Fannie and Freddie Bailout Buoys Markets

APA Surgutneftegaz worker standing by a well. The oil firm's stock recovered 4.3 percent Monday from a four-year low.
The U.S. government's bailout of mortgage giants Fannie Mae and Freddie Mac was good news across the board for Russian markets on Monday, lifting stocks, commodities and the ruble.

Reeling from plunging crude oil prices, a partial exodus of Western investors and a tightening of the global credit crunch, Russian stock indexes pulled themselves back up on Monday for the first time in almost a week.

The dollar-denominated RTS Index gained 2.5 percent, or 36 points, after four steady days of losses, while the ruble-denominated MICEX Index rose by 3.3 percent, or 41 points, breaking a three-day losing streak.

On currency exchanges, the ruble finally made headway against the dollar, gaining 0.16 percent day on day at the markets' close and recovering from six days of losses against the dollar. Analysts estimate that the Central Bank sold about $5 billion to prop up the ruble on Thursday and Friday.

Most analysts pointed to the U.S. government's bailout of Fannie Mae and Freddie Mac on Sunday as the primary factor in the markets' rebound.

The bailout signals a huge relief for Moscow as well as New York, because of the far-reaching effects of the U.S. mortgage crisis, said Maxim Osadchy, a senior analyst at Antanta Capital.

"The market decided that the worst half of the crisis was over," Osadchy said.

The U.S. mortgage bailout came after two pieces of good news for Russian markets late last week — the tentative resolution of the TNK-BP shareholder dispute Thursday and an Energy Ministry proposal Friday for further tax cuts on mineral resources.

While the bailout signals relief for the global credit crunch that has pummeled international markets all summer, investors and analysts remain cautious over whether the Russian market will dip any further.

"What we're trying to figure out is if the bailout of Fannie Mae and Freddie Mac is an inflection point for the whole Russian market," said Ronald Smith, chief strategist at Alfa Bank.

"Investors have been beaten up so much by unexpected news," Smith added, referring to the politically charged events that have directed the Russian market this summer. "Investors globally are very hesitant to get back into Russia at this point, and into equities markets everywhere."

The impending arrival of havoc-wreaking Hurricane Ike in the Gulf of Mexico signaled at least a temporary relief for Russia's commodities-driven equities market.

State-controlled energy majors bounced back Monday, with Rosneft up 5.7 percent on the MICEX after four straight days of losses and Gazprom up a more modest 2.4 percent. Closely held oil firm Surgutneftegaz rose 4.3 percent, recovering from a four-year low.

Oil and gas investors are likely to derive more confidence from the Tuesday's scheduled meeting of the Organization of Petroleum Exporting Countries, where there may be initial discussions of OPEC stepping in to fix crude oil prices.

Smith said Iran and Venezuela, "two price hawks," would be inclined to cut back on production hit $100 per barrel.

Other countries, such as Saudi Arabia, would probably wait until prices got as low as $80 per barrel, Smith said.

On Moscow markets on Monday, Russian state-controlled banks also enjoyed strong gains, with VTB Bank bouncing back in a 7 percent increase and Sberbank rising by 6 percent.

In a note to emerging-markets investors Monday, Goldman Sachs revised its forecast to imply a 1 percent recovery of the ruble against the dollar/euro basket as "Russian corporates return to the debt markets and investors grow more comfortable with the [Central Bank's] backstop."

In the same report, however, Goldman Sachs also noted that the ruble was likely to remain volatile for at least the next three to six months.

Osadchy, of Antanta Capital, said the mortgage bailout by itself could not lift Russian markets out of the doldrums.

"It will not only depend on the general situation of the financial market but on the local situation with the South Ossetian conflict and the conflict with Mechel," Osadchy said.

Smith, of Alfa Bank, agreed that the Russian market was far from out of the woods.

"By the end of the year, we may be up several tens of percent," he said, "but it will be with some nervousness and probably some heart-stopping moments along the way."