Is the Russian market on the eve of a serious correction?

Since the beginning of the year, the idea of ​​a “commodity supercycle” has become increasingly popular on Wall Street. This code name hides a simple idea: when a lot of money is “printed”, the emission wave eventually reaches the commodity markets, raises the prices of raw materials and creates the very inflation that developed economies have been fighting for long and hard.

Unlike developing ones, which are fighting inflation. It was in the early 00s, when, after the collapse of the dot-com bubble, the Fed lowered the rate to 1%, creating a mortgage bubble over time, but also contributing, along the way, to soaring commodity prices.

This was the case after the collapse of the mortgage bubble, when the crisis was flooded not only with an ultra-soft monetary policy, but with asset buyback programs. The same situation is developing now.

And so, since the beginning of the year, the same people who a couple of years ago categorically argued that oil would never be higher than $ 100 per barrel, now they say that this is a matter of the next few years. And this time they will be right, given that the “printing presses” of the world’s leading central banks are already “smoking”, jointly issuing the next trillions of dollars in emission per month. Already, prices for metals have returned to the levels of the second half of the 00s. Oil, trying to rise above $ 70 per barrel, is just catching up with metals.

The question of how exactly and under what sauce prices will rise is secondary. Is it under the sauce of the introduction of “environmental” taxes, which will withdraw conditionally “dirty” production from the market; whether under the sauce of the next problems in the Middle East, which, perhaps, will arrange another “oil shock”; or simply under the pressure of unlimited monetary emission, which is planned to be “pumped” into infrastructure costs associated, among other things, with electric mobilization.

But the law of conservation of energy in connection with electromobilization has not been canceled: in order for an electric car to drive, it needs to be charged, and to charge it, you need to burn fuel. Just not in his engine, but in a power plant that will give him energy.

In light of the upward trend in commodity prices, which is probably quite satisfactory for the US Democratic Administration, which is eager for a “green revolution”, which is easiest to do on the trend of rising fuel prices, the long-term outlook for the Russian stock market looks bright. It is quite possible that the Russian market is waiting for a remake of the early 00s with the prospect of establishing a new historical maximum of the RTS index on the horizon of five to seven years. But this is in the long run. What about this year? This year, things may not be as smooth as we would like.

The upward trend in commodity prices, fueled by inflationary expectations and giving rise to inflationary expectations, spurred the growth of dollar yields, which rushed to “catch up” with inflationary expectations. This gave rise to an increase in the real dollar rate, which, calculated on the basis of the ten-year UST , is still negative, but will soon cross zero if the current trends persist.

This trend puts pressure on emerging markets, primarily on the national debt markets of developing countries. In a normal situation, an increase in bond yields should be viewed as an increase in risk appetite, but in a situation of “catching up with inflation” growth, the reaction of different asset classes may be different. Risk-he in the US may come against the background of risk-off in peripheral markets. The strong American market is starting to take away the liquidity of the weak markets.

The mechanism is simple: an increase in dollar yield curtails carry-trade strategies, when the capital of developed countries, in search of positive returns, lifted the debt markets of developing countries and strengthened their currencies, thereby contributing to a decrease in yields on local markets. The decline in profitability spurred the growth of local stock markets. Now the situation is unfolding: the growth of dollar yields amid rising commodity inflation is forcing the monetary authorities of developing countries to unfold the monetary policy cycle, moving on to tightening.

This is very clearly demonstrated by the policy of the Bank of Russia in recent months. The Bank of Russia is forced to raise the rate even in spite of the recommendations of the IMF, being no longer able not to react to the fall in the ruble debt market. The political motives for the fall in this case are secondary in comparison with the macroeconomic ones, but, of course, they also do not add optimism regarding the ruble yield. The ruble yield will continue to grow, and this, in turn, will affect the yield on ruble bank deposits – it will begin to recover.

The end of last year and the beginning of this year were marked by the exodus of depositors from banks, when depositors realized that ruble rates on time deposits did not even cover official inflation, and lost by half to real inflation. It is this contingent of people who decided that “enough to endure this” became the very stream of retail investors, thanks to which Russian brokers report on new records for opening new accounts and attracting client funds. The bad news is that this tide will soon run dry. And life experience suggests that “retail” is most actively buying the local maximum of the market.

Yes, commodities will remain strong and are likely to continue to rise after some correction. But until dollar yields “settle” at levels that adequately reflect sharply higher inflation expectations, emerging markets may be in a fever. The “saw” that has been observed in both the ruble and dollar indices of the Moscow Exchange since the beginning of the year, although it has an upward bias, may turn out to be the end of a rebound trend from last year’s bottom. And if the ruble index can still be helped by the weakening of the ruble, which is now being actively promoted by the inflation of political risks, the weak ruble is not an assistant for the RTS.

The fall of the last two weeks may be a harbinger of a deep correction, which could lead the RTS index below the highs of last summer, when there was just a peak of optimism regarding the ruble debt and local lows of the USD / RUB pair . Today, optimism about the debt market has greatly diminished, and there is no reason why the stock market should not “cool down” in this regard before mustering the strength to conquer new heights. Quite frankly, there are too many “random passengers” on the market right now to take them to new highs.

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