Tuesday, May 27, 2014

Russia and the U.S. retail economy

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.