Welcome to CrushTheStreet.com’s Weekly Market Wrap-up!
Our top story of the week is the rapid escalation of volatility in global financial markets, particularly in Russia where the national currency, or the ruble, has collapsed under the weight of international sanctions spearheaded by the United States and the European Union. Over the past month, the ruble to dollar ratio hit an average of roughly 40-to-1, meaning that a single ruble is worth less than three U.S. pennies.
In comparison, just prior to the 2008 financial crisis, the ruble to dollar ratio hit an all-time high of nearly 23-to-1. At currently depressed valuations, it’s difficult to imagine that this profound impact to the Russian economy was part of president Vladimir Putin’s calculus when he annexed the Crimean peninsula earlier this year.
Although extremely popular in his native Russia and in many alternative circles within the U.S., which regard him as a buffer against American imperialism, Putin and his carefully selected administration may be in over their heads. An influx of 6-billion rubles, or the equivalent of 146 million dollars, was pumped into the system by the Russian central bank as part of an interventionist strategy designed to stabilize the currency. However, the efforts failed to stem the tide of volatility, with the ruble extending its longest losing streak in more than a year. Neither has a small gesture of goodwill in the form of Russian troop withdrawals from the Ukrainian border brought about any discernible sentiment shift.
The main problem is that Russia is a largely commoditized economy. While that would typically be an advantage in a resource-constrained global market environment, when deflationary cycles are encountered, such economies are leveraged inversely to the underlying demand trajectory. As gasoline prices continue to drop and as consumer spending habits shift accordingly, more funds are being diverted away from commodities and other necessities, and into discretionary items. As Russia tends to lack in the production of consumer friendly or innovative goods, their leverage towards domestic and geo-political affairs will likely decline unless the fundamentals radically change.
So far, Russian power-players, while vocal supporters for Putin, are nonetheless voting with their wallets towards the opposite direction. The rate on a three-year ruble-dollar basis swap hit negative 301 basis points on Tuesday, according to a recent report from Bloomberg. This means that Russian traders are willing to pay record premiums in exchange for the relative safety of greenbacks. This move makes even more sense when we realize that the sanctions have crippled Russian banks’ and corporations’ access to Western debt markets, thus forcing entities to manage their cash-flow under extremely unfavorable circumstances. While Russia is certainly not in the same crisis as Argentina, the facts are quite clear that unless conditions shift quickly, it may share the same fate.
In financial news, initial jobless claims hit a 14-year low, while industrial output rose sharply in September, painting a more optimistic view of the U.S. economy and raised hopes that global economic weakness and the escalating Ebola scare will not hinder otherwise fragile recovery efforts. Still, the major indices flip-flopped between positive and negative territory during Thursday’s market session, with the Dow Jones closing at 16,105 and the S&P 500 finishing the day at 1,862 points. The precious metals complex received a modest boost earlier in the week due to the severe volatility experienced in global equity markets, with gold settling at $1,241 while silver closed unchanged from the prior session at $17.54. Palladium negated the overall metals trend, dropping over 3% of valuation on Thursday to finish at 744 on the ask. In digital currency news, bitcoin staged a comeback from last week’s volatility, settling into a range just below the 380 level.