On the world markets, the demand for risky assets has decreased

Mikhail Vasiliev, Sovcombank 13 September 2021 17:05

On the world markets, the demand for risky assets decreased against the background of a slowdown in the global economic recovery and increased inflation.

The Fed's regional survey showed that the pace of economic growth in the United States slowed slightly in July-August to moderate.

Democrats in the US Congress are working on various options for raising taxes, including for repurchasing shares of companies.

In China, the slowdown in business activity is being superimposed by the tightening of regulation of large companies.

An additional negative for the markets was the expectation of a gradual reduction in monetary support from the leading central banks.

Following the results of the last meeting, the ECB expected to keep ultra-low rates and the total volume of the quantitative easing program unchanged.

In the next quarter, the ECB will reduce the volume of asset repurchases, according to Reuters sources, from €80 billion to €60-70 billion per month.

The market consensus is that the Fed will also begin to reduce the volume of bond purchases from the current $120 billion per month by the end of the year.

Meanwhile, thanks to the purchase of bonds and pumping the markets with cheap liquidity, the balance sheets of the Fed and the ECB have updated their next record highs.

On the positive side, it can be noted that the fourth wave of COVID-19 continues to decline in the world due to the more contagious delta strain.

In the oil market, Brent prices rose by 2% to $73 per barrel due to the continued deficit and lower production in the Gulf of Mexico.

The main event of the week on the Russian financial market was the increase in the Central Bank's key rate by 25 bps, to 6.75% per annum. This decision was supported by the distance of inflation from the target 4%, increased inflation expectations and the economic recovery. Annual inflation in August rose to a 5-year high of 6.7%, and in early September, according to our estimates, remained near this level. The Bank of Russia has tightened the signal and now " admits the possibility of further increases in the key rate at the next meetings." In the baseline scenario, we believe that the Bank of Russia may raise the key rate by another 25-50 bps this year, to 7.0%-7.25%.

In the debt market, OFZ yields have hardly changed over the week, the rate on a 10-year paper remains near 7%.

In the foreign exchange market, the ruble-dollar exchange rate remained near the 73 mark, we expect the 72-75 range to remain until the end of the year.

Weekly auctions OFZ were weak, the Ministry of Finance attracted only 11.8 billion rubles, but has already fulfilled 97% of the plan for this quarter. 15-year OFZ-PD 26240 was sold 11.8 billion rubles at 7.43% (demand – 31.6 billion rubles, the yield premium to the secondary market – 4 bps). The placement of new 11-year inflationary OFZ-IN 52004 did not take place for technical reasons (the Ministry of Finance is waiting for improvements from the Moscow Exchange).

The main event of the coming week will be the US inflation data for August, 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 with the spread of new COVID-19 strains and their impact on the global economy.

The US Congress continues to discuss the $3.5 trillion budget plan, the $1.2 trillion infrastructure investment project and a possible tax increase.

From the world statistics, we note the weekly data on the US labor market and possible signals from the Fed governors ahead of the September 22 meeting.

In September, the support of the ruble 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 that the ruble will remain stable in the range of 72-75 against the dollar in the autumn. We believe that the Bank of Russia may raise the key rate to 7.0% in October.

This year, we expect a confident recovery of the global economy and a 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 the normalization of the Fed's monetary policy as the economy grows and inflation increases. 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 background of the 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 to the country.

According to our estimates, the Russian economy will grow by 4% this year after shrinking by 3% in 2020. In the basic scenario, we do not expect the introduction of new tough anti-Russian sanctions (secondary public 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 may raise the key rate by another 25-50 bps this year, to 7.0%-7.25%; next year we expect a cycle of rate cuts.

Mikhail Vasiliev, Investment Analysis Department of Sovcombank

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