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. Last Updated: 07/27/2016

Greenspan's Warning Prolongs Market Funk

With only one positive trigger coming Friday, tied-up liquidity and one portentous comment was enough last week to extend the market's monthlong decline.

On Wednesday, one of the world's most-respected economists, former U.S. Federal Reserve Chairman Alan Greenspan, said the Chinese market was heading for a "dramatic contraction."

His remarks echoed earlier warnings from Chinese officials that a bubble was developing there. If the forecast turns out to be prescient (or self-fulfilling), and the world's largest emerging economy goes into decline, the rest of the emerging market universe would almost certainly be pulled down with it.

Indeed, Russian markets did not react well to the news. The RTS index dropped 3.8 percent in the two days following Greenspan's comments, bringing one-month losses on the index to more than 9 percent.

Media speculated that bad relations with the European Union, which reached new lows over the Litvinenko murder investigation, were driving investors away. But analysts said this was sensationalistic.

"In reality, the impact of huge new equity issuance and aggressive domestic traders are weighing on the market more than political sentiment," James Beadle, portfolio manager at Pilgrim Asset Management, said in a note to investors Friday.

Last week, the Dixy supermarket chain said it had issued $380 million in new equity, and investors sold off stocks in order to buy it.

But whatever its causes, the recent downturn was enough last week to prompt a response from President Vladimir Putin, albeit one that he later appeared to retract. He suggested at a Cabinet meeting Monday that government funds be used to bolster Russia's stock market, essentially calling for the state to manipulate prices. Though he softened the remark Thursday by saying blue chips might one day be subject to "careful" support, Alfa Bank said in a note that Putin's suggestions had "a history of being put into practice."

If indeed the government were to intervene, a crucial skill for traders would become judging when it would do so and playing the market accordingly. But clearly, propping up blue chip stocks would not revive the struggling fundamentals of Russia's oil firms, which have dragged down the market this year.

A better approach would be to lower their tax burden, analysts have said. From the oil sold above $27 per barrel, the taxman now gets 90 percent of the marginal revenues. This leaves oil firms with little to spend on badly needed oil field development, which might actually create some fundamental value to hold up their stocks.

As things stand, the oil industry depends mostly on one-off triggers to stay out of the red. One such trigger came when Gazprom Neft (SIBN) announced a joint venture with Lukoil (LKOH) that sent its stock up more than 4 percent, helping to keep the market's head above water Friday.

Spikes in the oil price can also serve as a trigger, but they have not been doing so recently. Brent crude for July delivery closed the week at $70.69 per barrel in London after peaking Thursday at $71.80 per barrel, the highest intraday price in almost 9 months. Russian oil stocks remained sluggish.

That may begin to change at the end of this week, as Friday marks the unofficial beginning of both the U.S. driving season, which tends to bolster demand, and of the hurricane season, which often cuts into supply by knocking out rigs and refineries.