Markets Rebound After Fed Cut Offers Hope

ReutersTrader Dirk Mueller watching the German DAX Index during midday trading.
Russian markets had a rollercoaster ride Tuesday, recovering after an initial freefall to drop by just over 1 percent amid bargain-hunting, while a surprise early decision by the U.S. Federal Reserve to slash interest rates looked to be calming investors.

"[The Fed's move] has stopped the bleeding for now," said George Lilis, head of research at MDM Bank. "But I'm not sure it will be enough."

After a torrid start to the day, falling as much as 5.8 percent in early trading, the benchmark RTS climbed back into positive territory in the late afternoon, but lost ground again to close at 1,967.90, a drop of 32 points, or 1.6 percent. The MICEX, where most Russian trading takes place, lost 18 points, or 1.1 percent, after dropping as much as 8.7 percent in early trading.

The Fed cut interest rates by three-quarters of a percentage point Tuesday amid deepening concerns over the likelihood of a U.S. recession sparking a worldwide downturn.

Both the RTS and MICEX initially plummeted at the start of the day -- a reaction to the massive falls recorded on Asian markets. A bout of buying pushed both indexes up into positive ground by late afternoon. Toward the close, both indexes again dropped, prompted by early falls on U.S. markets.

"There are a number of investors who see Russia as a buying opportunity ... because they believe the Russian economy is much more detached from Western woes than any of the other emerging economies," said George Nianias, chairman of Russia-focused hedge fund Denholm Hall.

Asian markets, which closed before the Fed announced its cut, suffered another session of huge losses, outstripping Monday's falls. Japan's Nikkei plunged 5.7 percent, while Australia's benchmark S&P/ASX 200 index slumped by 7.1 percent, the biggest slide in nearly 20 years. Hong Kong's Hang Seng index nose-dived by 8.7 percent.

The FTSE 100 index in London was up 3 percent as of late afternoon. Germany's DAX was down 0.5 percent while France's CAC-40 traded up at 2.8 percent.

There was also some relief in the United States. By the second hour of trading, the markets had recovered some early losses. The Dow Jones was down 1.6 percent, while the S&P index was down 1.8 percent. The Nasdaq fell 2.4 percent.

One of the few Russian companies listed in New York, telecoms firm VimpelCom, fell there by 13 percent in early trading.

Hedge funds, particularly European funds, were said to be aggressively buying Tuesday, piling into "cheap" Russian stocks. Heavy trading pushed Unified Energy System up by as much as 10 percent midafternoon, resulting in a temporary suspension on MICEX, before later closing down on the day. Norilsk Nickel, which had fallen by more than 10 percent Monday, attracted funds, as did Sberbank and Gazprom.

"It looks like a lot of hedge funds want to increase exposure to risk again," said Pavel Shlyk, a portfolio adviser at Wermuth Asset Management. "It looks like we are already overdone. In the longer term, the view is still fairly gloomy, but Russia remains a really cheap market."

The Fed made the decision to cut interest rates to 3.5 percent after an emergency meeting late Monday -- a week ahead of its next scheduled meeting -- as a global sell-off threatened to continue with the opening of U.S. markets after the Martin Luther King Day holiday. It is the strongest sign yet that the U.S. government is concerned about the prospect of recession, but in some quarters the cut was interpreted as a panicked move to reinvigorate the U.S. economy.

The Fed said in a statement that it had made the cut "in view of a weakening of the economic outlook and increasing downside risks to growth."

Economists in Moscow remained confident that Russia was in no danger of going into a recession.

"We have been relatively upbeat on Russia's growth this year. We are not expecting a very deep slowdown in other parts of world ... but we are expecting commodity prices to stay high," said Rory MacFarquhar, a managing director at Goldman Sachs. "There's a lot of momentum in the Russian economy, so it's not obvious why there would be too much of a feed-through from the global economy."

Gold, seen by investors as the ultimate safe-haven commodity, has come under pressure in the last two days. It leapt 10 percent on the Fed's announcement, however, to trade at $877.85 per ton. U.S. crude futures, meanwhile, dipped to $88.75 per barrel in midmorning trading, amid concerns that a U.S. recession could hurt demand.

Analysts were skeptical that a slowdown would be sufficient to drive down oil prices in an environment of strong demand from China and tight supply. If all outstanding speculative contracts were sold today, said Goldman Sachs in a report, oil would fall to the "low $80s."

Alexander Morozov, an economist at HSBC in Moscow, warned that Russia's economy could be vulnerable to the global woes if it were to experience a drop in capital flows, particularly in the form of foreign direct investment. "This could lead to a moderate slowdown," he said.