On
the global market scene, Russia has been one of the major laggards this year. The Market Vectors Russia ETF (RSX), a
reflection of the country’s stock market, fell 30% from its October 2013 high. RSX fell to its lowest level in more than four
years only two months ago and seemed to be in danger of breaking below its 2009
long-term support.
Bear
in mind that the stock market – in any country – is the single best barometer
of future business and economic conditions, as per the old Dow Theory saw. Things looked pretty bleak for Russia earlier
this spring, that is until the country caught a break from a major development
in the commodities market.
Fortunately
for Russia, the price of oil has been surging the last few weeks. Russia’s economy is heavily influenced by the
oil price due to the country’s reliance on oil and gas production and
exports. As goes the oil price, so goes
the Russian economy, according to conventional wisdom. It’s not surprising then to see Russia’s
stock market rally in response to the recent oil price spike.
Russia’s gain, however, could become America’s loss. As the price of oil rises, it makes the cost of all fuels from diesel to gasoline more expensive. In turn, rising fuel costs eventually filter down into increased costs for all consumer goods. Currently, however, the gas price hasn’t risen to unsustainable levels since the oil market rally hasn’t had time to ripple into other petroleum markets. Consumers should therefore be safe for now.
The
powers-that-be learned back in 1998 the folly of allowing oil prices to fall
too low, for it nearly brought down Russia along with the rest of the global
economy. Since then we’ve seen a global
subsidization of the oil price to artificially high levels, and most
particularly in the price of gasoline.
Whenever things start to look bad for Russia, a rally in the energy
markets always seems to come to her aid.
A
couple of useful barometers to watch in order to gauge the extent of fuel price
pressures on the economy are the stocks of FedEx Corp. (FDX) and United Parcel
Service (UPS). Both stocks are holding
up well and are as yet unfazed. Rising
fuel costs always weigh on these two key economic indicators, though, and if
FDX and UPS start to flag this summer we’ll have a “heads up” that the fuel
price increase could create problems for the retail economy.
