We continue keeping you informed on the results of our activities, and the IFC specialists’ take on the situation and the processes in global and regional economies.

In October 2018, the value of assets of the WellMax investment portfolio increased by 1.13% in USD and EUR, which is equivalent to 14.44% per annum with monthly compounded interest. There was a 15.72% yield per annum in rubles and a 12.15% yield per annum in yuans with monthly compounded interest.

Despite the increased volatility in the world’s stock and commodity markets in the early October, the WellMax Premium portfolio also showed a significant growth over the last month. Over the period from September 10^th, 2018, to October 10^th, 2018, the value of assets of this investment portfolio increased by 7.8% in USD.

Overall, over the period from January 10, 2018, to October 10, 2018, the value of assets of the WellMax Premium investment portfolio increased by 12.68%.

The most important event of the last month was the sell-off trend in the world’s financial markets, the strongest one since February, 2018. In the US, the three most important indices – the S&P 500 Broad Market Index, the Nasdaq Composite high-tech companies index, and the Dow Jones Industrial Index – fell by 6.7%, 8.7%, and 6.6%, respectively, over just seven trade sessions (from October 3rd to October 11th). They nearly reverted to the level of early 2018, as can be seen on the chart below (source: Bloomberg).

European stock market indices followed the strong US stock sell-off trend, with FTSE 100 of Great Britain, CAC 40 of France, and DAX 30 of Germany going down, which is illustrated by the graph below (source: Bloomberg),

The Asian stock market did not elude the panic, with the SSE Composite Index plummeting by more than 8.4% over the first four trade sessions (October 8-11) following China’s long National Foundation Day holidays. The drop is illustrated by the graph below (source: Bloomberg).

The strong downward trend in the world’s stock markets was caused by the investors’ anxiety about the prospects of the earnings season starting in the US. According to many market participants, this season may be even worse than expectations due to the trade conflict escalation between the USA and China. First and foremost, the circumstances concerned threaten the overbought high-tech companies, whose stocks have mainly soared over the last several years due to the rapid growth of the companies’ key financial figures.

It should also be noted that the above-mentioned factor is more of an immediate cause, rather than the real reason for the fall. The main cause of the downward trend in the stock market was the US Fed’s aggressive policy, to which we made numerous references in our previous economic reviews.

It is the ongoing increase in the Fed’s base rate, along with the growing volume of dollar liquidity withdrawal from the market (i.e. the Fed’s balance sheet shrinkage), which served as the primary reason for the capital outflow from the developing economies, as well as from the “overheated” US stock market to the risk-free US Treasuries, with their yield’s strong consolidation above 3.1% for 10-year bonds as resulted from the Fed’s policy.

Currently, it is hard to say whether the recent decline is a small correction resembling the February one, which will be followed by new growth records in the market, or whether last week’s stock sell-off heralds a more significant fall in the short term. At the same time, despite the highly volatile market, the IFC team has a clear understanding of the market processes, as well as market strategies for the three possible global scenarios of market development (growth, decline, and lingering flat). We also have a set of investment instruments necessary to implement these strategies.

As we forecast in the previous economic review,

following a short period of correction, the euro’s currency rate resumed weakening against the US dollar. On top of the factors mentioned in our previous economic reports, there were two more sending the euro down – the Bavarian election results, which turned out to be a failure for Frau Merkel, and the massive sell-off of Italian bonds.

Last Sunday, October 14^th, Bavaria, the largest German state, held parliamentary elections, in which the ruling Christian Social Union (the main local political ally of Merkel’s party) suffered its sharpest setback since 1950. According to the preliminary results, the Christian Social Union only gained 37% of the vote (10% less than in the 2013 election), which means that the ruling coalition partners of Angela Merkel’s Christian Democratic Union lost their absolute majority in the Landtag of Bavaria. The left-centrist Social Democratic Party of Germany, which is the Christian Democratic Union’s government coalition ally, came fifth with less than 10% of the vote, against 20% in the previous election. Besides, the Alternative for Germany, an anti-immigration party, entered the Landtag for the first time with 10% of the vote. Considering the fact that Bavaria is not only the largest state of Germany, but also the driving force of the Federal Republic of Germany in general, the disappointing outcome of the local election is likely to affect Berlin’s domestic policy, and bring about changes to the government coalition lineup. Thus, following the Bavarian election setback, the Social Democratic Party of Germany resumed the discussion about the necessity to quit the government coalition in order to return to their role as an opposition force.

On top of the German political perturbation, the euro experienced even more pressure from the increased sell-off of Italy’s government bonds amid the media reports concerning Italy’s Deputy Prime Minister Matteo Salvini allowing for a breach of the European Union’s budget deficit limits. Due to the intensifying friction between Rome and Brussels regarding Italy’s budget formation, Italian 10-year government bonds went down significantly, with their yield reaching that of the period of the country’s debt crisis.

It should be mentioned that the confrontation between Rome and Brussels may bears risks for the Eurozone and the euro both in economic and political terms. Economically, the price drop for Italy’s bonds adversely affects the country’s banking sector, as Italian banks are the largest holders of government bonds. At the same time, the associated yield growth puts more pressure on the country’s budget, and adversely affects the overall macroeconomic stability of the Eurozone’s third largest economy. In terms of politics, the euro may be exposed to the risk coming from the growing eurosceptic trend, and the calls for Italy to leave the monetary union, brought about by yet another conflict between Italian authorities and the European Union.

Last month, the behavior of the rouble’s exchange rate corresponded to the forecast we provided in our previous economic review.

Last month’s strengthening of the rouble, first and foremost, came from the factors we mentioned in our previous economic review (the high oil price, the Central Bank’s decision to suspend purchases of foreign currency for the Ministry of Finance till late 2018, and Russia’s overall macroeconomic stability).

In the near future, the Russian rouble is going to be maintained by the tax period, which sustains the demand for the national currency, since mineral companies sell their export revenue in order to pay taxes.

Overall, the combination of the factors currently affecting the currency’s exchange rate is highly positive for the rouble. However, it should be noted that the risk factors we mentioned in our previous reviews (the US Fed’s monetary policy and the associated pressure on the developing markets, sanctions, etc.) also continue to put pressure on the rouble, but their effect, unlike the high oil price, is permanent.

Last month, the oil price continued to break new records, soaring above $86 US/Brent barrel at that moment, which is the oil price maximum over the 4-year period.

The rapid strengthening of oil price observed since the second half of August has been mainly caused by the possible restoration of the US sanctions against the export of energy carriers from Iran in November. This proved to be a cause for growing concern among investors about the possibility of a spreading deficit in the oil market, as we reported in detail in our previous economic reviews.

The early October brought another reason for the oil price growth – tropical hurricane Michael, which temporarily shut down about 40% of the oil-producing capacity in the Gulf of Mexico.

Currently, the oil price is being pushed up by the conflict escalation between the USA and Saudi Arabia following the disappearance of Jamal Khashoggi, a Saudi Arabian opposition journalist, in Turkey. Being a well-known critic of the Saudi Arabian authorities, and permanently residing in the USA, Jamal Khashoggi went missing in Istanbul on October 2nd after his visit to the Saudi Arabian Consulate. According to the Turkish officials, the opposition activist was killed by the security service inside the consulate. Following the alleged murder, the US officials announced their readiness to impose sanctions against Saudi Arabia within the framework of the so-called Magnitsky Act, which authorizes personal sanctions for human rights violations. Thus, according to US President Donald Trump’s announcement as of October 13, he promised a ‘severe punishment’ in case Riyadh had indeed been involved in Khashoggi’s disappearance. In response, Saudi officials pointed out their role in global economy, and announced their readiness ‘to respond with greater action’ in case of sanctions. According to the oil market’s participants, this was a hint at oil delivery limitation being used as a diplomatic weapon, for the first time since 1973.

At the same time, it should be noted that such a scenario is rather unlikely, since Saudi Arabia is the key ally of the US in the region. Thus, the most likely scenario is the US confining itself to diplomatic protest notes to Saudi Arabia. As for Saudi Arabia, an oil embargo would be a highly imprudent measure, since the country’s budget greatly depends on oil exports.

When it comes to the world’s oil market, there is another event to be noted, which is a strong change in the US domestic natural gas market. Last month, both the southern and north-western parts of the US (where most of US shale gas is produced) showed a sharp increase in the natural gas price, which came as a result of a number of reasons (low gas stocks in underground storage, the new export terminals put into operation, etc.), which we had forecast in our previous economic reviews. The natural gas price growth and the expectation of this positive trend to be maintained in the medium term (due to the beginning of the heating season) are most likely to positively affect the financial results of the gas companies within our portfolio (in the third, and, even more so, in the fourth quarter). In its turn, this positive influence will propel the growth of the issuers’ quotations.

Considering the high volatility of the world’s financial markets, lasting trade disagreements between the US and China, and the upcoming Midterm election in the US, we are about to enter an informationally rich and volatile period. We cannot exclude volatility spurts in the stock markets, and further escalation of the trade conflict between the two largest economies of the world, following the announcement of the election results. The growing uncertainty and volatility of the world’s financial markets provide more opportunities for our clients and us, since the skill to analyze news flows and the ability to make swift investment decisions have always been the strong suit of the International Financial Community team.

Faithfully yours,

IFC team