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Fitch Downgrades Nigeria’s Credit Rating

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Fitch Ratings

International rating agency, Fitch Ratings Inc., yesterday downgraded Nigeria’s credit ratings, citing the likelihood of the country to miss its debt obligations.

In a statement issued, yesterday, Fitch said: “The outlooks are stable. The issue ratings on Nigeria’s senior unsecured foreign-currency bonds have also been downgraded to ‘B+’ from ‘BB-’. The Country Ceiling has been revised down to ‘B+’ from ‘BB-’ and the Short-Term Foreign-Currency IDR affirmed at ‘B’.”

The new ratings imply that though Nigeria is currently meeting financial commitments, there is a limited margin of safety and capacity for continued timely payments is contingent upon a sustained, favourable business and economic environment.

Explaining the rationale for downgrading the country’s rating, Fitch said: “Nigeria’s fiscal and external vulnerability has worsened due to a sharp fall in oil revenue and fiscal and monetary adjustments that were slow to take shape and insufficient to mitigate the impact of low global oil prices. Renewed insurgency in the Niger Delta in the first half of 2016 has lowered oil production, magnifying pressures on export revenues and limiting the inflow of hard currency.

Forecast

Fitch forecasts Nigeria’s general government fiscal deficit to grow to 4.2 percent in 2016, after averaging 1.5 percent in 2011-15, before beginning to narrow in 2017.

“Despite expected increases in non-oil revenue, the agency expects overall general government revenue to drop to just 5.5 percent of GDP, from an average of 12 per cent in 2011-15.

“The fall in general government revenue represents a risk to the country’s debt profile. Fitch estimates general government debt/revenue will rise to 259 percent in 2016 from 181 percent in 2015, higher than the 223 percent median for ‘B’ rated peers.  Nevertheless, depreciation of the naira will increase the debt and debt service burden.

“On 20 June, the Central Bank of Nigeria (CBN) commenced trading on the inter-bank foreign exchange market under a revised set of guidelines that will result in a more flexible exchange rate. However, the new regime will not be fully flexible as it will still involve a parallel market as importers of 41 items are excluded from the inter-bank market, which will continue to hinder growth, capital inflows and investment, in Fitch’s view.

Uncertainty

Furthermore, the delayed change in exchange rate policy casts some uncertainty over the authorities’ commitment to a more flexible system. The CBN’s previous exchange rate policy of managing demand for hard currency and restricting access to dollar auctions at the official FX rate resulted in a significant shortage in dollar liquidity.

“Fitch expects that some continued intervention in the FX market will reduce international reserves, which were below USD27bn before the new market began trading, compared with USD34bn at end-2014. Fitch expects reserves to fall to 3.4 months cover of current external payments by end-2016. Fitch forecasts GDP growth to fall to 1.5 percent in 2016, down from 2.7 percent in the previous year, after GDP contracted by 0.4 percent year-on-year in the first quarter of 2016, stemming partly from low hard currency liquidity.  The second quarter is likely to experience a further contraction, as the resurgence of violence in the Niger Delta has brought oil production levels down to around 1.5 million barrels per day (mbpd) in May, from approximately 2.1 mbpd in January.”

The naira yesterday strengthened for the second consecutive day in the interbank foreign exchange market for spot and future transactions, while interest rate fell by more than half to 34 percent.

Data released by Financial Market Dealers Quote (FMDQ) showed that the interbank exchange rate for spot transactions rose to N281.67 per dollar yesterday from N282.8 on Wednesday, indicating N1.1 or 0.3 percent appreciation for the naira. However, the interbank exchange rates for all future transactions    remained stable.

On the other hand interest rate in the interbank money market dropped sharply by more than half in response to decision of Central Bank of Nigeria (CBN) to open its discount window for banks to use their treasury bills to fund foreign exchange purchases.

Interest rate on overnight lending fell from average of 68 per cent on Wednesday to 34 percent yesterday while interest rate on securitised lending fell to 30 per cent from 63 per cent.

Meanwhile FMDQ yesterday announced it has revised the methodology and publication standard for Nigeria Interbank Foreign Exchange (NIFEX) in line with the Principles for Financial Benchmarks of the International Organisation of Securities Commissions (IOSCO). The revised standard, the company stated, would take effect from today June 24, 2016.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Sell the Rally, Tesla falls 10%, King Dollar, Oil Falls, Nat Gas Squeeze, Gold Breaks $1800, Bitcoin Declines

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Gold - Investors King

By Edward Moya, Senior Market Analyst, UK & EMEA, OANDA

Market volatility is not going away anytime soon as the ‘buy the dip’ crowd has a new motto, ‘sell the rally’.  Today’s stock market rally did not last as corporate America reminded us that supply chain troubles persist, and profit forecasts are not providing any reasons to be optimistic.  Many traders are still processing what happened yesterday with the Fed and the reality is that they missed an opportunity. 

It is hard to aggressively maintain a bullish stance with equities when you know the Fed missed an opportunity going full hawk, which would lead to one last major surge in Treasury yields that would not yield a complete collapse in economic growth prospects as the Fed would be viewed as finally catching up in battling inflation.  Yesterday, the Fed should have ended their bond buying and clearly sent a strong signal for a March liftoff.

Tesla

Tesla shares tumbled after the electric car maker said they won’t be rolling out any new model vehicles in 2022.  Investors were excited that Elon Musk was participating on the earnings call, which many saw as a sign a big announcement was happening.  Musk is focusing on self-driving and on the Tesla-robot to work in factories.  Tesla is clearly running out of momentum and the lack of a launch of a low-budget car in the mid-$20,000 range really dampens the growth outlook as the competition tries to catch up. Tesla is still the EV king and given the chip and commodity shortage problems globally, this might be the right call for the company, but most analysts will hate it.

FX

The curve is flattening as front-end rates rise on expectations that the Fed may have to deliver more tightening.  Over the past eight Fed hiking cycles, the dollar weakened 75% of the time in the six months following the beginning of rate hikes. This time is much different than the recoveries seen in the 70s, 80s, 90s, and 2000s. Coming out of the COVID-19 pandemic and entering an unbalanced global economic recovery, with several geopolitical risks, the dollar could have some support from several opportunities that stem from some safe-haven purchases of Treasuries. The dollar outlook could appreciate further here as investors begin to price in four or five Fed rate hikes this year, but the growth potential abroad should limit that upside.

Oil

WTI crude prices reversed earlier gains as the dollar surged following better-than-expected economic data that supported the idea that the economy can handle rapid Fed rate hikes.  No one is questioning how tight the oil market remains, but there is some exhaustion after making fresh seven-year highs and that has led to some profit-taking.  The developments in Ukraine have been constructive as diplomacy continues and while progress has not been made, a period of calm could perhaps have energy traders refrain from resorting to their buy every oil dip strategy.

The focus for many in the oil space will shift to the OPEC+ policy meeting next week which should be an easy meeting that delivers another modest production increase. The political pressure is growing for OPEC+ to deliver more barrels of crude, but they will likely stick to the expected increase of 400,000 bpd for March. With some OPEC+ members struggling to reach their quotas, any oil weakness should be limited.

Nat Gas

US natural gas prices surged over 70% for February delivery as short sellers may have gotten squeezed out ahead of February expiration.  Many hedge funds were betting natural gas would go up as frigid weather sent demand soaring, but money managers were short.

Gold

Gold’s pain gets worse as investors grow pessimistic over how non-interest bearing assets may perform this year now that the Fed seems poised to deliver four or five rate hikes this year. Another round of economic data supported the tightening arguments as the US economy had the strongest year in decades, while omicron likely had a short-term impact on durable goods and pending home sales.

Gold is vulnerable to further technical selling now that the $1800 level has been breached, with $1760 providing key support.  Risk aversion will eventually lead to some flows back into bullion, but that won’t happen until this selloff is over.

Bitcoin

Bitcoin’s rollercoaster ride is not over yet as risky assets take a hit on growing expectations that the Fed could be more aggressive tightening policy this year.  The Fed got inflation wrong and the scramble to deliver interest rate hikes this year is sending the best performing assets during the pandemic tumbling. The Fed’s aggressive fight against inflation will ease once financial conditions are threatened and that is far away.  The next couple of months will remain very choppy for crypto markets but the fundamentals still support a broadening formation for the top performing cryptos.

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Another Rebound Despite Hawkish Fed

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markets energies crude oil

By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

It’s been a remarkable week so far in financial markets and it seems there’s still plenty more to come.

It’s been a tough month for investors, forced to watch on as central bank tightening expectations hammered risk appetite and, in turn, stock markets. This has been largely accepted as a consequence of inflation being allowed to run hot for too long but this week, the fightback has started.

Monday’s turnaround was incredible. The latest blow came from the geopolitical arena and at one stage, it looked like investors were out for the count but they picked themselves up and somehow found the upper hand. On Tuesday, it was Microsoft that landed a late blow but once more, stock markets quickly recovered and went into the Fed decision on the front foot.

By the time Powell arrived on the scene and delivered what could have been the knockout punch, investors were full of belief and today we’re seeing the benefit of the fightback earlier in the week. Rather than rolling over, defeated at the thought of five Fed hikes next year, investors are seizing on the lower valuations and the US has kicked off trading on Thursday on a strong note.

Whether that can be sustained over the coming weeks, we’ll see, but this week will give investors more confidence. Naturally, it’s helped by data showing the economy grew by 6.9% in the last quarter, capping off a strong year of growth, which along with a tight labour market may offer encouragement that higher inflation and interest rates won’t derail the recovery in 2022.

Oil has sight set on $100

Oil prices are making decent gains again on Thursday, with Brent once more above $90 which is naturally leading to talk of $100 oil and when it will happen. The environment continues to be very bullish for oil prices, given supply issues within OPEC+, strong demand, and now, geopolitical risk premiums. It’s hard to see what’s going to stand in the way of triple-digit oil, especially if we see no diplomatic breakthrough between Russia and the West any time soon. And based on Russia’s response to their proposals, it doesn’t seem a breakthrough is on the horizon.

Gold pummelled by hawkish Fed

Stock markets certainly took the Fed decision better than gold did, with the yellow metal falling 1.6% on Wednesday and now another 0.5% today. It seems that weeks of traders embracing gold like an old friend that offers inflation protection have quickly unwound and it’s been quickly cast aside. While it has found some support around $1,800 today and may remain supported to some extent out of fear that even five hikes won’t do it, it’s certainly fallen out of favour and may have peaked for now.

Bitcoin making a comeback?

Bitcoin is certainly enjoying the relief that this week has brought. The cryptocurrency was getting into dangerous territory but has recovered well as sentiment has improved and now looks in a much more comfortable position. Of course, volatility is still here and there’s plenty of underlying anxiety in the market that could see bitcoin tumble again but suddenly, $40,000 is looking more vulnerable than $30,000. A move above here could be the catalyst that the crypto crowd has been craving.

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Fed Must Not Fail on Inflation AGAIN With Too Many Hikes

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Inflation - Investors King

The U.S. Federal Reserve has already failed on inflation, they must not do so again by “hitting the brakes too hard with too many rate hikes,” affirms the CEO of one of the world’s largest independent financial advisory, asset management and fintech organisations.

The comments from deVere Group’s Nigel Green follow the world’s most influential central bank on Wednesday refusing to rule out an aggressive run of interest rate rises as he all but confirmed the first increase would be implemented in March.

He says: “As was widely expected by the markets, the Fed –  now in hawkish mode – has practically green-lit a rate rise for the first time in three years in March as it tries to take on surging inflation, which is running at its hottest in 40 years.

“The Fed admitted that inflation may not drop toward its pre-pandemic levels any time soon, and that the rise in prices could, in fact, speed-up.

“Why, then, did the world’s most powerful central bank not act sooner to stem this off quicker?

“This grand scale inaction must be the biggest miscalculation in the Fed’s history.”

He continues: “However, now the debate is focusing on how fast the U.S. central bank will move toward policy normalization.”

Some leading experts on Wall Street are saying there could be up to five rate hikes in 2022, others are now suggesting even more than this.

“I would urge the Fed not to fail on inflation again by hitting the brakes with too many rate hikes,” says Nigel Green.

“The excess money in the system will come out fast. There’s a real risk that numerous interest rate hikes would cause a recession and may not even slow inflation as the soaring prices are triggered by supply chain issues which the Fed’s hikes will not solve.”

At Wednesday’s meeting, the Chair Jerome Powell swerved a question about whether the Federal Open Market Committee (FOMC) would raise rates at all subsequent meetings this year, which would mean seven increases in 2022.

The deVere CEO concludes: “With booming demand, snarled supply chains and high levels of wage growth, the Fed might be tempted to act too fast with rate hikes this year.

“But such moves could turn out to be a masterclass in the law of unintended consequences.”

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