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The Central Bank of Russia recently lowered the key rate by 2 percentage points to 18% per annum, a move that was expected by many investors. However, the stock market took a dip instead of soaring, with the Moscow Exchange Index closing down 1.3% on the day and 0.4% for the week, at 2772 points.
Antonov, a leading investment analyst at Go Invest, sees this as an opportunity for investors to earn higher returns from bonds. He states that it's better for investors to get 14-18% annually from bonds than nothing, or worse. This bullish sentiment is shared by Mikhail Zeltzer, an expert at BCS Mir Investments, who predicts a potential -200 bp reduction in the key rate in September, and percentage cuts in October and December, which could lower the current rate to 14% by year-end.
However, the market's reaction to the rate cut was not as positive as one might expect. This can be attributed to several factors, as explained by the head of the equity analysis department at FG "Finam", Natalia Malykh. She suggests that the market may be underestimating the event of a key rate cut.
One such factor is the cautious or neutral central bank tone. Despite the 200 basis point cut aligning with expectations, the Bank of Russia emphasized ongoing pro-inflation risks including elevated inflation expectations and a tight labor market. This cautious outlook can signal uncertainty or risks ahead, which may spook investors.
Another factor is the concerns about economic fundamentals. A lower key rate sometimes reflects the central bank’s concern about slower growth or recession risk. If investors interpret the rate cut as a response to deteriorating economic conditions or expect inflation risks that could derail growth, they may sell stocks even on "positive" rate cut news.
The timing and anticipation effects also play a significant role. If markets had priced in a larger or quicker cut, a smaller-than-expected reduction or a cautious message can trigger disappointment and a sell-off. Furthermore, the sequencing of rate cuts and inflation forecasts can affect investor sentiment about the trajectory of the economy and monetary policy.
Research shows central banks respond asymmetrically to market moves—cuts often happen after declines and are interpreted as corrective measures to negative economic signals rather than pure positive news. This can make rate cuts appear as responses to troubles rather than growth stimuli.
The increase in the ruble's exchange rate against the yuan was due to speculators selling "yuan" to lock in profits after the event. However, afterwards, the Russian currency quickly relinquished its temporarily gained positions, and by the end of the day, its exchange rate had barely changed from Thursday's close.
Large investors are opting for more reliable bonds due to the uncertainty, according to Antonov. This uncertainty is heavily influencing market participants' sentiment, as per the head of investment consulting at Alor Broker, Aleksei Antonov. Some of the biggest losers last Friday were the shares of heavily indebted companies like Mechel and AFK "Systema", as well as those dependent on housing purchases by the population like Samolet and PIC.
Despite the negative market reaction, Nikita Bredikhín, a leading investment analyst at Go Invest, positively assesses the Moscow Exchange Index's medium-term prospects and sees bank stocks as beneficiaries of a key rate cut. The head of investment consulting at Alor Broker, Aleksei Antonov, also believes that the uncertainty surrounding potential U.S. sanctions is heavily influencing market participants' sentiment.
Mikhail Zeltzer, on the other hand, expects the Moscow Exchange Index to return to the 2900-3000 range in the medium term and reach 3200 on an annual horizon. Bredishein, however, notes that a key rate cut is negative for the ruble, considering that a tight monetary policy was the key factor in its strengthening in the first half of the year.
In conclusion, the market can fall on positive interest rate cut news when the cut signals central bank caution, ongoing risks, or weaker economic outlooks rather than unambiguously stronger growth prospects. This explains why following the Bank of Russia’s July meeting, despite the expected rate cut, cautious guidance and risks led to negative market reactions.
Antonov, an investment analyst at Go Invest, believes that the recent rate cut by the Central Bank of Russia presents an opportunity for investors to earn higher returns from bonds, suggesting it's better to receive 14-18% annually from bonds rather than nothing, or worse.
Despite Nikita Bredikhín, another leading investment analyst at Go Invest, positively assessing the Moscow Exchange Index's medium-term prospects, the market's reaction to the rate cut was not as positive as expected, with concerns about economic fundamentals and the central bank's cautious outlook affecting investor sentiment.
