GLOBAL NEWS FRIDAY, DECEMBER 19, 2014 Russian crisis has the potential to cause systemic problems for the global financial system if the situation continues to deteriorate -- The plunge in the Russian ruble this week illustrated that the Russian financial system is in serious trouble and that a deep recession in 2015 is certain. We expect the Russian situation to continue to deteriorate and we expect collateral damage for the European and emerging markets but we do not expect any impact on the global economy akin, to say, Lehman Brothers. The Russian ruble (USDRUB) earlier this week plunged to a record low of 80 rubles/dollar but then recovered by Thurs¬day to close at 61.55 rubles/dollar. The ruble late Thursday was down by -6% on the week and by -25% on the month. The ruble has plunged by -89% so far this year. Meanwhile, the Russian stock market, in ruble terms at least, has hung in there fairly well so far and the Micex stock index remains in the upper half of its 3-year trading range. However, the Micex stock index has plunged in dollar terms due to the ruble’s collapse, chasing any sane foreign inves¬tors out of Russian stocks. In dollar terms, the Russia Micex index has fallen by -45% since June, nearly halving in value. The Russian 10-year government bond yield has soared by more than 3 percentage points to 13.72% from 10.6% coming into December. The rise in the government bond has been driven by default fears and a surge in inflation expectations with the sharp depreciation of the ruble and the big jump in import prices. The Russian crisis stems from the combination of government mismanagement, the plunge in oil prices, and Western sanctions on Russia over Crimea and Ukraine. There was all out panic earlier this week as Russians converted rubles to foreign currencies and bought high-valued products such as electronics. The Russian central bank was able to halt the ruble’s decline, at least temporarily, with the combination of high short-term interest rates of 17% and foreign currency intervention. The Russian government has roughly $360 billion of foreign currency reserves, which means the Russian government has more ammunition for intervention. As a worst case scenario, the Russian government could impose currency controls and prevent Russians from converting rubles into foreign currencies or allowing Russians to send cash out of the country, thus artificially arresting the decline in the ruble. However, the real problem will come if there is a complete crisis of confidence and bank depositors start a run on Russian banks. If Russian banks start to fail, then Russia would be facing a complete meltdown. There is also the possibility that large government-connected Russian companies could default on their loans since some have lost access to European and U.S. markets due to sanctions. The Russian government’s fiscal finances are currently in relatively good shape but could quickly deteriorate if the government is forced to engage in large bank or corporate bailouts. The Russian government has only restricted access to global capital due to the sanctions. If the Russian central bank cranks up its money presses to give the government bailout money, then the situation would become even worse with soaring inflation and an even bigger sell-off in the ruble. The global financial system has had time to cordon itself off from Russia to some extent due to the Western sanctions and the long-time knowledge of large Russian risks. However, some European banks and some global financial institutions still have large exposures to Russia, meaning a meltdown in Russia could conceivably bring down one or more global banks or big hedge funds, raising systemic risk possibilities. The situation in Russia is also causing the “risk-off” dumping of investments in other emerging countries, thus causing somewhat of a domino effect. The iShares MSCI Emerg¬ing Market ETF has plunged by -7.2% so far this month, although it so far remains safely above the 5-year low posted in late 2011. The markets will remain on the lookout for contagion from Russia spreading to emerging market countries, some of which have already taken a hit with the plunge in oil prices. The even more dangerous scenario is if Russia starts to lash out at Europe and the U.S. for the sanctions by cutting off natural gas flows to Europe. That would hurt European businesses and could tip the Eurozone economy back into recession. Russia could also react with new military attacks on neighbors in an attempt to rally nationalistic support and deflect blame from President Putin. The bottom line is that it is too early to tell whether the Russian carnage will be mostly contained within Russian borders or whether Russia will yet create systemic problems for the global financial system. We expect to see continued negative carry-over effects for the European and emerging countries as investors bail out of risky positions. Moreover, if the Russian situation goes into a meltdown, then the global markets need to brace for systemic problems in the global financial system. Market Recap • U.S. weekly initial unemployment claims unexpectedly fell -6,000 to a 6-week low of 289,000, better than expectations of +1,000 to 295,000. Weekly continuing claims fell -147,000 to 2.373 million, a bigger drop than expectations of -78,000 to 2.436 million. • The Dec Philadelphia Fed business outlook index fell -16.3 to 24.5, weaker than expectations of -14.8 to 26.0. • U.S. Nov leading indicators rose +0.6%, stronger than expectations of +0.5%, although Oct was revised lower to +0.6% from +0.9%. • The German Dec IFO business climate index rose +0.8 to 105.5, right on expectations and the highest in 4 months. • Market closes • Stock Market -- The S&P 500 index on Thursday posted a 1-1/2 week high and settled sharply higher: S&P 500 +2.40%, Dow Jones +2.43%, Nasdaq +2.47%. Bullish factors included (1) carry-over support from Wednesday’s FOMC meeting statement where the Fed said it will be “patient” in its approach to raising interest rates, and (2) the unexpected -6,000 drop in weekly U.S. jobless claims, better than expectations of +1,000 to 295,000. • Interest Rates -- TYH5 -15.00, FVH5 -6.25. • Forex -- Closes: Dollar index +0.102 (+0.11%), EUR/USD -0.00556 (-0.45%), USD/JPY +0.193 (+0.16%). • Metals -- Closes: GCG5 +0.3 (+0.03%), SIH5 +0.006 (+0.04%), HGH5 -0.0170 (-0.59%). • Energy -- Closes: CLF5 -2.36 (-4.18%), RBF5 -0.0390 (-2.49%).
Posted on: Fri, 19 Dec 2014 07:11:32 +0000
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