Alternative investment fund founded and based in Amsterdam, Netherlands.

USA

A major event of the week unfolded in USA. The Federal Reserve Chair addressed the Senate claiming that the interest rate might be raised in the coming months. Her arguments to toughen credit conditions are good domestic economic data and achievement of most targets for key macroeconomic indicators. Besides, the Fed Chair stressed that keeping low rates for too long might adversely affect all they had done to boost the economic growth. In our opinion, it might spur capital outflow from emerging markets, as LIBOR 3M rates have been growing for more than 6 consecutive months hitting 1.03%-1.05%. It tempts investors over to investments in USD denominated assets. Raising the Fed rate ceiling is up ahead, of course. For example, in March. It raises barriers for immediate purchase of assets or USD funding, as raising the rate means growing yield of debt instruments but yields of 2.3% to 2.5% might tempt institutional investors even now. Historical UST 10 Yield Curve (issue maturing on 02/15/27)

ECB

ECB meeting minutes released this January confirm intention of monetary authorities to keep on boosting the monetary policy, as key macroeconomic indicators have not been achieved, which intention provoked traders into buying sovereign bonds of EU member countries and yields declined as little as few basis points. There have also been buys on EM debt markets.

Europe

As we approach the presidential elections in France (this April-May), they take a toll on investor sentiments, who prefer German sovereign bonds to French government bonds. As German government bonds build more confidence even despite parliamentary elections set for September. Comparative Yield of Sovereign EU and Other European 10Y Bonds (right: France, Germany, Switzerland) One Week Yield Curve of German 10Y Sovereign Bonds

Oil

Hedge funds are still increasing their long positions in oil. Latest reports show that hedge funds have accumulated 453,000 long contracts and 39,400 short contracts in their portfolios, which confirms a growing gap between long and short positions. Thus, the market continues to rely on the oil quotations growth, which is contributed by OPEC reports on oil production cuts by 86% of the target introduced by countries that had signed the OPEC deal.

U.S. Fed

The Fed minutes released this January did not contain any express indication that the interest rate ceiling would be raised. However, Fed Chair Janet Yellen and other FOMC members made numerous statements that it would be reasonable to raise the rate any time soon on condition that the inflation and labor market would grow as currently expected. In our opinion, the Regulator does not intend to raise the rate at the meeting scheduled for March 15. FOMC members probably would like to see specific steps of the U.S. President to boost the national economy and facilitate tax reforms. Keeping hawkish rhetoric (statements that the rate will be raised) will in turn bolster the U.S. dollar, while the public debt market will face pressure, which will beef up the bond yields.

In the past two months, reduced almost all global indices, as investors worried about the ambiguous of the FOMC minutes, the fed and the ECB. Among officials of the American regulator is divided on a further increase in interest rates and the normalization of the fed's balance sheet. Protocols of June meeting of the European regulator, together with the review officials hinted at a possible tapering of the policy of purchase of assets from the market, so the yield of government bonds of EU countries increased by 10 b.p. Thus, the French 10-year government bonds are trading around 0.92 percent, the German is about 0.56%, the Italian - 2,27%, etc. in addition, the Bank of England also hinted at the imminent tightening of monetary policy. Thus, the increase in rates, the tapering of QE forced investors to take profits on government bonds and the stock market.

While there is a confrontation between the White house and the House of representatives in the U.S. Congress for adoption of the law on new sanctions against Iran and Russia, as well as limit the powers of the President of the United States oil prices are going up due to the good forecast API. So crude oil inventories fell by 8.1 million barrels, so the oil price grew 1.6% to $48.3 per barrel despite a negative report by the IEA to increase the production of shale oil with an excess of supply on the world market. In addition, while the market ignores the excess of production quotas in June, Saudi Arabia's and Saudi Aramco's statement of intention to invest about $300 billion in oil production in the next 10 years. On the part of the Saudis, the move is a response to the statement made by Qatar to increase the production of natural gas. We will remind, Qatar and Iran intend to jointly develop the North field/South Pars, where reserves are estimated at 28 trillion m 3 of gas and 7 billion tons of oil (45 billion barrels). It is interesting to note that the President of the United States actively concludes transaction for the sale of U.S. liquefied gas to Europe reinforcing its position with to protect Europe from Russian energy dependence. Although Russia may try dumping prices of gas, as the Saudis have oil to Asia despite the fact that the price war is not yet observed on the horizon. Also, the Saudis do not want to lose market share amid rising oil production in the United States. Saudi Arabia, Russia, the United States is the "three pillars" that produce 10 million b/D. the position of these countries depends on the market situation of crude oil and distillates.

Black gold didn't stand a chance

Having played at the beginning of the short week's dividend cut-off in Sberbank, NLMK, the MICEX index tried to stabilize on Tuesday in the 1860-1870 range of items, but on Wednesday dived below due to the strengthening of the dollar against the ruble above 57 rubles per dollar.

In turn, the price of oil Brent on Tuesday, on the evening session, responded to lower on disappointing data from the American petroleum Institute (API). According to his information, published on Tuesday evening, last week increased crude oil inventories in the United States by 2.75 million barrels, which reduced the price of black gold by 1.2 % to us $ 48.2 per barrel of Brent. Investors had expected in the Asian session, the situation will begin to improve, as the survey of experts on the oil market conducted by Bloomberg, contrary to the data API. Experts expect that the data of U.S. Department of energy, published on Wednesday, shows inventory decline by 2.45 million barrels. However, the price was not adjusted upwards, and was trading in the range of $ 48-48,5 per barrel, in response to the negative report from the International energy Agency and awaiting official data from the US Department of energy. The data was good, overall crude oil stockpiles and the stockpiles of Cushing decreased by 1.66 million and 1.15 million barrels, respectively. But oil production in the USA remained at a high level, 9.3 million barrels per day. After the release of such statistics, the price of Brent crude oil has fallen by 3.6 %, to $ 47 per barrel, where the last time was at the end of November 2016.

On the value of Russian equities in addition to oil impact the threat of new sanctions against certain sectors of Russia's economy. This topic will get more response in the quotes after the US President will sign the bill. However, think about the consequences is now. For example, it is known that there may be a ban on investment in sovereign bonds, a ban on lending to Russian companies, participation in privatization etc., which may cause a revision of the credit ratings of the issuers of the key sectors of the Russian economy.

The U.S. dollar yesterday, fluctuating near the mark of 57 rubles, and only after the failure of oil prices slightly rose to 57.2 ruble. Russian officials in recent years, often talking about the fact that the ruble was not bound to the price of oil. But this is only partly true. We observed increase of the ratio of the 90 - day correlation between ruble and oil in the period of 1 year up to 0.55 points in mid-June from 0.33 at the beginning of may. Correlation start increasing in may as investors waited for key events - the OPEC meeting. Now, when it became clear that the production volume will be reduced by 1.8 million barrels per day for another 9 months, investors were disappointed as was expecting big numbers for the volume reduction. Against this background, the oil price fell down by 11.3 %, to $ 48 per barrel of Brent, despite the fact that the ruble has weakened just 1.4 percent, to 57 rubles to the dollar, as investors reduced the risk premium for Russia. We believe that the weakening of the ruble will continue in June and July due to the slowdown in the growth rate of the balance of the current account that will be impacted by seasonal factors - reduction of energy demand due to warm weather, dividend payments, which immediately converts the currency for payment to holders of Depositary receipts, as well as the tourist season for Russians. Although the population continues to maintain a savings behaviors that should not lead to significant spending on vacation. But the main factor for the Russian ruble will be the meeting of the Bank of Russia key rate on June 16. Last week, the head of the Central Bank Elvira Nabiullina during a speech in the state Duma said about the possibility of a rate cut by 25 - 50 basis points to 9-8,75 % per annum .Theoretically, this should weaken the ruble and reduce the yield of OFZ. In our opinion, the dollar will get stronger against the ruble to 60.2 rubles, and at the very least. However, many traders think that the rate reduction is already incorporated in the market. On the other hand, a weak ruble will help to strengthen the position of Russian exporters on external markets. Plus money market rates will decline, which will make more affordable funding for banks and financial companies, and on this background the Russian stock market may grow.

The weakening of the U.S. dollar against foreign currencies (e.g., Euro - by more than 1%, to $1,115 per Euro) has led to the fact that investors decided to reduce positions in the shares of European companies fearing for the decline in export earnings. In turn, the us currency has experienced and will continue to experience pressure due to a new round of political aggravation around the US President, which the local newspaper was initially accused of divulging secrets at a meeting with Russian foreign Minister Sergei Lavrov, and then - the pressure on the FBI to halt investigation against its adviser.

Although, in our opinion, the closer the June meeting of Committee on operations in open market FRS of the USA at the rate, the more investors will demand for dollars, since the probability of increase in top-level stakes at this meeting is 90%. Despite the fact that the same rate for the Euro is negative due to the effect of the quantitative easing program of the ECB on financial market of the EU.

The ruble weakened with the growth of oil Starting in the morning with a light minor note, the Russian market already in the second half of the day stabilized and showed a negligible increase. The Russian ruble weakened to 57 rubles to the dollar, despite the fact that the price of oil increased. Most likely, this recorrelate was caused by an increase in crude oil inventories in the U.S. at 882 thousand barrels per week, according to the forecast of the American petroleum Institute (API), which has a solid reputation among oil traders. It could reinforce fears of traders concerning the continuation of the cyclical growth trend in oil production in the United States.

Almost year fixed weekly gain by the number of units of active drilling rigs in the US, where the main growth is accounted for rigs of horizontal drilling. This leads to a gradual increase in oil production that threatens to neutralize the efforts of the countries of the OPEC oil cartel and joined them 11 oil-producing countries to reduce production volumes of the black gold. An agreement to this reduction is expected to be extended for 25 may, but some members of the oil cartel cut prices for Asian consumers, which suggests sufficient oil reserves.

In addition, the forecasts of the US Department of energy demand and oil supply show that an insignificant imbalance in the oil market will remain in favor of the proposal to the end of the year. Data published yesterday the US Department of energy on the reduction of oil reserves, contrary to the prediction API, to 1,753 million barrels in the week threw the quotes of Brent crude by about 1% up from $52 to $52,6 per barrel. In the future, the current and the following week the Russian currency will have the support of the tax period (payout severance tax, income tax, VAT, excise duties), as exporters begin to sell dollars. We expect the strengthening of the ruble in this period.

Regarding the global market of sovereign Eurobonds note that on Wednesday the yield of gobongo countries of Asia and Europe declined because of the desire of investors to reduce positions in risky assets on the background of the same political situation in the United States. Perhaps, therefore, the auctions of the Ministry of Finance of the Russian Federation on placement of OFZ series and 26220 26221 passed without much demand, characteristic for the last 2 months. Although liquidity in the banking system enough to 2.29 trillion rubles on correspondent accounts and 551 billion on Deposit at the CBR.

Bonds

Week has been difficult for international investors. On the background of aggravation of political developments pertaining to Russia, the US and the DPRK investors switched to sovereign bonds of Europe, USA. So yields of government securities of France, Germany, Italy, etc. declined by 5-10 b.p. and the us Treasury 10-year securities 20 b.p. to 2.2% for the week. Even good reporting of the American companies for I quarter did not support the stock market, so, for the week the S&P500 went by 1.1% in the negative to 2328 b.p. However, the profitability of European papers did not last at low levels went back up due to the long Easter holidays, as investors chose to remain in the money.

The lower the degree of tension with the United States against the DPRK, the European markets will switch their attention to the presidential elections in France, the first round of which starts in late April. It is possible that government bonds in Sweden, Denmark, Switzerland, the UK will be used by investors as temporary refuge within the framework of risk-off.

As a trading strategy, consider the following scenario: we approach the end of the first 100 days in office the new U.S. President, analysts will begin to assess the stock market is at a high historical levels - above 2300 points, and the month of may can be held under the slogan not "Peace! Work! May!", a "Sell! Sell! Sell!". Thus, investors will fix profit on shares and move on, for example, in corporate bonds. With that, Donald trump says that he doesn't like a strong currency, like, policy of low interest rates. Recall that the probability of increasing top-level interest rate the fed currently stands at 11% in may and 50% in June, 53% in July, 71% in August. In this situation already, Eurobonds of some of the companies high-tech sector attracts investors because of undervalued against the same bonds.

Investors involved in commodity markets, namely oil, will have to wait for the technical sessions of the OPEC which will take place on 22 April, where it will be possible to discuss the issue of prolongation of the agreement on the reduction of oil production. But the main meeting will be held on may 25. Therefore, the Commission will take into account the fact of increasing oil production in the United States that we evaluate negatively. If continued reduction of oil production in OPEC and outside of OPEC amid rising production in the United States, then after a while prices may destabilize and fall. The cartel countries will begin to lose its positions on the market, will cease to observe the discipline of the transaction and will start dumping prices for buyers, leading to price wars. Although this is a very pessimistic scenario.

In the epilogue, we note that the decline in oil production of the world's stocks are increased and accounted for slightly more than 3 billion barrels.

Sovereign bonds of the region AMER (Northern South America) finished the week lower yields by 15-20 b.p. for example, husbandy Mexico, Peru, Chile, etc. 10 b.p. American 10-year-old government bonds traded on Monday at 2.36 per cent compared to 2.5% a week earlier. A large part of the decline apparent on Friday, after the start of trading in the U.S. market. So the withdrawal from the agenda in the U.S. Congress, the health insurance act, or Obamacare forces them to leave in risk-free assets such as government bonds. Because now investors react more to political factors, as judged on future policy, the US President's first 100 days of government. Fulfilling campaign promises, giving them a reason to assume the continued growth in the market or not.

However, we note a positive attitude in Friday's speech, Secretary of the Treasury on the issue of the debt limit, which ended a week ago. The Minister believes that the Congress can solve the problem of the limit in the spring session. However, we expect a confrontation between the two political parties on this issue, as it was a few years ago. The result that investors will prefer to withdraw from risky assets.

Against this background, the Euro strengthened against the dollar by 0.6% to 1.08. Debt markets and the European currency, the Euro, also responds to the race in France, the imminent start of the procedure Brexit. The last event, previously scheduled for March 29. Here is a possible implementation scenario of the "Buy rumors – sell facts", i.e., fixation positions on the British pound in fact the announcement of withdrawal from the EU.

Therefore, the policy determines the movement of the market.

At the end of last week, the U.S. dollar weakened against the Euro to 1.07 dollars per Euro. However, the US currency will get stronger in the short term due to the FOMC meeting, the fed on Wednesday where the results are expected to increase in the top rate of interest. Futures on the bet quote this event with 100% positive outcome rate is raised to 1%. The volatility of the world market will increase in anticipation of the meeting, so now the investment decision it is better to take after the rate decision.

In the commodity market, investors will not dare to buy oil after the next growth of stocks of crude oil and active oil rigs in the US, although the price decreased by 8% to $51.4 per barrel. At least in the Asian session, it does not redeem, likely investors are waiting for statistics on regular fuel.

ECB meeting

The yield of most sovereign bonds of the EU increased by 10 b.p. for example, the paper of Italy, maturing in the 26th year rose to 2.34%, a similar German bonds to 0.48%, French to 1.12%. Paper with non-investment rating, e.g., Portugal, Greece traded at a yield of 4% and 7% respectively. So the market reacted to the ECB meeting, where the management of the European regulator has left interest rates unchanged. Rates will remain at current or lower levels for an extended period of time. Program of buying assets on the open market will be continued until such time as the Board of governors will not see a sustainable trajectory of inflation in accordance with the target level. The core inflation rate has increased again, mainly due to rising prices of energy commodities and food prices. However, core inflation remains subdued, so the figure is 1.7% at the end of January this year. Thus, short-term bursts of inflation in the medium term do not affect the stabilization of prices. Inflation after exclusion of food and energy is 0.9% at the target level of 2 per cent. Therefore, the purchase of government bonds will continue.

In the LATAM sector

In the sector LATAM (Latin America) note the increase in yields on 10-year government bonds of Venezuela (Caa3/CCC/CCC) is denominated in U.S. dollars, up 22% on the background of worsening domestic problems, but in the first place there is the probability of default on debt. For example, foreign debts, a country must pay $90 billion in the next 10 years despite the fact that gold reserves are estimated at $10.6 billion In the period of the current year will have to repay $7.5 billion. the Emerging picture is not encouraging investors.

This week...

Of world events of the current week, also select the run procedure on the UK exit from the EU, which may add volatility in the global markets. Plus the US President will submit to Congress the draft budget of the country, where it can contain specifics on economic policy. So the American market can respond to decline if investors ' expectations are not met. In short, the week will be intense.

Last week events led to greater volatility in the global debt market. For instance, the U.S. 10 Year Treasury yields declined 8 bps to 2.50% as the Fed's benchmark interest rate was announced after the FOMC meeting. The Federal Reserve raised the interest rate a quarter point to 1%.

In the past two months, investor expectations have been bolstered by the growing consumer spending, stable unemployment rate, and job growth, which the Fed Chair mentioned in the statement. Hawkish statements made by the FOMC members about impending monetary action are particularly important. From the viewpoint of the practical trade, the postulate that “the market lives for expectations and locks in positions as received” has been confirmed. For that reason, investors saw a confusing picture when the rate was raised, the bond yields were declining and the U.S. dollar was weakened. The market will now be estimating the time for the next rate increase. Two such actions are in the making. The likelihood of the rate increase is rising from June to December 2017. According to the statement, the Committee will eye the level of inflationary expectations and labor market data before making a decision.

After the end of this story, investors switched to emerging markets, which had received a speculative money flow. For example, the Russian government debt yield curve – federal loan bond yield – has declined on all intervals from 17 bps to 23 bps. The middle interval is verging on 8% and the distant interval is traded at about 8.1% as we speak.

EMEA/APAC/LATAM

The 10Y sovereign gilt yields have increased 8 bps to 1.28% as the UK Parliament passes the Brexit bill and the Bank of England's Monetary Policy Committee meets to discuss interest rates. The growth will probably continue, as this procedure will be announced in the next 2 weeks. Besides, one of nine MPC members voted to raise interest rate suggesting that BOE and ECB will be set to tighten the monetary policy.

German, French, Italian and other EU government euro bonds responded to the Fed's decision with a declining yield but on Thursday and Friday, they failed to consolidate their hold on the new level and rolled back amid political happenings in France and the Netherlands.

In turn, APAC government bond yields showed a decline on Thursday and Friday after the Fed announced a rate increase but maintained the present level.

The same dynamics has been displayed by the dollar denominated government bonds in LATAM. For example, Brazilian bonds (Ba2/BB/BB) dropped 19 bps to 4.93%, Chilean bonds (Aa3/AA-/A+) – 14 bps to 3%, Peruvian, Argentine, Mexican, Colombian, and other bonds also declined although yields of many securities have been growing since late February in wait for the rate increase.

Foreign Currency

We would like to mention Russia in view of emerging markets. After the Fed decided to raise the rate, investors returned to carry trade in Russia, as they bought rubles and then federal loan bonds. Thus, the ruble did not react to the fall in oil prices. As we approach the tax period (March 27-31), exporters can sell currency earnings for rubles well in advance, which will make the ruble stronger. Another big advantage is that S&P revised its outlook on Russia's credit rating to “positive” from “stable” last Friday, following which the ruble gained 1% against the U.S. dollar to 57.2 rubles per $1. We cannot rule out that certain investment funds might revise their positions on the Russian Federation and increase the share of Russian assets in their portfolios. We believe that it might create additional demand for rubles over the medium term.

The CBR key rate meeting is scheduled late this week. In our opinion, the key rate cut cycle in 2017 will echo 2016. At least, we do not expect any rate cuts in March as people's inflationary expectations are still high, about 12-13%. Last year, it declined 2 bps from 14% to 12%. The rate was cut twice.

We expect many statements from the FOMC members this week. The recent history has already proved that the likelihood of any rate changes grows every time when one of them reports future monetary actions. Usually, it makes the U.S. dollar stronger. The market created great conditions for that, as euro shows local high of $1.07 per euro while early last week it used to be $1.05.