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Norvik Research 14.02.2017

14/02/2017 19:00

Global developments

US stocks and the dollar rose while Treasuries fell in response to Fed Chair Yellen’s robust assessment of the US economy in her semiannual report to the Congress. Markets have interpreted Yellen’s comments as hawkish after she noted that further policy adjustment would be needed even if inflation and employment levels rise gradually. Both 2-year and 10-year UST yields are up 3 bps after steeper initial spikes, at 1.23% and 2.47%, respectively. Market-implied probability of a rate hike in March rose 4 pp to 34%. The dollar index rose 0.3%. S&P 500 is up 0.4% to a new all-time high, as are several other indices. The Euro Stoxx 600 is marginally higher. In China, CSI 300 was flat after January CPI and particularly PPI increases exceeded expectations. Gold price is up 0.3%.

Brent prices are 0.5% up at $55.9/bbl on continuing optimism over OPEC’s ability to achieve the agreed output cuts.

Russia and CIS area developments and market colour

Russia’s federal budget deficit widened significantly in January, due to a sharp increase in spending. On our estimates, on a 12-month rolling basis, budget deficit rose to 4.1% of GDP, from 3.6% of GDP in December. Total revenue as a share of GDP was unchanged at 16.0% as non-hydrocarbon receipts rose from 5.7% of GDP in December to 5.8% of GDP in January. At the same time, expenditure rose sharply to 20.1% of GDP, from 19.6% in January. This increase in spending was much higher than implied by earlier estimates of the impact of one-off pension payments last month (0.2% of annualized GDP). The surge in spending does not conform to the government’s decision (in late January) to save all of this year’s oil-related revenue windfall in the Reserve Fund. We expect spending to moderate in the remainder of the year, thanks to the adopted fiscal rule.

The rouble is 0.9% stronger today at 57.4 supported by rising oil prices. OFZ dynamics is mixed today despite the rouble’s strength. Russia’s longer term sovereign bonds yields are 1-2 bps wider, Kazakhstan is marginally lower. Ukraine sovereign yields are 7-10 bps tighter.

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