24 ★ Friday2 August 2019Giancarlo Perasso
Markets Insight
Kelloggrallied on better than expected
second-quarter sales and operating
profit, which was helped by lower costs.
Growth from snacks and frozen foods
countered a continuing slowdown of the
cereals business while fewer promotions
offset falling volumes in North America.
Management left 2019 guidance
unchanged but improved visibility meant
that it was more confident in the target.
Fertiliser makerCF Industriesled the
S&P 500 gainers on forecast-beating
interim earnings, in spite of bad weather
delaying the US spring planting season.
CF offered a bullish outlook, saying
global demand would outstrip production
for the next few years
Abiomed, the artificial heart maker,
tumbled after reporting slowing sales
growth and cutting full-year guidance.
Investors had been expecting better
from Abiomed after the Food and Drug
Authority said in May that its Impella RP
heart pump was safe and effective.
Fitbithit a record low. Slow growth of
its services business and disappointing
sales of the recently launched Versa Lite
smartwatch led the fitness band maker to
warn of a full-year revenue shortfall.
Clovis Oncologyslid after posting a
wider than expected quarterly loss, which
heightened cash burn fears.Bryce ElderWall Street Eurozone London
Zalando, Europe’s largest online fashion
retailer, jumped to a one-year high after
raising earnings targets.
An acceleration in site visits, customer
sign-ups and order numbers improved
the group’s cost ratios.
Hugo Bosswas under pressure after
posting 2 per cent quarterly like-for-like
revenue growth, below the 3.5 per cent
analysts expected, and trimming
full-year guidance. The Americas were its
problem market, particularly through
wholesalers.
AMSled a sell-off among European
chip stocks after US peers Qualcommand
Lam Researchboth posted weaker than
expected results.
ButInfineonbeat the trend on better
than expected earnings, with the
German chipmaker’s automotive division
showing a surprise return to quarter-on-
quarter growth. “It appears that the
company will weather the cyclical
downtown successfully,” said Bernstein
Research.
Glanbiaslid for a second day in the
wake of Wednesday’s profit warning from
the diet supplements maker. Goodbody
Stockbrokers said Glanbia remained
dependent on a second-half rebound in
growth,which looked a stretch.
Bryce ElderDisappointing results fromRoyal Dutch
Shellmeant sterling’s continued slide was
not enough to lift the FTSE 100 index.
Lower production and weak refining
margins resulted in Shell posting a
sharper than expected 26 per cent drop
in second-quarter clean net income.
British American Tobaccoled the FTSE
100 gainers after reiterating full-year
guidance alongside stronger than
expected interim sales and profit.
London Stock Exchangehit a record
high after formally announcing its $27bn
purchase of financial data business
Refinitiv.
The main new positive was LSE’s
guidance for a more than 30 per cent
boost to earnings per share in the first
full year, post-close.
Capitahit its highest level in nearly a
year after its interim results came with a
more optimistic than expected outlook,
which helped support confidence in the
outsourcer’s potential turnround.
Halfordsslipped after Citigroup
predicted the retailer’s dividend would
have to be sacrificed to fund store refits.
Stafflinerose on stakebuilding by a
Singapore-based peer.
HRnetGroupbecame Staffline’s biggest
shareholder, having built a 24.89 per cent
holding in less than a month.Bryce Elder3 US Treasuries rally sharply following
release of weak data and Trump tweet
3 Brent crude oil sinks to near $60 a
barrel
3 Pound dips below $1.21 ahead of Bank
of England interest rate decisionUS Treasuries climbed sharply, Wall
Street stocks fell and the dollar briefly
strengthened the day after Jay Powell,
the Federal Reserve chair, cut interest
rates by 25 basis pointsbut described the
move as just a “mid-cycle adjustment”.
Stephen Innes, managing partner at
VM Markets, said the market perception
of a “one and done rate cut” on
Wednesday had led to a renewed bout of
dollar strength — before the greenback
gave back gains following the release of
weak US manufacturing data.
The dollar index, which measures the
greenback against a baskets of peers,
rose to a two-year high of98.94, before
retreating almost 6 per cent by the
afternoon in New York.
Adding to market nerves was a tweet
by President Donald Trump, who said the
US would place a 10 per cent tariff on
$300bn of additional Chinese goods.
“The US will start, on September 1st,
putting a small additional Tariff of 10% on
the remaining 300 Billion Dollars of
goods and products coming from China
into our Country. This does not include
the 250 Billion Dollars already Tariffed at
25%,” he wrote on Twitter.Data from the US manufacturing sector
missed economists’ forecasts. The ISM
purchasing managers’ index from the
sector came in at 51.2, missing
expectations for a reading of 52.
US Treasuries jumped higher following
the forecast miss. The yields on the 10-
year benchmark sank 14 basis points to
1.89 per cent and those on two-year
notes fell 15bp to 1.74 per cent.
Following the US president’s tweet,
Wall Street stocks fell, with the Dow
Jones Industrial Average dipping 0.5 per
cent, alongside 0.5 per cent and 0.2 percent falls, respectively, for the S&P 500
and Nasdaq Composite indices.
Brent crude, the international
benchmark, also fell sharply, down more
than 6 per cent to $60.34 a barrel.
WTI, the US marker, declined even
further, sliding more than 7 per cent to
$54.09 a barrel.
Another currency under pressure was
the pound, which fell 0.6 per cent to
$1.2085 after the Bank of England cut its
UK growth forecasts. That was sterling’s
lowest level since January 2017.
Nikou AsgariWhat you need to know
Treasuries rally after weak US manufacturing data
Source: Bloomberg -year Treasury yields ( ) Tuesday Wednesday ThursdayThe day in the markets
Markets update
US Eurozone Japan UK China Brazil
Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa
Level 3009.36 1526.84 21540.99 7584.87 2908.77 103604.23
% change on day 0.97 0.46 0.09 -0.03 -0.81 1.76
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 98.833 1.106 108.185 1.215 6.902 3.827
% change on day 0.322 -0.629 -0.359 -0.816 0.240 1.716
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 1.963 -0.453 -0.136 0.592 3.152 7.263
Basis point change on day -6.860 -1.200 2.310 -1.800 -0.800 0.000
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 346.90 63.33 56.69 1427.55 16.48 2813.70
% change on day 0.37 -1.55 -2.17 0.12 0.12 -0.25
Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.Main equity markets
S&P 500 index Eurofirst 300 index FTSE 100 index||||||||||||||||||||
Jun 2019 Aug272028803040||||||||||||||||||||
Jun 2019 Aug1440148015201560||||||||||||||||||||
Jun 2019 Aug7040736076808000Biggest movers
% US Eurozone UKUpsCorteva 11.07
Kellogg 9.59
Vertex Pharmaceuticals 8.40
Cf Industries Holdings 8.03
Nektar Therapeutics 7.06Societe Generale 5.83
Deutsche Boerse 5.30
Vopak 3.63
Philips 2.74
Legrand 2.57British American Tobacco 6.89
London Stock Exchange 6.52
Intertek 4.45
Smith & Nephew 3.52
Standard Chartered 3.31
%DownsAbiomed -26.16
Concho Resources -24.07
Prudential Fin -8.71
Diamondback Energy -7.43
Huntington Ingalls Industries -7.30
Prices taken at 17:00 GMTEvonik Industries -5.05
Royal Dutch Shell -4.90
Hugo Boss -4.55
Tenaris -4.08
Siemens -4.03
Based on the constituents of the FTSE Eurofirst 300 EurozoneMondi -5.35
Royal Dutch Shell -5.01
Royal Dutch Shell -4.93
Glencore -4.50
Anglo American -4.27
All data provided by Morningstar unless otherwise noted.B
iting sanctions were imposed
on Russia about five years ago
following its annexation of
Crimea with further penalties
added in subsequent years.
But if the punitive measures imposed
by the US and the EU were designed to
inflict economic pain, deter further
aggressive military action in Ukraine or
elsewhere, prevent interference in dem-
ocratic elections, reduce intelligence
gathering capabilities in the west and
punish Russia for using banned chemi-
cal weapons in a foreign country, the
results have at best been mixed.
The true outcome of international
sanctions on the country’s economy is
difficult to ascertain as several other fac-
tors are in play.
While the population’s living stand-
ards and the foreign investment envi-
ronment have deteriorated, the broader
effect of the sanctions may have been
stymiedas Russia has simultaneously
achieved macroeconomic stability and a
stronger external financial position.
The annexation of Crimea and the
secession in Ukraine’s Donbass region
took place shortly before oil prices tum-
bled from $120 per barrel to about $50
per barrel. The Russian economy was
therefore hit by the double shock of
sanctions and sharply declining oil.
It tried to control the subsequent cur-
rency depreciation by raising interest
rates and using foreign exchange
reserves. Ultimately, the Central Bank
of Russia switched to a regime of pure
inflation targeting and a free-floating
exchange rate. It started cutting the pol-
icy rate once inflation started to decline.
Meanwhile, the Ministry of Finance
was starting to adopt a prudent stance.
The combination of orthodox mone-
tary policy, prudent fiscal policy — and a
bit of luck in the form of higher oil prices— has allowed Russia to record a strong
current account surplus.
Russian authorities succeeded in sta-
bilising the economy while rebuilding
foreign exchange reserves and lowering
debt to GDP.
It is not clear what impact sanctions
have had on the real economy. On the
one hand, productivity is growing at 2.5
per cent and accelerating. On the other,
GDP growth was about 2 per cent in
2017-18, similar to the average rate of
growth in 2012-14 — a disappointing
outcome since the economy did not
rebound strongly following the reces-sion in 2015 — and the economy
remains highly dependent on oil.
A stronger rebound did not material-
ise due to the very strict monetary
stance and some fiscal retrenchment
pursued by the Russian authorities, as
well as longstanding structural features
of the economy including a negative
population trend, a weak investment
climate and the government’s tight con-
trol of the economy. Apart from the
recent pension reform that saw the
retirement age increase, structural
reform remains basically absent.
The only true structural reform, para-
doxically, has been the imposition of
Russian sanctions on EU agricultural
goods, which contributed to an
improvement in the domestic agricul-
tural sector to the point where the coun-
try is a leading exporter of many agri-
cultural commodities. The weaker rou-ble has also helped. It isdifficult to say
that sanctions have been a significant
factor contributing to Russia’s slow
growth trend sinceseveral other drivers
affected the economy more deeply.
The clearest indication that sanctions
are no longer considered a significant
factor is the trend in the share of OFZ —
federal rouble-denominated bonds —
held by foreigners. There was a big drop
in this share from the sanctions
imposed in the spring of 2018 but for-
eign investors have returned to the local
market more recently and thepropor-
tion of OFZ held by foreigners has crept
back up to about one-third.
Moreover, from the perspective of
those holding dollar-denominated Rus-
sian bonds, the country appears to be a
remarkably safe credit. Public external
debt is about 10 per cent of the current
foreign exchange reserves andRussia is
a net international creditor. In addition,
among emerging market issuers, Russia
and Botswana have the lowest debt-to-
GDP ratios at above 13 per cent.
Combined with its strong ability to
pay, Russians — from President
Vladimir Putin to the common citizen —
possess an equally strong willingness to
pay. They remember the humiliation of
its 1998 default and appear determined
not to repeat this in the future.
Shouldmoredamaging sanctions —
such as those imposed on South Africa
during apartheid — be imposed, it
would be a different story.
The holders of rouble-denominated
bonds would probably be affected the
most because of Russia’s weakening cur-
rency but holders of foreign currency-
denominated debt would likely be
repaid in full.Giancarlo Perasso is the lead economist of
the CEEMA region at PGIM Fixed IncomeInvestors rediscover
attractions of Russian
bonds despite sanctions
Russians remember
the humiliation of its 1998
default and appear
determined for no repeat
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