U.S. Stocks Stable as Russia Grapple with 1998-style Crisis

Nichole Harper
16 Dec, 2014
New York City

U.S. indexes and oil prices in New York were stable at least for today and Russia faced foreign exchange crisis. U.S. dollar and treasuries and the yen rose as investors avoided exposure to currencies of emerging markets.

U.S. stocks stayed and oil prices in New York at least for today were stable after Russia faced foreign exchange crisis.

Fear gripped world financial markets after oil price weakness sparked currency crisis in Russia and European markets struggle with economic fallout.

Fed policy makers began two-day meeting and economists and traders debated the prospect of first rate increase in several years as the global economies slows and the reported inflation stays below the Fed target.

Russian Crisis

Russia took unusual and emergency steps to stem the falling ruble but failed to calm nervous markets.

Russia hiked its reference rate by 650 basis points at mid-night Moscow time to 17% and also arranged a bailout of Rosneft OAO, one of the largest oil companies in the nation.

Russia’s central bank arranged emergency financing of $10 billion for Rosneft as the state controlled struggle to rollover its debt at the end of this month.

The surprise move heightened tensions in the currency market and forced the ruble down to a record low on the worries of other bailouts that may be necessary in the next two weeks.

The sanctions on Russian companies forced the state-controlled oil company to repay its debt, which would have been rolled over under normal circumstances.

Russia’s central bank issued 625 billion yen in exchange of Rosneft bonds and those rubles were exchanged in the currency market for dollar, surprising traders and driving the exchange rate down to as low as 80 before recovering to 72 against the dollar.

Russian companies are scheduled to repay $30 billion by the end of this month and additional $130 billion are due next year.

With dollar in short supply and wide ranging sanctions from the European Union and the U.S., Russian companies are facing foreign exchange crisis.

The sudden collapse of Russian currency played out with sharp declines in values of currencies of Brazil, Mexico, Indonesia and Turkey.

Russia is bracing for more stringent measures including capital controls and sharply lower government spending.

Russian government announced measures to cut government spending by 500 billion rubles before the Rosneft transaction, but traders overlooked the announcement and still sold ruble.

Russia’s dollar denominated stock index, RTS index declined 12% and extended December-month loss to 33% and for the year plunged 42%.

Middle East Markets Plunge

In addition, Middle Eastern market indexes took another hit and the benchmark indexes of Abu Dhabi and Dubai plunged more than 7% and Saudi Arabian index extended losses to 20%.

Crude oil futures dropped below $55 a barrel for the first time in more than five years.

Gold was not immune from the chaos in the financial markets and declined $14.80 or 1.23% to $1,192.20 an ounce.

U.S. treasuries, dollar and the yen rallied as investors avoided risk taking. European markets losses for the seventh day in a row

European Markets

In London trading, FTSE 100 index gained 0.7% or 43.43 to 6,226.15 and in Frankfurt the DAX index increased 0.9% or 87.35 to 9,421.36.

In Paris, CAC 40 index rose 0.3% or 14.09 to 4,019.47.

BT Group is in talks to acquire EE for £12.5 billion in a cash-and-stock deal. BAE Systems awarded a contract worth £270 million from the Ministry of Defence.

Metro AG profit surged 214% to €182 million but sales dropped 4%. Repsol agreed to acquire Talisman Energy for $13 billion.

Asian Markets

Stocks in Tokyo and Asia declined for the second day on the dramatic turn of events in Russia.

Nikkei dropped 2% and extended two-day sell-off after Russia hiked interest rate by 6.5% to ward off capital flight.

Investors in Tokyo reacted to dramatic events in Russia and persistent weakness in oil price and the yen advanced after global investors dumped currencies of emerging markets.

Investors turned cautious and sold stocks after oil price correction extended to 47% and ruble plunged 13% forcing Russian government to take unprecedented steps and dramatically lift interest rate by 6.5% at mid-night Moscow time.

Currencies of emerging market nations from Indonesia, Thailand, Brazil, Mexico, Turkey and India took hit on the dramatic collapse of Russian ruble.

The Markit survey showed Japan’s purchasing managers index increased to 52.1 from 52 in November, the fastest rate in three months.

The Nikkei 225 Stock Average declined 344.08 or 2% to 16,755.32 and the broader Topix index dropped 25.92 1.9% to 1,353.37.

The yen gained 0.09% to 117.87 against one dollar.

Asahi Holdings Inc agreed to acquire Johnson Matthey Plc for about 22.82 billion yen or $186 million.