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Russian equities saw heavy trading Tuesday, with total volume exceeding $1 billion...

Russian equities saw heavy trading Tuesday, with total volume exceeding $1 billion. The ADR segment was dominated by the major oil stocks, with Yukos (-3.4%) under intense pressure on the latest wave of negative news. Nevertheless, the market was stable overall (RTS Index -0.1%) as other major stocks posted gains ? led by Gazprom(ADS +3.4%, locals +2.3%) and Norilsk Nickel +2.3%). UES (+1.6%) and LUKoil (+1.7%) were also strong performers. S&P?s one-notch sovereign foreign currency rating upgrade triggered a brief spike, but does not change the existing picture dominated by liquidity on one side and mounting fears over Yukos on the other. The contest between those two factors remains quite evenly matched, with the negative (Yukos) side looking set to gain the upper hand for the remainder of the week.

Russian external debt ended the day flat yesterday, which confirms the view that S&P's decision yesterday to raise Russia's rating from 'BB' to 'BB+' (one notch below investment grade) was already priced in by the external debt market. The latter is currently waiting for news from the FOMC meeting. The EMBI+ Russia Index gained 0.1% yesterday with its spread widening by 5 bp to 245.

Domestic sovereign rouble bonds (GKOs and OFZs), which are only traded on MICEX, didn't have sufficient time to react to the upgrade given that the news appeared just five minutes before close. Corporate rouble bonds added 0.5-1.0% as the upgrade furthered the current rally in the domestic debt market, which is already fuelled by the strong rouble and ample domestic liquidity.