Alfa-Bank analysts: markets are trying to find the bottom

Alfa-Bank's Center for Macroeconomic Analysis provided a commentary on the current situation: how the global economy is feeling, what are the main risks, what is happening with the Russian currency rate, and what can help stabilize the market.

EU border closures exacerbate market sentiment, liquidity crunch is not yet over: the decision of France, and then the EU, to close borders for 30 days from March 17 in order to control the spread of the coronavirus epidemic has seriously exacerbated market sentiment. In fact, we can say that the EU economy will stop its activity for a month, with the exception of sectors that provide the population with the most necessary.

As stated earlier, since the share of trade in the structure of the EU economy is much higher than in China and the US, it is not surprising that the markets have remained under pressure since the beginning of this week. On Monday-Tuesday, on the world financial markets, however, there was an attempt to find the bottom against the backdrop of the actions of the monetary authorities to maintain liquidity.

However, on Wednesday it turned out that liquidity risks in the global system remain significant. In European countries, due to the risk of bankruptcy of a large number of private companies, asset management funds began to prepare for the withdrawal of funds by their clients (redemption), which forced them to look for additional opportunities to reduce investment in market assets despite the scale of possible losses. IN
As a result, oil prices broke through the $25/bar level on Wednesday. and gone below; trade remains in the red zone on all global exchanges. The current downward movement of the markets is connected not so much with economic expectations, but with the ongoing liquidity crisis.

In addition, the sharp drop in quotes is exacerbated by the high share of algorithmic trading, which is estimated to account for from 10% in the bond market (lowest share) to 65% in the stock market (highest value), while on average in US markets, algorithmic trading provides 55% of market turnover, and in Europe about 30%.

Expectations for an exit from the epidemic remain highly polarized. As for the development of the economic situation itself, expectations at the moment remain extremely divergent. Some international experts believe that there will be no radical changes in the global economy - the closure of borders only affects passenger traffic, but has little effect on the turnover of international trade. China’s statistics are used as an example: in January-February, the country’s exports fell by 17% y / y as a result of a large number of production shutdowns, but imports to China decreased by only 4%, which means that the demand shock from China was not very
insignificant.

Under this concept, the world economy simply faces the effect of a “long vacation” in April-May, but then a rapid recovery in activity may follow. Economists of the alternative camp with a more pessimistic attitude emphasize that the closure of the EU borders and quarantine in the world will exacerbate the structural problems of the economies. In some countries, this will lead to a financial crisis and trigger a fundamentally justified devaluation; in the EU countries, a huge risk is the bankruptcy of a large number of private enterprises and frontal nationalization; in many countries, including China, unemployment and social
tension.

Experts agree on only one thing - the second quarter will show a huge failure in
economic growth.

Russia shows a weak dependence on external factors: the situation in Russia so far looks quite good by the standards of many other countries. Industrial growth data released recently shows that it grew by 3.3% y/y in February after increasing by 1.1% y/y in January, and to a large extent this dynamics was based not so much on the mining sector, how much for growth in the manufacturing industry. This means that the government supports the economy through the financing of spending obligations, and this allows part of the
deal with external risks.

The collapse of the OPEC + agreement in early March will allow us to count on an additional acceleration of growth in the production sector. Although to achieve the previously planned growth in Russia
GDP of more than 2% at the end of this year is now impossible, the scenario of 1% growth at the end of this year still looks realistic.

The ruble is moving in close correlation with oil, the CBR will increase support for the ruble with oil below $25/bbl. After a fairly long period of stability, the ruble came under strong pressure on Wednesday, March 18, which was associated with a sharp decline in oil prices. The good news is the fact that the exchange rate of the Russian currency is closely correlated with oil, that is, the market does not see additional factors of pressure on the exchange rate, except for the decline in oil prices.

The main risk at the moment is a possible outflow of non-residents from the OFZ market. The Russian bond market is one of those markets that have suffered little in recent weeks, and in case of aggravation of liquidity problems, global funds may decide to take profits in Russian instruments. The growing pressure on the foreign exchange market is evidenced by the statistics on the sale of foreign currency by the Ministry of Finance - on March 17, the volume of market support increased to $75 million per day, although at the beginning of the week this amount was still only $50 million.

This morning, the Central Bank announced a plan to start selling foreign currency as part of the Sberbank deal, these sales will be realized when oil prices fall below $25/bbl, which is about $5 billion, which should help stabilize the market.