Bi-Weekly FICC Strategy - October 6, 2021. Surging Commodity Prices Fan Inflation Expectations

> Oil: Following the OPEC+ meeting on October 4, Brent rallied well above $80/bbl, as the group agreed to push ahead with the planned 0.4 mln bpd production increase for November, despite various reports that an increase of up to 0.8 mln bpd was being considered amid the spike in natural gas prices. We believe that all else being equal, December is the most likely time for a discussion about whether market balances justify faster production increases. For now, OPEC+ appears to have set a floor for Brent at $80/bbl, and we expect the benchmark to trade within a $80-85/bbl range in the coming weeks.> Ruble: We would expect the euro to further depreciate globally as eurozone inflation expectations rise and real sovereign yields fall. Thus, the ruble could appreciate to 83 against the euro in the upcoming two weeks, as it will be supported by a hawkish CBR and a high FX offer from exporters. This should protect the local currency from what is expected to be global dollar appreciation. Still, there is a risk of a sharp global risk-off move, as global energy prices could unanchor inflation expectations, while US lawmakers might end up raising the debt ceiling at the last minute.> OFZs and ruble rates: We believe that the current weakness could persist for some time, as surging oil and gas prices have kept pushing inflation expectations higher, which in turn has kept global bond investors on edge. That said, we see ruble rates as excessively high from a fundamental standpoint, especially in longer tenors.> EM bonds: We expect sovereign Eurobond quotes to stabilize around current levels over the short term, though we could see spreads widen further if US Treasury yields start heading north again.> FSU sovereign Eurobonds: We think that spreads of FSU sovereign Eurobonds should consolidate close to current levels.> FSU corporate and banking Eurobonds: Negative dynamics prevailed in the FSU corporate and banking space over the last two weeks, and we expect continuing pressure amid rising dollar rates and downbeat sentiment toward EM debt.> FSU primary Eurobond market: Russian issuers are still active, but high market volatility could compel them to take a pause.