Monday’s selloff in Russian assets shows how Vladimir Putin’s recurring standoffs with the West are ruining the investment case for one of the most attractively valued markets.
The biggest loss for equities since March 2014, when Russia invaded Crimea, highlights the deteriorating sentiment: bears are dominating bulls by the greatest degree in four years, according to a technical pattern called directional movement indicator (the red line in the chart below). At one point, the plunge took the benchmark MOEX Russia Index below both its 100-day and 200-day moving averages for the first time in intraday trading since February 2016.
Until last week, traders were touting Russian stock valuations: at 6.4 times projected earnings, they’re the cheapest among major emerging markets. Analysts pumped up their estimates for earnings to a record last month, adding to their appeal. But that optimism vanished after U.S. President Donald Trump sanctioned billionaires with connections to the Kremlin and adopted a tough stance on the latest chemical assault in Syria.
Putin is already facing a coordinated diplomatic onslaught by the U.S. and Europe over a poison attack on a former spy on British soil.
The mounting pressures pushed investors to demand the highest risk premium over U.S. Treasuries since November 2016 — the month Trump got elected — to own Russian sovereign dollar-denominated bonds. The JPMorgan Diversified Russia Sovereign Spread Index jumped 21 basis points, the most since June 24 of that year, the day after the UK voted to leave the European Union.
The ruble is showing signs of stress too. Options traders turned bearish, raising their expectations for currency volatility over one month by almost 20 percent on Monday. That’s the biggest jump since May 1, 2017 and the highest in almost in two months.
Brent was the only good news for Russia today, rising 0.7 percent in dollar terms. A weaker ruble sent it 3.3 percent higher in local-currency terms to 4,034.7 per barrel.
If analysts are pushed to cut earnings estimates for Russian companies and with market pain spreading to credit-default swaps, Putin may soon have a crisis on his hands similar to the one in late 2014 when crude oil tumbled.
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