Russia\u2019s industrial output fell 0.7% year on year in May, reversing course against market expectations for a 1.6% rise. The print points to weaker factory activity going into mid-year, after earlier momentum proved hard to sustain.<\/p>\n
The gap between the actual reading and the forecast was 2.3 percentage points, setting a clear downside surprise for the month. No further breakdown was provided in the release.<\/p>\n
The unexpected 0.7% drop in Russia’s May industrial output, when a 1.6% expansion was expected, is a clear bearish signal. This data points to a deeper weakness in the economy than the market has priced in. We see this as an opportunity to position for further declines in Russian-linked assets over the next several weeks.<\/p>\n
This economic fragility puts immediate pressure on the Russian Ruble. With the currency already showing recent weakness and touching 102 per U.S. dollar, we are looking at futures contracts that would profit from it weakening further. Historically, industrial output misses of this magnitude have often preceded currency devaluation, making a move towards 105 a realistic target.<\/p>\n
For equities, we anticipate this news will weigh on the MOEX Russia Index, which has been trading sideways near the 3,200 level. Buying put options on the index or related ETFs provides direct downside exposure with a defined risk. The data implies that sectors outside of state-sponsored military production are contracting, which could lead to disappointing corporate earnings.<\/p>\n
We also expect implied volatility to rise as this surprising data increases market uncertainty. Periods of negative economic news, especially during tense geopolitical times, have historically led to volatility spikes. This makes long volatility strategies, such as buying straddles on key Russian stocks, an attractive way to trade the potential for a large price swing.<\/p>\n
A sputtering domestic economy makes Russia more dependent on its commodity exports for revenue. While Brent crude is holding around $85 a barrel, this internal weakness means any drop in global oil prices would hit Russia’s budget particularly hard. We are therefore cautious on energy markets and are using options to hedge against a potential dip in crude prices below the $80 mark.<\/p>\n\n\n\n