"УНИВЕР Капитал": Eurobonds Market Outlook

Дмитрий Кондратьев , Начальник отдела аналитических исследований

The recent data released by the International Energy Agency shows that in the second quarter this year, the world’s supply of crude exceeded demand by 200,000 barrels a day. Despite the overproduction of oil in the world, OPEC production is continuously rising. Iran, Iraq and Saudi Arabia contributed to the oil production growth the most.

In the U.S., 2016 Q2 GDP grew by 1.2%, which is below the forecast of 2.6%. Weaker-than-expected U.S. GDP report further decrease chance for an interest-rate rise this year by the Federal Reserve. Federal Reserve Bank of New York President William Dudley over the weekend argued for continued caution but also added that “it is premature to rule out further monetary policy tightening this year.”

Euro zone’s GDP growth decreased to 0.3% in 2016 Q2, comparing to  0.6% in the previous quarter.

On Monday, U.K. purchasing managers’ index, published by IHS Markit, was 48.2 in July, down from 52.4 in June. Manufacturing activity in U.K. dropped to its lowest level since 2013, adding to signs of slowing economy because the U.K.’s June 23 vote to leave the European Union.

On Friday the Bank of Japan left the key rate unchanged, but decided to increase buying the exchange-traded funds and increase its US dollar lending program.

On Friday last week the Bank of Russia’s Board of Directors left the key rate unchanged. This decision was expected by investors and thus didn’t change the Russian market much. Markit research report published on Monday states that Purchasing Managers’ Index (PMI) in the Russian manufacturing sector decreased to 49.5 points in July from 51.5 points in June, showing that Russian economy is still far from healthy condition.

Russia’s gross domestic product (GDP) fell 0.2–0.4% on the year in April–June, the Bank of Russia announced Monday this week. In June, manufacturing activity continued to slow down gradually, while wages increased and unemployment level slightly fell according to the bank officials. Bank of Russia predicted that GDP would fall 0.3–0.7% in 2016 under a basic scenario that average annual oil price would stay at $38 per barrel. Russia may see a quarterly growth of GDP in July–December, the CBR officials said on Friday. Previously, the Economic Development Ministry said that GDP decreased 0.6% on the year in April–June and 0.9% in January–June.

Russia’s Eurobond market last week demonstrated neutral dynamics. Russian Sovereign curve added 10-25 bps in the short end. Unlike the rest of the government bonds the RUSSIA-26 added more than 2.5% price-wise last week, continuing to attract more investors due to the recent inclusion into the Euroclear list. Oil and gas sector’s Eurobonds expectedly underperformed given the decreasing oil prices.

Russian Eurobond market remains overbought in general. So we think that mid-term strategies are more convenient for the current market condition. For such strategies we recommend to buy quasi-sovereign dollar-denominated Russian Eurobonds: ALROSA20, GPBRU19, and   RURAIL22 that have acceptable low level of risk and attractive yields.

 

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Eurobonds Weekly 01.08.2016

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