"УНИВЕР Капитал": Eurobond Market Outlook

World Market

At the moment, the crude oil prices are consolidating and not showing continued signs of upward or downward trends. We expect WTI and Brent crude to be supported at 43.5 and 46.5 $/bbl, respectively. Last week, the latest U.S. oil rig-count data from Baker Hughes showed a decline of 13 units to 662, the first decline in seven weeks.

Gold futures swung between small gains and losses last week ending up at 1119 on Monday.

The IMF also warned the Fed against raising interest rates prematurely. A mixed jobs report Friday complicates the Fed’s decision on rates. The IMF officials have repeatedly said the Fed should delay a rate hike until 2016, not only because the U.S. economy isn’t ready, but also because of the global economy that experiences growth lower than expected. Rate decision need to be postponed amid global markets turmoil and conflicting labor signals - an improved unemployment rate alongside slower hiring.

EM currencies are tumbling, particularly those exposed to commodities, like Russia and Brazil - Russian ruble, that depreciated by almost 40% since May. The head of the IMF, Christine Lagarde, after a meeting of top finance officials from the Group of 20 largest economies on Saturday called for the urgent economic overhauls as the global growth outlook deteriorates and market turmoil hits emerging markets.

In August, PBoC also devalued the yuan, but the 3.7% decrease it has experienced since then is limited compared to EM currencies. But Chinese officials said they didn’t want the yuan to depreciate further and want the yuan gains stronger footing. Chinese FX reserves fell by a record $93.9 bn last month as the central bank sold dollars to support the yuan. The governor of China’s central bank, Zhou Xiaochuan, said Saturday that the “correction in the stock market is almost done,” and China’s financial markets are expected to become “more stable.”

Russian Market

Over last week the Russian ruble had followed the oil prices trend trying to hit the level of 70 rubles a USD. The ruble depreciation may lead to higher inflation. The inflation in August has reached 0,4% which is more than expected 0% and the full year CPI to the level of 12,5%. Given this, we expect that the CBR will leave the current key rate intact at 11% during CBR’s policy meeting scheduled for Friday 11 September.

The Russian Eurobonds’ market declined last week due to fluctuating oil market. Financial and oil & gas sectors companies, Gazprom, Rosneft, and VEB, suffered the most. But Russian sovereign Eurobonds curve haven’t moved much over the last week.

At the moment Russian corporate quasi-government Eurobonds, ALROSA 7 ¾ 11/03/20, SBERRU 5.18 06/28/19, and ROSNRM 3.149 03/06/17, have attractive yields. Using these Eurobonds, the investor’s  portfolio can be attuned to get a required risk/return profile. In the mid-term the Eurobonds’ yields have potential to drop by 50-70 bps. But In the rocky market’s environment, these Eurobonds might be held till maturity.