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Norvik Research 12.12.2016

12/12/2016 17:46

Global developments

Saudi Arabia’s unexpected commitment to further cut output in the wake of this weekend’s agreement by non-OPEC producers has led to fresh sharp increases in oil prices. The comments from the Saudi oil minister were made shortly after non-OPEC producers meeting in Vienna confirmed a cumulative cut of 558K bbl/day, including the 300K bbl/day reduction earlier pledged by Russia (to be fully phased in by May 2017). Brent prices spiked over 6% at the opening and are now up 3.7% on the day at $56.4/bbl. Oil market sentiment is now set to be influenced mainly by news on implementation of the Vienna agreements and the pace of recovery in US oil output, particularly from shale producers.

Global bonds extended losses after the sharp rise in oil prices. 10-year US Treasury yields rose 3 bps to 2.50% after jumping 6 bps on Friday.10-year German Bund yields rose 4 bps at 0.40%. The dollar index slid 0.4% after rising 0.5% on Friday. EURUSD is 0.7% higher at 1.061. S&P 500 futures are marginally lower. Euro Stoxx 600 is down 0.4% today after soaring 4% in the previous week. Nikkei 225 rose 0.9% while CSI 300 is down 2.4%. Gold is down 0.3%.

Russia and CIS area developments and market colour

Ukraine’s sovereign credit rating was affirmed by S&P on Friday at B- with a stable outlook. S&P projects Ukraine’s current account deficit to widen to 3.1% of GDP in 2016 (and average 2.8% of GDP in 2016-2019), compared to the 12-month rolling data through October of about 2.7%. Regarding the banking sector risks (including Privatbank), S&P noted that “legacy issues pertaining to related party lending presents a serious risk to some large systemic banks, and hence the broader system”. According to last week’s comments by the NBU Governor, the NBU will decide on Privatbank’s status by the end of this year.

CIS area sovereign Eurobond yields are mostly lower following the sharp swings in oil and bond markets. Russia and Kazakhstan longer-term sovereign yields are 4-5 bps tighter. Armenia-25 and Belarus-18 are 5 bps and 17 bps lower, respectively. Ukraine sovereign bond yields are 1-2 bps wider.

The rouble is 2% stronger at 61.3 against the dollar in the wake of the continuing oil price advances. A rally in the OFZ market has extended into the second week, with yields down 5-10 bps on continuing non-resident buying. The strength of the oil prices and the rouble may prompt the CBR to adopt a less hawkish stance at this Friday’s monetary policy meeting. Scope for further RUB appreciation is uncertain in view of possible CBR interventions. The most recent such interventions were in May-June 2015 when RUB traded at 50-60 vs USD.

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