Markets Seek Balance After Fall

APOil traders gesturing on the New York Mercantile Exchange. Crude fell below $60 on Friday to a two-month low.
The second half of 2009 continued in a dramatic and downward fashion last week, with Russian equities shedding more than 10 percent, the ruble taking a beating, and oil prices retreating.

A report from the International Energy Agency on Friday cast new doubt on the chances of a global economic recovery in the second half, and remaining uncertainty over the Russian banking sector kept some investors on the sidelines.

Crude prices spent most of June hovering around $70 per barrel and were up more than 60 percent on the year. But they slid back past $60 on Friday — a 10 percent decline on the week after data showed U.S. stockpiles at their highest levels since 1990. The IEA report also had a hand in spooking traders and driving prices lower.

“Over the past two weeks the mood has suddenly changed as many leading economic and energy indicators continue to show very weak readings, suggesting that the ‘green shoots’ have been largely driven by a rebuild of inventories rather than by strong end-user demand,” the IEA said.

We thus remain skeptical regarding the much-trumpeted, strong second half 2009 demand rebound, even if China exceeds expectations, it said.

President Dmitry Medvedev told world leaders at a G8 summit Wednesday that a poll of oil company executives conducted in early June at the St. Petersburg International Economic Forum found that they regarded $70 to $80 as a fair price for oil. Kremlin spokeswoman Natalya Timakova later told reporters that G8 leaders generally agreed, although British Prime Minister Gordon Brown, when asked about the oil talks, said no details or prices had been discussed or agreed.

Analysts had been warning that oil prices were due for a correction, and last weeks fall seemed to put crude more in line with the markets fundamentals.

Oil prices got a bit ahead of themselves, said Artyom Konchin, an analyst at UniCredit Securities. The numbers coming out over the past few weeks just could not support a price of $70 per barrel.

As the bad figures piled up, investors who were buying oil as a hedge against equities began unwinding their positions, accounting for the drop, Konchin said.

Prices could go as low as $50 per barrel, he said, adding that anything lower was unlikely.

Equity markets, meanwhile, continued a decline that began in June. Not even Thursdays cautiously optimistic prognosis from Finance Minister Alexei Kudrin who made the conservative forecast that the economy would grow by 1 percent in 2010 could lift the markets.

The ruble-denominated MICEX Index, which closed below 900 for the first time since April, ended the week down 10.2 percent at 871.33. The index is off more than 25 percent from its 2009 high of 1206.2 on June 1.

The dollar-denominated RTS Index was down 12.1 percent by Friday, with just a modest 0.3 percent gain Tuesday countering an otherwise downward week.

But the correction, which has brought both indexes into bear territory, is just bringing stocks into line with the more sobering macro news from the first half, analysts said.

Its been a good year for stocks, but not such a good one for the economy, said Danila Levchenko, chief economist at Otkritie. All of the numbers have been quite bad.

Market prices now more or less reflect the broader economic picture, he said, but things could still change rapidly. It all depends on oil, he said.

A continued sell-off in stocks is likely if crude drops below $57 per barrel, said Andrei Kuk, a senior trader at UralSib. He said he considered oil undervalued at $60 per barrel.

And while crude prices may be a familiar refrain, Russia still has another variable to contend with and this one hasnt necessarily been priced into the recent slide.

The market does not yet understand how serious the bad-debt problem is, Kuk said. Anything could happen with bank stocks.

The Central Bank has said it sees nonperforming loans rising to 8.5 percent, and possibly as high as 10.3 percent, by the end of the year from about 4 percent at the start of June.

On Thursday, Deposit Insurance Agency head Alexei Turbanov said the situation would worsen in the fourth quarter, with another 50 to 60 lenders likely to lose their licenses by year-end because of bad corporate loans and slowing industrial production. Kudrin said Thursday that bad loans would slightly exceed 10 percent of all corporate loans by year-end.

Caught among the falling stocks and commodities, the ruble extended its decline by more than 4 percent its worst week since February, dropping to 32.68 from 31.3. The ruble had roughly the same losses against the euro, slipping to 45.61 from 43.72.

Bad loans not withstanding, Kuk said he saw a buying opportunity in the near future.

Theres no reason to buy now. But if oil stops falling and the ruble stops falling, buy stocks, he said.