The beginning of June has been rather nervous for those bearish on VanEck Vectors Russia ETF (NYSE: RSX). Brent oil went past $50 per barrel while the dollar plunged following the disappointing jobs report, which created a strong upside momentum in RSX.
However, the short managed to hold, as the $18 level remained a strong resistance for RSX. The Russian Central Bank has finally decided to cut the key rate, so it's high time to look at what's going on both in the economy and on the stock market and lay out the plans for the summer.
The Central Bank still fears inflation, which is why the cut was a small one - from 11% to 10.50%. The Central Bank stated that annual inflation stood at 7.3% and that inflation expectations of both businesses and consumers continued to decrease.
There's still plenty of room to cut the rate, but the Central Bank is as cautious as possible. The target for inflation is 4% in 2017 and the Central Bank anticipates a GDP growth of 1.3% based on a $40 oil forecast.
I don't buy this optimism and continue to believe that strong focus on inflation numbers hurts the already weak economy. The Central Bank admits that the main driver for the decrease inflation is weak consumption - is that something to be proud about?
I believe that the dismal performance of the Russian economy, together with dubious policies, played a key role in the fact that RSX short survived while Brent oil almost went past $53 per barrel.
Without any kind of stimulus, the main hope for the economy is that oil prices will bail it out. This is, of course, possible, but the absence of other positives puts pressure on RSX and new highs in oil do not translate into corresponding highs in RSX.
Let's now talk about key factors that might have a significant impact on RSX this summer.
The first one is the possible rate hike by the Fed, which could lead to a rally in the dollar. The recent Fed decision to leave the rate unchanged was hardly big news and, most likely, we should not expect a rate hike in the summer. However, if the Fed changes its mind and makes a hike, the dollar will rally and emerging markets and commodities will fall under pressure.
The second important factor is the Brexit referendum. Despite sanctions, EU remains an important trading partner for Russia, so what's negative for EU will be negative for RSX.
Short-term, the vote for Brexit will create a turmoil in the financial markets and RSX will suffer. Bloomberg's Brexit Likelihood Score gives Brexit a 39% probability and is constantly increasing. However, the current consensus is that Britain will stay in the EU and the opposite outcome will be a major shock. I don't expect a major relief rally in case of no Brexit as I don't think that the possibility of Britain leaving the EU has been priced in the markets.
The third factor is the price of oil. Oil made an impressive rally from lows and we can expect at least a correction from this rally. At this point, oil is the crucial factor and Brent's push to $55 will surely end the short trade in RSX. However, I believe that oil's correction risks are elevated at current levels. Anyway, oil is the most important factor to watch.
I don't expect any surprises on the Russian economic front this summer. In my view, stagnation is the most likely outcome without a major impact from external factors (like oil or dollar). Most likely, RSX will continue to be a part of buy/sell emerging markets trade. In this light, looking at the performance of a fellow BRIC country Brazil (NYSE: EWZ) might provide additional insights into the risk appetite towards emerging markets. I remain bearish on RSX.
Disclosure: I am/we are short RSX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.