have now confirmed the economy is stabilising after almost a two year long recession, the longest in almost two decades.
This year's G20 Summit concluded on Monday with ~85% of the world leaders departing from China's Hangzhou City and attention seeking North Korea launch three Rodong ballistic missiles which ended up in the Sea of Japan. Poor Mr. Obama neither had a red carpet rolled out on arrival, nor an appropriate staircase, this upset Mr. Trump no end, who tweeted his total disbelief at the ‘sign of such disrespect’. ‘First World problems’ comes to mind.
It seems there was a lot of chat at the Summit but very little outcome. For one, UK PM, May stood firm, not settling on any firm trade deals, despite Japan’s 15 page memo warning of Japanese businesses’ potential exit and Obama’s statement that although 'very special', the US’s relationship with the UK is not a priority.
As the Brexit effect continues to ripple through markets this week, sovereign bond yields have rallied to fresh lows and the US Treasury curve continues to flatten. Historically such aggressive falls in yields and the extent to which the US curve has flattened have indicated an approaching recession; we think it is a bit too early to call for a recession at this stage as moves have been amplified by global financial market uncertainty. However, we do not see any upside pressures in the short-term as concerns over global stagnation and further weak to mixed economic data will no doubt dampen already fragile market sentiment. In fact, the relatively cautious minutes from the June FOMC meeting released yesterday indicate a further delay in rate hikes and an even more gradual pace to future rate rises, with repeated reference to the “uncertainty”.
Happy St. Patrick’s Day! Once considered a strictly religious holiday in Ireland, with pubs closed nationwide, in 1970 the law was overturned and the stout was poured with pride!
As we had expected, the FOMC did not move to raise rates yesterday, and in fact surprised the market with its more dovish than expected stance; revising the dot plots down to two (and a quarter) rate hikes this year from four back in December, the median dot is now at 0.875%. The benchmark 10-yr UST climbed to 1.997% ahead of the meeting, falling ~10bps by the end of the session. On balance the US economy has shown signs of stability and in some sectors, i.e. the job market, further strength. What continues to remain of concern to the central bank members is the spillover from “global economic and financial developments” which have recovered somewhat off the lows seen earlier this year.