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Norvik Research 02.03.2017

02/03/2017 17:39

Global developments

US stock markets soared to fresh highs following the pro-business tone of Trump’s state of the union address and publication of strong manufacturing PMI data. In his first formal policy address to Congress late on Tuesday, Trump adopted an unusually conciliatory tone while refraining from providing specific details about his administration’s tax reform plans. S&P jumped 1.4% yesterday (today futures are 0.1% lower). Euro Stoxx 600 rose 1.5% yesterday and is marginally lower today. Nikkei 225 is up 0.9%, while CSI 300 is down 0.7%.

A string of hawkish comments from senior Fed officials have led to a sharp increase in market expectations for a US interest rate hike already in March. Comments from voting FOMC members Kaplan, Dudley and most recently Brainard pointed to their readiness to support a near-term rate hike. The market-implied probability of a Fed hike in March reached 86%, from 50% earlier this week and 40% last week. Investors are now waiting for comments from Fischer and Yellen tomorrow afternoon (at 17.30 GMT and 18.00 GMT, respectively) to provide further guidance about Fed’s intentions.

The dollar rose 0.3% today after rising 0.7% yesterday. 10-year US Treasury yields are up 2 bps today at 2.47% after rising 7 bps yesterday. German 10-year yields rose 8 bps yesterday to 0.28% and reached 0.30% today. Bloomberg commodity index is down 0.4%. Gold price is 0.8% lower.

China’s PMI data for February exceeded expectations. Official PMI came out at 51.6 against consensus of 51.2 and January’s reading of 51.3. Markit Caixin PMI was 51.7 against consensus of 50.8.

Russia and CIS area developments and market colour

Russia’s manufacturing PMI eased in February to 52.5 from 54.7 in the previous month, for the first time in six months. Besides a pick-up in the stock of finished goods, all other components of the index were weaker, including in particular output prices. While some of the weakness may reflect calendar day effects, demand and upward price pressures eased last month.

Russia’s inflation declined in the week to 27 February to 0.0% WoW, 4.5% YoY (estimated) from 0.1% WoW, 4.6% YoY.

The rouble is 0.6% weaker today at 58.7 versus USD. OFZ yields are little changed today. Russia’s and Kazakhstan’s Eurobond yields are 2 bps higher.

Corporate news

Evraz’s 2016 annual report yesterday pointed to a sharp recovery in profitability in H2 2016, prompting S&P to improve outlook on its ratings. In H2 2016, EBITDA reached $954mn, up 62% on H1 2016, with EBITDA margin increasing from 16.3% to 20.0% over the same period. Cost-cutting measures last year totalled $316mn. Cash flow generation was helped by a recovery in steel prices since April, a jump in coking coal prices in late 2016 and the rouble’s weakening last year.

Net debt fell from $5.3 bn in H1 to $4.8 bn at end-2016. Net Debt/EBITDA fell sharply in H2, to 3.1 from 5.0 in H1. Evraz projects Net Debt/EBITDA to reach 3.0 by end-H1 2017, with a long-term goal of 2.0. This year’s refinancing needs are modest but will rise sharply in 2018 (from $294mn to $853mn).

Evraz today announced a tender offer for a buyback of 2018 and 2020 bonds.

Following the release of Evraz’s 2016 results, S&P announced a change in its outlook for its BB- rating from negative to stable, citing resilient operating performance and cash flow generation in 2016. S&P anticipates further improvement in credit metrics in 2017, supported by the group's deleveraging strategy and stronger market conditions. The stable outlook reflects the agency’s expectations that Evraz will have adequate credit metrics in the next two years, with funds from operations (FFO) to debt of above 20% and free operating cash flow generation exceeding $400 million per year. S&P said that it would consider a downgrade if Evraz' profits and credit metrics deteriorated in 2017, without short-term prospects of recovery, with FFO to debt ratio falling below 20% under normal market conditions. Conversely, S&P may consider a positive rating action if credit metrics improve significantly as a result of deleveraging, supported by industry and price improvement, and FFO to debt is sustainably above 30%.

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