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Norvik Research 06.02.2017

06/02/2017 19:09

Global developments

Investors are cautious at the start of the new trading week amid rising political uncertainty in France. The dollar index is 0.3% stronger, reversing the declines after the mixed US labour market data on Friday. Yields on 10-year US treasuries are down 3 bps to 2.44%. Yield differential between French and Italian government bonds over Bunds widened further. Stock markets rose modestly in Asia and are in retreat elsewhere. S&P futures are marginally lower after a 0.2% drop on Friday. Gold prices are up 0.7%.

Oil prices declined marginally today, despite higher geopolitical tensions on the back of harsh anti-Iranian rhetoric by senior US officials. Drilling activity in the US expanded further over the past week, with the rig count rising by 17 to 583. Brent prices are down 0.5% at $56.5/bbl.

Russia and CIS area developments and market colour

Russia’s headline inflation declined to 5.0% YoY in January from 5.4% in December, below consensus forecast for 5.1% YoY. Officially measured core inflation fell from 6.0% YoY to 5.5% YoY (consensus: 5.6%). Both headline and core inflation have been declining rapidly since mid-2016, shedding 250 bps and 200 bps, respectively, supported by the rouble’s 20% nominal appreciation in trade-weighted terms over the period and persistent weakness of consumer demand. The continuing fall in inflation against the backdrop of stronger oil prices and the rouble point to room for policy easing later in H1 2017, in our view, despite the CBR’s hawkish policy stance.

The latest version of Russia’s debt strategy, published earlier today by the Finance Ministry, targets net domestic borrowing of RUB 1.05tn per year over 2017-2019. These targets represent a steep increase from RUB 0.5tn in 2016, driven by sharply higher shares of borrowing in deficit financing (91% of total by end-2019, from 20% in 2016). In the meantime net external borrowings will be negative in each of the next 3 years. These targets are consistent with only gradual increases in the ratio of public sector debt to GDP, from 13.2% in 2016 to 15.3% in 2019.

The rouble is 0.6% stronger today at 58.9 against the dollar. OFZ yields are mostly flat today, after widening modestly on Friday following the hawkish CBR statement. Russian sovereign bond yields are broadly flat today, Kazakhstan is marginally tighter, Ukraine sovereign yields are 5-10 bps lower.

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