Russia Hike’s Interest Rates To 17 Percent; Why Monster Rate Hike Spells Trouble Ahead; Ruble Tumbles; Weak Economic Data Out Of China/Germany
Desperate Times, Call For Desperate Measures
In a surprise move late yesterday, Russia’s Central Bank hiked interest rates from 10.5 percent to 17 percent in an attempt to bolster the Ruble and prevent its further weakening. But, the move did not work. Although the Ruble temporarily strengthened, the currency quickly resumed [within hours] its downward spiral — suggesting that Russia’s Central Bank may have lost control or the ability — at least for now — to do much about the situation. “The Ruble was already one of the worst performing currencies in 2014,” writes Matt Clinch on CNBC’s website, adding the currency “reached a high of 65.90 [U.S. Dollar vs. Ruble] and now below 60 as Moscow’s currency trading market opened earlier this morning. “The Central Bank of Russia is failing,” said — Ruble weakening again as oil prices weaken again,” said Timothy Ash, Head of Emerging Markets Research at Stanford Bank wrote in a research note. “The message is, We Have A Problem In Houston, or Baikonur,” Mr. Ash added. “Russia’s Central Bank cannot allow this move to fail,” according to Ash, and “will now have to come back with more rate hikes, or a “big, big” foreign exchange intervention — where the bank sells large sums of dollars to try and stem the U.S. dollar’s rise in value against its own currency.”
“This is essentially a panic situation, the Central Bank took the most drastic action they could think of,” said Uwe Parpart, Managing Director and Head of Research at Reorient Financial Markets, in an interview on CNBC. “The rate hike will further tighten domestic liquidity, putting a strain on the domestic corporate sector, and reinforcing economic weakness,” Mr. Parpart added.
“You can expect credit issues facing various companies and banks, so there’s a real issue of financial stability for Russia,” he said, “It’s a pretty bad situation, the only place worse off is Venezuela. Oil price stability will remain the main determinant of stability in Russian assets. The price of oil — Russia’s main export and revenue source — has fallen 46 percent in the past six months, due to abundant supply — partly from the U.S. shale revolution, and low demand growth. If oil prices continue to drift lower [oil is down again this morning to $54.37] the Central Banks measures will be overcome by more panic — in a matter of days.”
Global Macroeconomic Picture Worsens
Overnight, manufacturing numbers out of China and Germany came in weaker than expected, with PMI numbers out of Beijing the weakest in 7 months, while Germany’s manufacturing was the weakest in 18 months.
I am starting to get concerned that we could see another meltdown in U.S. stocks if this situation continues to get worse. Panic selling may set in. Treasury Inflation Protected Securities (TIPS) may be an attractive option for a portion of the portfolio — at least till we get more clarity — and see if Russia weathers the storm — or,, implodes. V/R, RCP