State Aid Energizes Stock Markets

APMICEX traders smiling Friday, when markets rose by more than 20 percent.
After receiving a much-needed adrenalin shot of liquidity from the state, the country's markets were jolted back into positive territory Friday, reopening after a two-day hiatus with record jumps to all but wipe out the losses of a nightmare week.

Canceling out its biggest-ever one-day loss of 17 percent on Tuesday, the ruble-denominated MICEX leapt by 29 percent to 1,099 points. The dollar-denominated RTS also set a one-day record, jumping by 22 percent to 1,295.9 points, and adding $140 billion to the value of stocks in a day.

Friday's rebound came after the RTS had fallen 57 percent from its May 19 high, amid a combination of falling oil prices and concerns over political risk.

The jump followed a pledge of government support from President Dmitry Medvedev for distressed blue-chip stocks, to the tune of up to $20 billion, and a promise of tax cuts.

A big supporting role in Friday's recovery was played by U.S. Treasury Secretary Hank Paulson's estimated $700 billion taxpayer bailout of Wall Street, which lifted global market sentiment out of the doldrums after banking titans Lehman Brothers and Merrill Lynch were humbled a week ago.

Continuing the week's stop-start theme, trading on Russian markets was halted again Friday — twice — as the state's market regulator stepped in with technical timeouts to cope with soaring prices.

In a welcome change, the day's top picks were VTB, Rosneft and Sberbank, with the three state-controlled firms seeing their shares rise 60 percent, 58 percent and 56 percent, respectively.

Yet their collapse in the preceding days meant that only Rosneft gained on the week, by a modest 6 percent. VTB was still off 15 percent while Sberbank ended the week down 5.6 percent.

The government's measures to boost liquidity — including 1.5 trillion rubles ($59 billion) of budget funds going to banking deposits, 1 trillion rubles available via repo operations and some 300 billion rubles returned to banks after a cut in reserve requirements — brought the total of promised state support to financial markets to over $130 billion.

On Friday, all eyes were on the investment forum in Sochi, where Prime Minister Vladimir Putin was expected to grab headlines with the keynote address. Yet the speech, in which Putin mainly reiterated a generic, pro-market stance on investment and a tough line on geopolitics, didn't appear to the prime mover of the market.

Market sentiment on Friday might indicate the start of a long-awaited recovery, although analysts said a lot would depend on two factors — world oil prices and whether the funds from the state reached their intended recipients.

David Aserkoff, chief strategist for Russia at Renaissance Capital, said the rally will be "sustainable, if we see stability in oil prices and the financial system."

The loans to Sberbank, VTB and Gazprombank would be sufficient "as long as [the money] reached the rest of the banking system," he said.

A dissenting voice came from rating agency Standard & Poor's, which on Friday downgraded Russia's debt outlook to stable from positive. The agency earlier criticized government proposals to prop up stocks with state money, citing worries over an inflation rate still running close to an annual 15 percent.

"The outlook revision is based on growing uncertainty regarding Russia's economic policy response as the liquidity crisis in its financial markets has deepened," the agency said in a statement, adding that the drying up of international capital markets could hit the country hard.

The recent turmoil would likely lead to the restructuring of highly indebted companies, while the higher cost of money could have an impact on growth, said Kingmsill Bond, chief strategist at Troika Dialog,

On Friday, Kudrin said the state had been forced to intervene to prevent the financial crisis from spreading to the rest of the economy. "[This drop] created problems for the balance sheets of companies with collateral and loans and caused margin calls. It could have grown into a giant system of nonpayments," he said, Interfax reported.

Apart from the aid package, Russian oil and gas stocks were also boosted Friday by rising U.S. oil prices, which climbed nearly 7 percent, to over $104 per barrel. Surgutneftegaz rose 55 percent, ending the week up by 4 percent. LUKoil gained 31 percent and Gazprom Neft rose 22 percent, finishing the week up 6.7 percent and 4 percent, respectively.

Gazprom shot up 36 percent, to end the week up 4.5 percent.

Oil prices remained the key to a market recovery, Bond said.

"If prices are sustained at or around current levels then the market will find a bottom and rise from here," he said. "However, given concerns about global growth, it may be some time before we find a clear base for the oil price."

In a note issued Friday, UBS said the market was pricing in oil at $50 per barrel for 2009, well below the $70 that Finance Minister Alexei Kudrin said last week would produce a balanced budget.

"For the RTS to return to sustainable growth and rise above 1,400, investors would want to see commodity prices somehow stabilizing and concerns about global financial institutions disappearing," UBS said.

Some metals and mining stocks gained less of a boost, amid concerns over rising raw material costs. Of the steelmakers, Novolipetsk Steel and Evraz made up most lost ground Friday, with Novolipetsk rising 42 percent on the MICEX and Evraz gaining by 30 percent in London, cutting their weekly losses to 7.3 percent and 1.5 percent, respectively.

Norilsk Nickel gained 14 percent Friday, and 6.4 percent on the week on expectations of a shares buyback.

In precious metals, a falling gold price took its toll on Polyus Gold. Despite rising by 45 percent Friday, the hammering it had taken in previous days still left the miner down 20 percent for the week. Polymetal, another precious metals producer, gained an impressive 55 percent, cutting its weekly loss to 12 percent.

Even before Friday's turnaround, one indicator was showing an improvement for Russia.

For the first time in 12 weeks, EPRF Global reported a net inflow, of $77 million from emerging-market funds into Russia in the week to Wednesday, compared with a net outflow from the BRIC countries — Brazil, Russia, India and China — of $379 million.