Scalper1 News
Summary RSX enjoys a rally while oil prices continue to fall. Political developments are the main reason for this. Fundamentally, Russia is under increased pressure due to falling oil. Earlier in October, I wrote an article discussing what worked and what did not work in my initial Market Vectors Russia ETF (NYSEARCA: RSX ) bear thesis. What interested me most was why RSX gained more support than I expected. I arrived to the conclusion that the combination of capital inflow and stronger ruble played a role in RSX’ relative strength. Nevertheless, I remained bearish on RSX. My bearish view on oil played a key role in this thesis. RSX’ top holdings Surgutneftegaz ( OTCPK:SGTPY ), LUKOIL ( OTC:LUKFY ), Tatneft ( OTCPK:OAOFY ) and Rosneft ( OTC:RNFTF ) are directly dependent on oil prices. Banks Sberbank ( OTCPK:SBRCY ) and VTB Bank are dependent on oil indirectly, as weaker oil leads to weaker Russian economy. Polyus Gold ( OTCPK:OPYGY ), Uralkali, Polymetal ( OTCPK:AUCOY ) get hurt by low commodity prices. This list can go on and on… However, as I’m writing this article, RSX gained 6.6% in two days, while oil prices remained under pressure – WTI is trading near $42 per barrel and Brent is trading below $44 per barrel. So, what happened? French tragedy boosted outlook for Russia G-20 leaders met after the horrific terrorist attacks in Paris. The sense of urgency made them turn to Russia, seeking to unite efforts on war with terrorism. The change of tone towards Russia was so dramatic that S&P even stated that new developments could help lift sanctions and boost Russia’s credit rating. In a separate event, Russia proposed Ukraine to pay off its $3 billion of debt by $1 billion per year starting from 2016. Russian also wanted U.S. and E.U. guarantees for Ukraine’s debt. If this deal is executed, it will effectively mean a new emission of Russia’s dollar-denominated debt. Currently, the country is cut from capital markets because of sanctions, so such a development will be a major breakthrough. Russia will become investable again. This was probably what went in the heads of fund managers when they looked at their exposure to Russia (there was little if any, I suppose). So, they just pushed the buy button regardless of oil prices. This is a bet that sanctions will be lifted by mid-2016, boosting the troubled economy. Is it sustainable? In the past few days, I’ve been thinking about whether my own perception of the Russian economy disturbs me from some “real picture”. Perhaps, all the bad news – poor economy, falling oil, various inefficiencies – are already priced in RSX and I’m just stubborn not to admit it. There is such a possibility. However, I don’t think the current rally will be sustainable unless oil prices actually rebound. The first reason for this is the Russian ruble – it became too strong in recent days. After a long and hard debate, Russian government approved the country’s budget for 2016. The main variable in the budget is the price of oil, which is denominated in rubles. The ruble-denominated price that Russia expects to get in 2016 is 3165. As I am writing this article, the ruble-denominated price of Brent oil is 2837 – way too low for the budget. As Russia’s reserve fund could run empty by 2016, according to the Ministry of Finance, the Central Bank may be forced to do something about the ruble if it stays strong. The only viable way is to cut the key rate, which stands at 11%. At the same time, the Fed might finally raise the rate, boosting the dollar and further hurting commodities. The combination of these two possible events will be detrimental to Russian securities. The recent enthusiasm in RSX may be short-lived as investors realize how much of a burden are low oil prices to both Russian oil producers and the economy in general. There’s most likely a long way before sanctions are lifted, and please remember this is politics – you can smile and say one thing and do the opposite. I think there are fundamental reasons to be very concerned about the Russian economy. However, in the light of recent events, anyone interested in shorting RSX should proceed with caution. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Scalper1 News
Scalper1 News