RSX: Commentary On Recent Developments – VanEck Vectors Russia ETF (NYSEARCA:RSX)

A number of important developments happened since my last article on the VanEck Vectors Russia ETF (RSX), “RSX: Rally Will Fade Soon”, was published. Without further ado, let’s get to the key catalysts in play.

Mueller found no evidence of Trump-Russia collusion

The Russian market got an immediate boost from this news, a kind of a relief rally. The rationale is simple: if the Mueller investigation had found something, the Russian stocks would have been devastated as it would have meant immediate and severe sanctions.

From what I read in various Russian business papers, analysts believe that this outcome is good for the Russian stock market as it decreases the chance of new sanctions on Russia. I disagree with this view. There were only two possible outcomes for the Russian market in this story – neutral and bad. It turned out that the neutral scenario took place.

The interests of Russia and the U.S. collide in many parts of the world, including Europe (gas pipelines), the Middle East (Syria, Iran) and now even Venezuela. In my opinion, the prospect of new sanctions on Russia depends solely on whether U.S. policymakers will decide that short-term competitive gains from sanctions outweigh long-term losses (a country which has a dominant role in the world’s financial system and imposes sanctions too often will force other players to start searching for alternative routes of payment and movement of goods).

Put simply, while the Mueller investigation will dominate the media this week and it also has Russia attached to it, the news will likely have minimal fundamental effect on the Russian stock market. The prospect of new sanctions will continue to weigh on valuations.

Russian Central Bank keeps rate at 7.75% but sounds more dovish

The rate decision was announced on March 22 and came as no surprise to observers. However, the tone of the comments was more dovish than most expected. The bank lowered the 2019 inflation forecast from 5.0-5.5% to 4.7-5.2% while maintaining annual GDP forecast at 1.2-1.7%. In my opinion, inflation came softer than expected despite the VAT increase from 18% to 20% because of weak demand. Real incomes of Russian consumers have been in decline since 2014 so producers had little room to pass the VAT increase into prices.

The Fed’s recent dovish language, in combination with softer than expected inflation, led to the Russian Central Bank announcing that it may return to rate cuts in 2019. In my opinion, the rate can be lowered to 7.25% sometime in the second half of 2019. While the interest rate is visibly high and puts pressure on businesses as credit is expensive, it serves as a major instrument for maintaining interest in ruble-denominated assets – the spread between the Fed rate and the ECB rate on one side and the Russian interest rate on the other side should be high enough to attract investors. I expect this policy to continue for the foreseeable future.

For RSX, it means that the rate will continue to put pressure on economic growth while at the same time maintaining interest in assets, a situation of balance.

Brent oil continues upside on the back of Venezuela problems

With energy having a 40% weight in RSX, the upside in oil prices is the key bullish catalyst that supports RSX right now. I must admit that I’m a bit worried that Brent oil (BNO) has not yet crossed the $70 mark despite continuous disaster in Venezuela and OPEC+ efforts to increase the price. This might suggest that there’s indeed some weakness in demand – or the market is just letting recession fears influence oil trading.

Technicals

RSX has hit a wall in the whereabouts of $21.50. In my opinion, the Russian market will need a very strong catalyst to make the breakthrough – like a major rally in oil. Without this, chance for upside from current levels are slim and downside looks more likely: growth is sluggish while sanctions’ risk is ever-present.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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