Fixed Income Comment: Nevertheless, the market has responded positively to the recent new issues

Notwithstanding Russian data releases today, which again are expected to
suggest some easing in economic performance, the principal market driver this
week will be reaction to the US Fed’s interest rate decision on Tuesday. The
market is currently anticipating a 25bps tightening and some implicit indication that
further policy moves will be deferred until after the US Presidential election in
November. Any action that contradicts this consensus could precipitate market
volatility. RU30 opened fractionally lower this morning at 963/4, with spreads
moving to 309 bps over US Treasuries. EM sentiment was also buoyed by the
Brazilian ratings upgrade.
Oil futures surged following the announcement by Yukos that it had suspended oil
exports to China. This eventuality had been anticipated, and any real shortfall in
exports is expected to be offset by other Russian producers. Constraints on
exports has less to do with actual production performance, and more to do with the
capacity utilisation of the oil transport infrastructure. The market, however, is still
digesting the impact of the proposed reforms of regional government, and further
personnel changes in government representation in the major Russian corporates
within which the government retains a stake. One of the latest proposed moves is
for Viktor Ivanov, deputy head of the Kremlin administration, to take a place on the
board of Aeroflot. Whether such moves simply represent a shift in actual
personnel, an attempt to secure greater state control, an aim to improve economic
and commercial efficiency, or a combination of all three, is likely to pre-occupy
analysts over the forthcoming months.
Nevertheless, the market has responded positively to the recent new issues, with
the Norilsk Nickel attracting substantial demand, culminating in a US$500 million
eurobond at 7.125. In a further boost to investor confidence, the statement by the
EU Trade commissioner, Lamy, envisaged that Russia would be able to join the
WTO in 2005-06.