Demand for risk has recovered in global markets

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Mikhail Vasiliev, Otkritie Bank 11 October 2021 16:36

On world markets, demand for risk has recovered, investors prefer to buy drawdowns in the US stock market in the conditions of the ultra-soft PREP of the Fed.

The US Congress finally agreed to raise the debt limit by $480 billion until December 3, which temporarily reduced investor concerns.

The fourth wave of COVID-19 due to the more contagious delta strain in the world has ended, which supports the recovery of the global economy. Global PMI indices for September indicated an increase in business activity in the global industry and services sector, while inflation accelerated.

Sales remain on the global debt market, government bond yields are rising against the backdrop of increased inflation and expectations of a tightening of the PREP. The yield of the benchmark 10-year US government bonds for the whole world increased by 15 bps in a week, to 1.61%, since the beginning of September the rate has increased by 30 bps.

FAO reported that world food prices in September increased by 1.2% mom and by 32.8% YoY and reached a 10-year high.

Global inflation remains near multi-year peaks due to rising raw materials and transportation costs, as well as disruptions in supply chains. Energy crises in China, India and Europe slow down economic recovery and increase import inflation for trading partner countries.

In the debt market of the People's Republic of China, sales remain due to the deterioration in the real estate market, new companies are experiencing problems following Evergrande.

In the US, the key employment report for September was ambiguous – only 194 thousand new jobs were created, unemployment fell to 4.8%. The market expects the Fed to start reducing bond repurchases by about $15 billion per month from the current $120 billion per month starting next month. The first Fed rate hike, according to the futures market, is expected in the second half of next year.

In the oil market, Brent prices rose to a 3-year high of $84 per barrel due to the continued deficit due to the actions of OPEC+ countries.

In the Russian debt market, OFZ yields are growing within the framework of global trends, since the beginning of September, the entire OFZ curve has risen by ~50 bps. Inflation is above forecasts – in September, price growth was 7.4% YoY, in early October, according to our estimates, inflation rose to 7.5% yoy.

The market expects that the Bank of Russia will raise the key rate by another 50 bps in two weeks, to 7.25%, and the peak rate will be reached at 7.5-7.75%. Representatives of the Central Bank still maintain cautious rhetoric – we believe that the regulator will raise the rate by 25 bps in October, to 7%.

In the foreign exchange market, the ruble/dollar exchange rate strengthened by 1.5% to 71.6 due to the long-term peaks in oil and gas prices.

In the conditions of weak conditions in the debt market and low budget demand for loans, the Ministry of Finance reduced the offer of OFZ at auctions.

New 11-year inflationary OFZ-IN 52004 were sold for all 10.1 billion rubles at 3.09% (limit - 10.1 billion rubles, demand - 28.9 billion rubles).

The main event of this week will be the US inflation data for September, which will have a direct impact on the Fed's monetary policy and the pace of QE reduction.

Investors will also focus on the situation in the Chinese real estate market, gas prices in Europe and signs of a new wave of the COVID-19 pandemic.

Among the world events, we note the beginning of the quarterly reporting season, the minutes of the September Fed meeting and weekly data on the US labor market.

In October, the ruble's support from the current account will gradually decrease. The dividend season is over, the holiday season is ending, which is in favor of the ruble. The increase in oil production by Russia will help to increase foreign exchange earnings. Restrictions on foreign tourism due to the pandemic reduce the demand for currency.

Sanctions risks remain a deterrent for the ruble. An increase in ruble rates with a slowdown in inflation will be positive for the ruble. We expect the ruble to remain stable in the 71-75 range against the dollar in the fall.

We believe that the Bank of Russia may raise the key rate to 7.0-7.25% in October.

This year we expect a steady recovery of the global economy and high demand for risky assets. The negative impact of the fourth wave of COVID-19 is likely to be weaker due to the ill, vaccinated and accumulated experience of citizens and businesses. In the second half of the year, most of the population in large countries will receive the vaccine, which will allow lifting restrictions on business activity. The global economy will begin to recover confidently, demand for commodities and assets of emerging markets will increase. The Fed and the ECB will maintain an ultra-soft monetary policy and continue to pump the markets with cheap liquidity.

We expect that the US and Europe will increase fiscal support for the economies in the coming months, the Fed and the ECB will finance the costs. The most important factor for the markets this year will be the expectations of normalization of the Fed's monetary policy as the economy grows and inflation. If the Fed tightens, US government bond yields are likely to rise and the dollar will strengthen, which will negatively affect EM assets.

Against the backdrop of a recovery in oil demand, OPEC+ countries will be able to further ease restrictions on oil production in the coming months. This will allow Russia to gradually increase oil production and increase the inflow of foreign exchange earnings into the country. According to our estimates, the Russian economy will grow by 4% this year after shrinking by 3% in 2020.

In the baseline scenario, we do not expect the introduction of tough new anti-Russian sanctions (secondary government debt, banks) from the Biden administration. There may be targeted personal sanctions, restrictions on some non-system companies or the Nord Stream 2 gas pipeline.

We believe that the Bank of Russia this year may raise the key rate by another 25-75 bps, to 7.0-7.5%; next year we expect a cycle of rate cuts.

Mikhail Vasiliev, Investment Analysis Department, Otkritie Bank

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