Mikhail Khanov
Last Friday, July 23, all three key US stock indexes once again renewed their all-time highs – DJIA, S&P 500 and NASDAQ Composite closed at new all-time highs. Thus, investors and speculators were not afraid to play bullish before the weekend. As we can see, inexhaustible optimism continues to prevail in the largest and most significant stock market in the world.
In fact, a very powerful bull market continues to manifest itself, which originated at the end of March 2020. This undoubtedly provides indirect support to many peripheral stock markets as well as commodity prices. And yet I would not dare to say that the current situation in the financial markets is cloudless and does not bear any risks. What is happening on them now? Let us consider the current and emerging events from the usual perspective for a Russian investor and speculator “dynamics of the US stock market – hydrocarbon prices – prospects for Russian stock indices”.
By the way, the word “foreshortening” in photography and cinematography often means an unusual point from which an object is observed. In other words, we consider markets and current economic conditions in the plane we need, without focusing on a large number of less significant, but still important factors. Therefore, the situation in the foreign exchange and debt markets, as well as in a number of exchange commodities, in this case remains behind the scenes.
Dynamics of the US stock market
To begin with, let’s return to the phenomenon of long-term, stable and almost recoilless growth in the US stock market. Repeated attempts to break the medium-term uptrend on it invariably end with the redemption of short-term drawdowns. The favorite strategy of stock market bulls Buy The Dip (“buy out the drawdown”) has not faltered so far, despite the fact that North American stock indices have climbed very high.
It is quite obvious that the situation is directly related to the pumping of the US economy with additional dollar liquidity as part of a number of stimulating measures by the federal government and the FRS. Even with all the speculation, the possibility of starting to roll back monetary stimuli in the United States is not yet seriously discussed. The results of the July meeting of the Board of Governors of the European Central Bank (ECB) indicated that the united West is pursuing a similar strategy. Moreover, the ECB indicated plans to accelerate the pace of asset repurchases under the relevant Pandemic Emergency Purchase Program (PEPP), which will not be phased out until at least the end of March 2022.
Currently, the projected start of the Fed’s rate hike cycle dates back to 2023. However, the head of the Federal Reserve Jerome Powell quite rightly believes that it is too early to estimate the timing of the rate hike. The question of the timing of the start of the reduction in the volume of buybacks in the United States remains equally vague. At the same time, the recent attempts to start the game for the fall of the US stock market are somehow connected with hints of a faster-than-expected start to curtailing incentives. In this regard, Jerome Powell is forced to personally reassure the markets, declaring that the Fed will change the current super-soft monetary policy only as the state of the North American economy clearly improves.
From a pragmatic point of view, it is still too early for US and EU traders to worry about the imminent future withdrawal of incentives, which could begin no earlier than a year from now, and possibly much later. Until then, the stock markets will have time to survive several medium-term waves of growth and decline. However, news on this topic can still turn them down. In this regard, the comments on the results of the forthcoming July meeting of the Federal Open Market Committee (FOMC) are very important.
To complete the picture, it is worth pointing out the current trend towards a paradoxical or inadequate reaction of stock and commodity markets to recent macroeconomic statistics. It is only logical that strong macroeconomic data will be the impetus to accelerate the start of the inevitable future withdrawal of stimulus measures. Therefore, before the next Fed meeting, they are interpreted in accordance with the well-known principle “the worse, the better.”
At the same time, an adequate assessment of recent statistical indicators is currently complicated by other reasons as well. In particular, we are talking about the “low base” effect. It is caused by a sharp deterioration in many macroeconomic indicators last year amid the global outbreak of coronavirus. In a broader sense, current statistics are often not indicative. Under normal conditions, a deviation from a stable series of statistical indicators becomes an important signal of a change in the state of the economy. But in the course of the protracted pandemic, the scale itself went out of balance and ceased to be informative.
The task of assessing current statistics becomes much more complicated when considering the entire complex of periodically published statistical data. For example, new home sales in the United States in July 2021 decreased by 6.6% compared to the previous month. During the same period, sales in the secondary housing market increased by 1.4%, where there is a shortage and rising prices. But the demand for new houses is weakening due to the rise in the cost of building materials, which is included in their cost. One can only guess what impact such statistical discord will have on the Fed’s monetary policy.
Let us add that inflation rates are now acquiring special significance among other statistical data. Central banks cannot ignore the upward trend in consumer prices as easily as other macroeconomic indicators. The Fed’s official position is that the current acceleration of inflation in the US is due to temporary factors and will not be protracted. However, on July 23, the Bank of Russia has already decided to raise the key rate by 1% at once, to 6.5% per annum, with an eye on the increased inflationary pressure in the Russian Federation. This is a very decisive step, and it is clear that this is not the limit of the increase until the end of this year.
Hydrocarbon prices
However, before considering the Russian stock market, it is worth talking about the current state of the oil market. In the second half of July, contracts for Brent crude oil showed a sharp two-day drawdown of almost 8%, followed by a V-shaped recovery in the region of $ 73-75 per barrel. From a technical point of view, after such a movement, the likelihood of a new sharp drawdown in the price of these contracts in the medium term is small. Thus, oil prices are quite firmly held at the level of almost three years ago. In fact, we are observing in them the implementation of the same drawdown redemption strategy as in the US stock market.
The formal reason for the recent short drop in prices for black gold was the results of the planned revision of the total quota for oil production by the participants in the international agreement in the OPEC + format. As a result of protracted two-week negotiations, they decided to start a monthly increase in production by 0.4 million barrels per day starting in August this year. Now we see that this measure did not cause a sharp drop in oil prices. But she stopped their mid-term rise. Initially, the OPEC + agreement was designed to stabilize world oil prices at levels that are comfortable for producers and consumers – and this mechanism achieves its main goal.
By the way, the US shale oil producers, paradoxically, do not extract excess profits from the current relatively high prices. After last year’s infamous drawdown for North American WTI crude futures deep into the negative zone, many in the industry have hedged the value of future supplies. For this reason, they are now generally more interested in maintaining production volumes at a stable level in order to fulfill contractual obligations. According to IHS Markit, about a third of the shale oil produced in the United States is now sold at $ 20 below the market price.
It must be admitted that the current high prices for hydrocarbon raw materials objectively indicate that the world economy is in the process of a rather powerful recovery. This is evidenced by the mid-term growth in the cost of such traditional energy sources as natural gas and coal.
An indirect confirmation of this thesis is the current loss of interest in paper and physical gold on the part of investors and speculators. Despite all the talk about a possible new crisis, we clearly do not see a rush of demand in the precious metals market.
Prospects for Russian stock indices
Moving on to talking about the current state of the Russian stock market, it should be noted that it has demonstrated unexpected strength and resilience throughout the summer dividend cut-off season. This is critically due to the support it receives from relatively high world oil and natural gas prices. So far, such factors as the hasty introduction of export duties on metals and metal products, as well as a sharp increase in the key rate by 1% in July, have not become fatal for him.
The rather sharp weekly drawdown of the Moscow Exchange and RTS indices in mid-July is still within the framework of the long-overdue corrective pullback. Moreover, in the following days we saw attempts to redeem this decline by analogy with the movements described above in oil futures and in the US stock market. One way or another, but the ruble index of the Moscow Exchange is still adding 13.9% since the beginning of this year, while the dollar-denominated RTS index rose even by 15.5%.
Thus, we observe the same medium-term optimism on the Russian stock market, but adjusted for country risks. There is no doubt that a possible deterioration of sentiment on the US stock market or on the oil market will still have a visible depressing effect on him.
Continuing the topic of country risks, it should be noted the unexpected and encouraging fact of the US refusal to oppose the completion of the construction of the Russian export gas pipeline Nord Stream 2. Nevertheless, the notorious “threat of toughening external sanctions against the Russian Federation” remains in force.
In conclusion, it is worth recalling the fact that the Russian stock market is not a kind of single “monolith” that implies the synchronous movement of all sectors and individual stocks. In it, as in more developed markets, a point approach to securities is appropriate and desirable. It is quite obvious that the medium-term prospects of the overbought receipts of TCS Group and the ordinary shares of Rostelecom, which have not risen in price in two decades, are not identical. A good example of this is, to put it mildly, the uneven dynamics of the shares of the domestic gas producing companies Gazprom and Novatek after the 2008 crisis.
