Axios Markets

Despite facing "tough" U.S. sanctions, Russia's economy is picking up steam, and its financial markets are delivering massive rewards to investors.

Why it matters: In an era in which the U.S. has made economic punishment its foreign policy weapon of choice, Russian President Vladimir Putin and others continue to defy the U.S. and are finding the consequences to be quite bearable.

Driving the news: Far from crumbling under the weight of sanctions, Putin recently introduced a set of constitutional reforms that the New York Times suggests "could create new avenues for him to rule Russia for the rest of his life."

• The changes are backed in part by an economy that is showing life after struggling in recent years.
• The IMF's latest World Economic Outlook calls for growth to pick up in Russia and Turkey, which also is facing sanctions, as a big factor in the European economy's recovery over the next two years.

What's happening: Russian stocks and bonds had a banner year in 2019 and look poised for more of the same in 2020.

• The country's benchmark stock index has bested the S&P 500 by 13 percentage points over the past one-year period and its 10-year government bonds have delivered a world-beating 210 basis point decline in yield.

What they're saying: Of the 21 countries TIAA Bank follows, which includes the U.S., eurozone, Singapore and other global heavyweights, "Russia is at the top of the list," TIAA Bank president of world markets Chris Gaffney, tells Axios.

• "Russia has used the US/China trade spat to strengthen ties with their southern neighbor, and continues to establish new trade relationships throughout the east as a way to soften the impact of western sanctions."

With most U.S. sanctions directed at individuals, rather than Russia as a whole, investors "decided that the fundamentals of the Russian debt market are so attractive that they completely outweigh the sanctions," Ed Al-Hussainy, senior interest rate and currency analyst at Columbia Threadneedle, tells Axios.

• Russia has managed to get its economy on track by bolstering its current account, bringing its debt-to-GDP ratio below 15% and accumulating hefty reserves, Gaffney and Al-Hussainy say.

The big picture: It isn't just Russia that has managed to fight off the strain of U.S. economic sanctions. The U.S. has dramatically increased sanctions on Syria, Cuba, North Korea, Turkey and Iran with the goal of regime change or shifts in behavior, and so far has little to show for it.

In stark contrast to broader emerging markets, which have badly underperformed U.S. stocks, Russia's benchmark RTS index has driven returns well above the S&P 500 over the last year.

• That has continued in 2020, as the RTS has delivered around 5% gains, doubling the S&P 500's 2.4% rise.
• Russian 10-year government debt has netted 15% total return over the last year, according to FactSet data.
• The strength of the ruble against the dollar, one of the few EM currencies to appreciate against the greenback in 2019, also meant even more bang for the buck in Russian debt and equities.

Yes, but: "It's important not to confuse financial markets with economic well-being," George Friedman, founder and chairman of Geopolitical Futures, tells Axios.

• "Outside Moscow and St Petersburg conditions are pretty bleak. This is why I don’t hold financial markets as predictive. In Russia, markets are up and towns outside the major cities are getting hurt."

Italian Five-Star leader Luigi Di Maio is set to resign as leader of the party in power ahead of an expected defeat in regional elections on Sunday. (Bloomberg)

Amazon is creating checkout terminals that would allow people to link their credit card information to their hands, giving them the opportunity to pay for things with their palms rather than with a card or phone. (WSJ)

President Trump doubled down on threats to put tariffs on European autos if a trade agreement is not made with the EU, but declined to set a deadline. (WSJ)

The U.S. and Hong Kong both announced the first confirmed cases of coronavirus and China's National Health Commission said the death toll from the virus has risen to nine, with 440 confirmed cases across 13 provinces.

Why it matters to the market: "There's no question that economic activity in Asia will be affected as we head into one of the busiest travel weeks in China," BK Asset Management managing director of FX strategy Kathy Lien wrote in a note to clients late Tuesday.

• With China's Lunar New Year holiday approaching, analysts at Goldman Sachs say that based on the damage from the SARS scare in 2003, a sustained outbreak could cut global GDP by significantly more than the 0.15% drop attributed to that outbreak.
• "If the virus is not contained, the impact on consumer confidence could be significant," Lien said.

The big picture: The coronavirus could negatively impact markets from currencies to oil, as declining air travel and sentiment weaken demand across industries.

• Goldman's commodities research team estimates that under conditions similar to 2003, oil prices could see negative shocks leading to a $3 per barrel decline, "although the initial high uncertainty could lead to a larger sell-off, as was the case in March 2003."
• "These volumes are roughly 1.6x times larger than in 2003 given Asia’s significantly higher contribution to global growth and jet fuel demand."

Confidence in Germany’s growth outlook has continued to increase, with the latest survey of investor expectations rising to the highest in more than four years.

Details: The ZEW economic research index of expectations for the next six months increased to 26.7 in January, significantly exceeding economists' estimates.

• The gauge turned positive last month for the first time since April, meaning more respondents are optimistic about the future than pessimistic.

Of note: If you're reading this newsletter without images displayed, you're doing it wrong.

With the "phase one" trade deal signed, major asset managers have taken their eyes off of the trade war a bit and begun to focus on the upcoming U.S. presidential election.

• The outcome of November's election is now investors' top concern, according to the results of Bank of America Securities' latest global fund manager survey.

Why it matters: The trade war dropped to the No. 2 concern among respondents for the first time since May, while worries about a "bond bubble" popping rose to the No. 3 worry.

Watch this space: A number of recent analyses have found that the stock market is currently showing some irrational exuberance, but BofA's model shows "investors are bullish but not euphoric,” chief investment strategist Michael Hartnett said in a note.

• The level of cash holdings has not yet reached the point that would signal excessive "greed," and overweight positions in stocks remain well below levels that signal concern.

Of note: Inflation expectations rose 14 percentage points from last month to net 56% of participants, the highest level since November 2018.

• 19% of fund managers surveyed think the global economy will experience above-trend growth and below-trend inflation; 62% continue to expect below-trend growth and inflation.
• Global corporate profit expectations jumped 14 percentage points from December, with a net 27% of respondents saying they expect profits to improve over the next 12 months, the highest level since March 2018.

The price of rhodium, a fine metal used in fine jewelry and car parts, has skyrocketed over the last few months. It has jumped by more than 50% in just the first three weeks of January, reaching a price more than six times that of gold and the highest since late 2008, FactSet data show.

What's happening: "Surging demand from carmakers is partly to blame," the Economist writes. "More than four-fifths of global demand for both rhodium and palladium comes from the automotive industry. The metals, together with platinum, help convert toxic gases in a vehicle’s exhaust system (such as carbon monoxide) into less harmful substances before they exit the tailpipe."