Week End Blog – Russia Ru(m)bles, Gold Glooms, but stocks prevail!

Another hectic week in financial markets is almost behind us, with Russia making the headlines once again. Renewed tensions in the Ukraine, crumbling oil prices and fears of recession resulted in a major depreciation of the ruble. This week alone the currency fell almost 10%, and at one point the collapse equaled 13%.

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Russian government bonds aren’t doing that well, either. Since the beginning of October local currency bonds plummeted 17%, dragging the whole of emerging debt down with it.

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That Russia is not blowing up completely, at least for now, is reflected in its equity market. In recent months and days, Russian stocks outperformed the MSCI World index. The overall debt load of the Russian economy is manageable and many Russian companies profit from a weaker currency, as part of their profits are realized abroad. That said; the current collapse of the ruble is extreme and could deteriorate Russia’s financial health. Also, with this pace of depreciation inflation is bound to pick up, hampering domestic demand. But for now Russian stocks are holding up remarkably well.

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Falling oil prices are not helping Russia, either. This week the OPEC announced that it expects it will have to supply less oil in each year until 2035 than previous forecast. Next year is the only exception in the two decade forecasting period. The reason is obvious. US shale gas!

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The price of oil had another difficult week, even as it rebounded somewhat in recent days. WTI crude oil is now almost 30% lower than back in June 2013, when the price of oil peaked at USD 110. As mentioned before, oil prices below USD 80 causes all kinds of troubles for oil-producing countries and shale gas companies.

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Keeping that last sentence in mind, more and more analysts predict the oil price may soon reach its bottom. While I do not necessarily disagree, I would like to point out that from a historical point of view this is the worst part of the year for oil prices. You can read more on this topic here.

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Fortunately, there are both winners and losers when oil prices dive. The ultimate winner is the consumer, as the table below neatly points out. US consumers will on average save USD 42 per month due to lower gasoline prices. Bring on Black Friday!

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And then there is gold. Once a love baby of investors, gold has now lost its shine and, just like oil, is back at multi-year lows. But that is nothing compared to the loss on the leveraged gold miners ETF, which has lost almost all of its value, 99.5%!

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No surprises in Europe. Growth was revised down again, this time by the European Commission. It now expects 0.8% GDP growth this year and a marginal increase to 1.1% in 2015. Bloomberg expectations were already down to these levels, so a bit of a non-event.

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Together with a muted inflation forecast, ECB president Draghi decided to deliver a pretty dovish message. He emphasized a bit too often if you ask me, that the governing council unanimously agreed to increase the amount of stimulus if necessary. For now a balance sheet of ECB 3 trillion looks like the ultimate goal. And, while this sounds very impressive, relative to the Fed that would be peanuts.

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Draghi’s speech did help the euro in the renewed race to the bottom. The yen and Ozzie dollar are way ahead, but the euro has now decisively joined the path of depreciation again.

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What a difference one ocean make. In the US the ISM rose to 59, three points higher than expected. And while the non-farm payrolls disappointed slightly, unemployment is down to 5.8%. The recovery in the US is here to stay.

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For equities it doesn’t really matter what happens. Russian worries, oil price shivers or very happy US manufacturers, equities just keep going. The Dow Jones set its 20th all time high this week (21 did follow one day later). Stocks are not derailed easily it seems.

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And even though we have had record after record, from a historical perspective, the best is yet to come. The mid-terms elections are over, it doesn’t matter who won, equities rally from this point on. On average, of course.

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On top of that, with Halloween out of the way, the best six months for equity markets have commenced. On average of course…

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We have reached the end of this Week End Blog. Thanks for reading and enjoy your weekend!

 

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