By Josie Cox and Tommy Stubbington
Russian markets Wednesday reacted with relief to the U.S. and
the European Union adopting tougher economic sanctions against
Russia, suggesting that investors had largely prepared for the
latest measures.
But wider European stock markets fell amid some patchy earnings
reports, falling further after an upbeat reading on the economy
failed to spur gains on Wall Street.
Moscow's Micex stock index closed 0.9% higher, having climbed as
much as 2% earlier in the session. The ruble recovered from an
initial dip to trade 0.6% higher against the U.S. dollar at
35.60.
The U.S. now has sanctioned five out of Russia's six largest
state banks, but even though the measures are expected to sharply
restrict the ability of state-controlled banks such as Sberbank and
VTB Group to raise capital on European markets, their debt didn't
move dramatically.
Sberbank bond yields fell on the day, while VTB bonds edged
higher, according to Tradeweb. Russian government bond yields also
fell. Russia's dollar bond due September 2023, for example, was
yielding 4.93%, about 0.04 percentage point lower than Tuesday's
close. Lower yields reflect higher prices.
Shares in Sberbank added 0.7%, while shares in VTB, which relies
heavily on foreign-debt financing, lost 1.3%.
Barclays economists wrote in a note to clients that the
sanctions by both the EU and the U.S. appear to have been "widely
anticipated by markets."
They do highlight, however, that market issuance of Russia banks
and companies--having been light since around the end of
January--has ground to a complete standstill more recently. The
latest sanctions news, they say "can only add more pressure to an
already challenging operating and financing environment."
Vladimir Osakovskiy, an economist at Bank of America Merrill
Lynch, meanwhile notes that a rise in borrowing costs and drop in
investments into the country "could push the economy into a 0.2%
recession this year."
In addition to banks, some of the U.S. sanctions are designed to
penalize Russia's energy sector by restricting the export of
technology that could be used to expand Russia's deep-water, Arctic
offshore or shale oil production. But administration officials said
the restrictions were designed to avoid affecting current energy
production capabilities.
Shares in energy giant OAO Rosneft climbed 1.7%. Stock in BP
PLC, which owns a near 20% stake in the Russian state-controlled
oil producer, lost 0.5%.
Derek Halpenny, European head of currency research at Bank of
Tokyo-Mitsubishi UFJ Ltd., similarly noted that the possible
severity of them should not be underestimated.
"This latest wave of sanctions certainly appear to be the
toughest yet and given the Russian economy was already on the verge
of recession, these latest measures will likely tip the economy
into a contraction that could turn severe," he said.
Portfolio manager Robert Simpson at Insight Investment said that
many of the sanctioned entities, including the government, have
healthy balance sheets, meaning that the outstanding debt looks
cheap.
"But that is only on the assumption that the political situation
doesn't deteriorate from here and there's no further ramping up of
sanctions," he said. He added that he is currently running a
negative position in both Russian credit and the Russian currency.
Insight manages about $3.4 billion in emerging market debt.
Elsewhere, the pan-European Stoxx Europe 600 index closed 0.5%
lower.
Firms including Total and Holcim were among the biggest fallers
after reporting earnings that disappointed investors.
During the second-quarter earnings season so far, more than 47%
of companies that have published results have fallen short of
market profit expectations. That compares with a figure of just
under 24% for the S&P 500.
This gap is beginning to worry some investors.
"Whilst the Eurozone recovery has been on track so far,
disappointing earnings pose a huge risk to this story," said Bill
Street, Head of Investments EMEA at State Street Global
Advisors.
"We expect a massive loss of confidence in Europe if the second
quarter earnings season disappoints," Mr. Street added.
Ben Edwards
contributed to this article
Write to Josie Cox at josie.cox@wsj.com and Tommy Stubbington at
tommy.stubbington@wsj.com