Position: Short Russia via the etf RSX; Long US Dollar via UUP
Using a 2-factor macro model, commodity prices and Chinese demand continue to weigh on Russia. Additionally, on the domestic front, today we received two incremental data points: unemployment rose a full percentage point to 9.2% in January from the previous month and Bank Rossii cut the refinancing rate 25bps to 8.5%.
From this year’s high of 1580 on the Russian Trading System (RTSI) on 1/19/10, the Russian stock market is down 9.8% and broken from an intermediate TREND perspective (Note: the RSX is down 9.3% over this same period).
For the commodity-levered economy, the pullback in commodities and the underperformance of the Russian market rhyme with our Buck Breakout theme for Q1, a bullish call on the US Dollar (despite its immediate term overbought level today), which we’re long via the etf UUP in our model portfolio. We also attribute this downward pressure from the recent economic tightening of China, Russia’s critical trade partner. (For more on our thesis on China, see our post “1Q10 THEME: Chinese Ox in a Box” from 1/13/10.)
The move by the central bank today to lower the refinancing rate signals an effort to improve liquidity and lift the market; and the RTSI reacted favorably to the cut, closing up 1.2% after opening down this morning. Bank Rossii said there are no inflationary pressures, citing that inflation has come in every month since August ’09 to its current level of +8% (in English, we still call that inflation).
Yet with unemployment popping, we’d expect further crimping in domestic consumption to accompany Russia’s already bleak economic performance (GDP fell 7.9% in Q4 Y/Y). And if we’re right on our intermediate term TREND (3 months or more) bearish view of commodities, analysts’ predictions for 3% GDP expansion in Russia this year could fall short.