White-Knuckle Ride Tests Bouncing Bear Market

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In last week's white-knuckle ride for investors, markets plummeted globally and Russia followed suit, testing the bear-market level of 20 percent in losses before bouncing back as traders went shopping for bargains.

Yet amid the gloom, Russia's position emerged stronger relative to the coming slowdown or recession in the United States, with officials and analysts from Finance Minister Alexei Kudrin on down offering reassurances that high commodity prices would help insulate the Russian economy.

After U.S. stock markets fell Tuesday to about 20 percent off recent highs, a combination of the U.S. Federal Reserve's emergency interest rate cut by three-quarters of a percentage point, U.S. government moves to help bond insurers and a $150 billion tax rebate giveaway came to their rescue. The S&P 500 and the Dow Jones Industrial Average even managed to end the week slightly up, by 0.4 percent and 0.9 percent, respectively -- their first weekly gains this year.

"Swift policy movement [in the United States] has provided a lot of reassurance" for investors, said Rory MacFarquhar, a managing director at Goldman Sachs in Moscow. "Support for insurers and the Fed rate cut have alleviated markets' worst fears."

Russian markets broadly followed their counterparts in Asia and Europe, suffering heavy losses in the first part of the week, then rebounding. The RTS plummeted 12.4 percent and the MICEX 12.1 percent by Wednesday's close, then rebounded by 7.5 percent and 8.5 percent, respectively, by the end of Friday. The RTS ended the week down 5.8 percent at 2,033.09 points, and the MICEX was down 4.6 percent, at 1,705.2 points.


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Despite the rough ride, traders and analysts rejected suggestions that the falls had led to panic at Moscow's investment banks.

"It's true, there were moments when bankers were staring hard at their screens," said Erik De Poy, strategist at Alfa Bank. "You never quite get used to it, but we've seen worse. Of course, it was nothing like '98."

For example, the May-June 2006 fall of 30 percent was deeper, De Poy said. "In some ways, it's just another correction, but scarier this time because there's a systemic risk."

As Russian exchanges approached the bear-market level, banks rushed out bargain-buy guides.

Goldman Sachs added commodity plays -- LUKoil, Norilsk Nickel and steel and coal firm Mechel -- to its "buy" list, while UralSib pointed to Rosneft, Transneft, Evraz, Norilsk and Urals Energy as the RTS stocks that had fallen by more than 20 percent since the index's Dec. 12 high.

The probability of continued high commodity prices, particularly for oil and gas, as well as strong consumer demand and expanding domestic investment, should allow Russia to "stand out as an economy decoupled from the broader global downturn," Goldman Sachs said in a research note Friday.

MacFarquhar added a rider, however: "Historically, the emerging markets have not decoupled and have suffered hard times. The most famous last words in finance are, 'It will be different this time.' It is dangerous to ignore historical precedents."

"When the world is falling apart, you fall with it," said Chris Weafer, chief strategist at UralSib. "But when the markets find their level, Russia will still be on course to perform strongly this year."

Backing up the Russian case were figures on fund flows for emerging markets in the week to Wednesday. Russia saw comparatively light outflows of $98 million, the best of any major emerging market, according to EPRF Global.

As the global business and political elite descended on Davos, Switzerland, apart from the bad markets news, the scandal that was talk of the town was the loss of 4.9 billion euros ($7.2 billion) at France's Societe Generale, where a rogue trader's losses of $1.4 billion on Jan. 18 alone were compounded when the bank unwound his trades on a plummeting market.

The incident, which brought back memories of rogue trader Nick Leeson single-handedly bringing down Barings Bank in the 1990s, also left investors scratching their heads as to how risk management systems had failed, and some wondering whether the bank had any more subprime-related surprises in store.

As SocGen scurried to raise emergency financing of 5.5 billion euros, questions were also raised about the possible effect on the bank's business in Russia, where it is seeking to wrap up the acquisition of a majority stake in Rosbank. State arms trader Rosoboronexport has sought to block the deal from going through, citing national security issues.

Rosbank shares fell 3 percent from Tuesday's close.

The week ahead promises to be just as busy -- and potentially turbulent -- with nine U.S. blue chips scheduled to report earnings, including ExxonMobil, McDonald's and American Express.

By the end of the week, investors should have a clearer picture and the markets should be more stable, but it could be at a lower level, Weafer said. "Any major disappointment will hit the markets hard," he said. "This week, the Dow and S&P will again test the 20 percent bear-market level."

A second U.S. Fed rate cut, of 25 or 50 basis points, is expected Wednesday, and the key U.S. payroll data, which will show whether firms are hiring or firing in greater numbers, come out Friday.

In the next few weeks, investors can "expect a volatile, uneasy equilibrium, punctuated by bad news and downgrades," De Poy said. "The jury is still out on a U.S. recession."

Weafer, meanwhile, offered a plea for the Kremlin to get moving on long-promised pension and mutual fund reform, which he said would cut down on market volatility.

"When there is a reason to be wary of markets, the bulk of Russia's domestic investor base heads for the exit at the same time. This ... will not change until the government initiates pension reforms and creates a more significant base for domestic managed money," Weafer said. "It really can't leave it any longer."