'Massacre' Pushes RTS Under 2,000

Russia's benchmark RTS index crashed back through the 2,000-point threshold Monday, shedding over 7 percent in the blackest day of trading in 18 months amid escalating fears of a U.S. recession.

"It's an all-out massacre," said Roland Nash, head of research at Renaissance Capital. "It's not even being driven by anything to do with Russia. It is the global markets attempting to price an expected U.S. recession."

Both Russian markets fell for a fifth successive day. The RTS had its biggest fall since June 13, 2006, closing down at 1,999.83 points, a loss of 159.27 points, or 7.4 percent. The MICEX, where most Russian share trading happens, lost 133.51 points, or 7.5 percent.

Stock markets were hammered worldwide. India's benchmark Sensex index plummeted 7.4 percent, while the Hang Seng in Hong Kong suffered its deepest plunge since September 2001.

In London, the FTSE 100 was down 4.75 percent by late afternoon, after trading down 6 percent at one point. In France, the CAC-40 was down 6.8 percent as of late afternoon, while Germany's DAX was down 7.2 percent.

"It's as bad as they say -- if not worse," said James Fenkner, managing partner at Red Star Asset Management. "For most people in the market, I don't think they have seen anything like this, where the biggest component of U.S. aggregate demand, the consumer, is in trouble."

"Today's a big capitulation day," he added.

A dearth of buyers sent Russian blue chips tumbling, as investors struggled to sell whatever they could. Norilsk Nickel plummeted 10.3 percent on the RTS, closely followed by Surgutneftegaz, down 9.6 percent, and LUKoil, down 8.5 percent. Gazprom dropped by 6.6 percent on MICEX. Unified Energy System, Severstal and Sberbank all suffered heavy losses.

Markets were closed in the United States for the Martin Luther King holiday, while investors on other markets continued to react to fears that the world's largest economy is tipping into recession and will have a knock-on effect elsewhere.

A $150 billion rescue plan unveiled at the end of last week by U.S. President George W. Bush, designed to head off a slowdown, failed to deliver the hoped-for response. Instead, U.S. markets continued tumbling Friday, and Asian markets were down at the open of business Monday.

Russia, seen by many investors as a safe haven amid the global rout, has until recently been considered partially immune to external events. But investors warned on Monday that Russia was in for a rough ride.

"It is shaping up to be a very bad first half. That is clear," Fenkner said. "There's a fundamental problem with the safe haven concept in an integrated world. ... Generally, Russia will do better than other emerging markets, but that doesn't mean they are all not going to be punished a bit."

The last few days have seemed a long way away from the optimism at the end of last year, when several investment houses predicted that the RTS would either break through, or come close to, the 3,000-point mark by the end of 2008.

Analysts are hopeful that the Russian markets will experience a strong rebound in February, after a crucial U.S. Federal Reserve meeting considers a possible interest rate cut at the end of January.

"Traders realize that clients have lots of cash, and are just waiting for an opportunity," said Erik DePoy, strategist at Alfa Bank. "It will reach a point where the valuations become very compelling."

There was little sign that investors were looking for a buying opportunity on Monday, however. After dropping all morning, the RTS started to find some support at the 2,000-point level, but resumed its fall toward the end of trading.

"Russia will not rally whilst global markets are in freefall," said Nash, of Renaissance. "But I think there is a distinct possibility that Russia will be one of the markets which will bounce the furthest."

Crude prices slid Monday on the back of concerns that a recession in the United States would dampen demand for oil. U.S. crude touched a six-week low Monday, dipping below $89 per barrel at one point in electronic trading.

On Jan. 3, oil briefly broke through the $100 barrier, reaching an all-time high of $100.09.

Russia, which has enjoyed an economic boom over the past few years on the back of its oil wealth, is particularly vulnerable to a significant fall in energy prices.

"The only way a recession is going to hit Russia is through commodity prices," Nash said.

But economists remained bullish Monday on the country's economic prospects, noting that oil prices showed little indication of retreating in the short term.

"Around $86 or $87 is where most people expect it to start to hold again," said Tony Machacek, an oil trader with Bache Commodities in London.

During talks in the Middle East on Monday, U.S. Energy Secretary Samuel Bodman called on Saudi Arabia, the world's leading oil exporter, to place more oil on the market in a bid to bring down prices.

But economists warned that investors could take pre-emptive action if a general loss of confidence takes hold.

"In the short term, this decoupling hypothesis ... is going to be tested," said Clemens Grafe, chief economist at UBS in Moscow.

"The question is to what extent the financial markets don't wait for commodity prices to come down ... because people just worry that they will."