Federal Reserve commitment on rates sees crude prices beef Russian equities

The commitment by the US Federal reserve to keep interest rates in the world’s largest economy at historic lows at least until 2013 has seen crude prices rebound and underpinned a rebound in Russian equities.

The Tuesday evening (Moscow time) statement from the Federal Open Markets Committee flagged the maintenance of the historically low US overnight rate into 2013.  The statement also noted three dissenting members who believed the rates should be kept low ‘as long as necessary’ without referring to a specific date, against a backdrop of GDP growth being substantially weaker than desired.  “To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent.  The Committee currently anticipates that economic conditions-including low rates of resource utilization and a subdued outlook for inflation over the medium run-are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.  The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.  The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”The slowdown in US economic recovery as indicated by weak 2Q GDP figures and the downward revision of earlier data had unnerved the oil market which had seen WTI slump below $80/bbl and Brent drop to nearly $100/bbl.  In the immediate aftermath of the Fed announcement,  on Wednesday morning, WTI futures due September added 2.81% tackling $81.91 price per barrel. London ICE reported Brent futures due September increase by $1.52 to 104.09 Petr Chankin, analyst at UniCredit says the upward trend may support Russia with energy prices underpinning the Russian economy.“Oil price is the main indicator for the Russian economy. All indexes depend on the price of oil. In case the oil prices continue to dampen the whole economy and industry will gradually deflate as well as the energy sector. The oil prices are falling since July and investors are not reluctant to invest in oil companies anticipating a demand shortfall.” Elena Kozhukhova, analyst at Aton, says Federal Reserve announcement saw a positive reaction from investors  but further data may bring more complications. “The indexes changed to an upward trend on the back of Federal reserve announcement to keep the rates low and provide coherent support to the economy. Above all the diminishing oil reserves reported by the American Oil Institute signaled investors. However, the US energy ministry is expected to report an increase of oil reserves to 1.35 million barrels. Today the markets will continue the rally and the next batch of statistic could change the future scenario.” Bogdan Zvarich analyst at Nettrader says Russian indexes could catch up on positive statistic from US "The market participants will keep an eye on US employment statistic release at 16:30 Moscow time. If the statistic date is positive the MICEX index may reach 1570 at the end of the trade session.”