Markets

Banks Deploy N1.2trn to Govt Securities as Pressure on Exchange Rate Resumes

Published

7 years ago

August 15, 2016

Money market activities closed, weekend, with a record N1.2 trillion over subscription to the Nigerian Treasury Bills, NTB, indicating that financial institutions are cashing-in heavily on the recent jerk-up of the Monetary Policy Rates, MPR, by the Monetary Policy Committee, MPC, of the Central Bank of Nigeria, CBN.

The MPR at 14 per cent would give higher returns on investments in fixed income and government securities, with a near zero risk compared to other financial market investments and lendings to other sectors of the economy. The subscription rates for the instruments, last week, ranged from 17–18 per cent.

The investments in NTB were also coming at the backdrop of N256 billion mopped up by the apex bank in its open market operation, OMO, a development which treasury dealers said indicated that CBN’s policy was pro-government securities.

They also said the policy helped reduce demand pressure on foreign exchange market while safeguarding both the exchange rate and the external reserves.

But developments in the inter-bank foreign exchange market, last weekend, indicated a renewed pressure on the exchange rate as demands appeared to be heavily outstripping supply, a situation which forced the apex bank to intervene with supplies twice last week.

Despite the intervention, naira depreciated significantly in the inter-bank spot market, closing at N332.1/USD1.0, weekend, down from N318.9/USD1.0 previous weekend.

Also, the huge cash flow to the government securities, according to the analysts, has led to starving of funds to other sectors of the economy, especially the manufacturing sector as banks now prefer trading in fixed income money market instruments where yields have risen recently with little or no risk.

Senior Analyst at CardinalStone Partners, a Lagos-based investment house, Tiffany Odugwe, said: “Given the currently high interest rate environment following the MPC’s decision to hike the MPR to attract foreign investments, yields may rise throughout August.

“However, at currently attractive levels, healthy demand for these securities may drive yields down but not to significantly lower levels. Also, given the need to manage foreign exchange rate, we do not see the CBN relaxing its tight grip on system liquidity soon, which implies that fixed income yields will likely remain high.”

Also, analysts point to the adverse side effect of this development on the equities market as cash are being redeployed from stock market to money market instruments.

According to Odugwe, “if yields continue to inch upward or even remain at current levels, there will be a crowd out effect on the equities market. Investors will gravitate towards the relatively safer returns that fixed income securities offer and that will mean a continued dismal performance for the equities market.”

Analysts at WSTC Financial Services Limited, another Lagos-based investment house, stated: “We expect attractive yields in the fixed income market to shift investors’ focus from equities.”

Yet some of them also see a steady rise in lending rates as another downside effect of the diversion of funds to government securities.

In their reactions to this money market development analysts at Greenwich Trust Limited, another Lagos-based financial institution, said: “We expect an uptick in lending rates to the real sector from deposit money banks as the MPC has completely reversed course after monetary easing in November 2015, when the MPR was cut from 13.0 per cent to 11.0 per cent failed to generate the credit growth the CBN anticipated.”

Prime lending rates across banks have since gone beyond 20 per cent with other lending rates trending above 30 per cent in the past two weeks.

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Samed Olukoya

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Crude Oil

Oil Prices Recover Slightly Amidst Demand Concerns in U.S. and China

Published

2 days ago

December 7, 2023

Investors King

Oil prices showed signs of recovery on Thursday after a recent slump to a six-month low, with Brent crude oil appreciating by 1% to $75.06 a barrel while the U.S. West Texas Intermediate crude oil also rose by 1% to $70.05 a barrel.

However, investor concerns persist over sluggish demand in both the United States and China.

The market’s unease was triggered by data indicating that U.S. oil output remains close to record highs despite falling inventories.

U.S. gasoline stocks rose unexpectedly by 5.4 million barrels to 223.6 million barrels, adding to the apprehension.

China, the world’s largest oil importer, also contributed to market jitters as crude oil imports in November dropped by 9% from the previous year.

High inventory levels, weak economic indicators, and reduced orders from independent refiners were cited as factors weakening demand.

Moody’s recent warnings on credit downgrades for Hong Kong, Macau, Chinese state-owned firms, and banks further fueled concerns about China’s economic stability.

Oil prices have experienced a 10% decline since OPEC+ announced voluntary output cuts of 2.2 million barrels per day for the first quarter of the next year.

In response to falling prices, OPEC+ member Algeria stated that it would consider extending or deepening oil supply cuts.

Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman met to discuss further oil price cooperation, potentially boosting market confidence in the effectiveness of output cuts.

Russia, part of OPEC+, pledged increased transparency regarding fuel refining and exports, addressing concerns about undisclosed fuel shipments.

Crude Oil

Oil Prices Continue Slide as Market Skepticism Grows Over OPEC+ Cuts

Published

3 days ago

December 6, 2023

Investors King

Global oil markets witnessed a continued decline on Wednesday as investors assessed the impact of extended OPEC+ cuts against a backdrop of diminishing demand prospects in China.

Brent crude oil, the international benchmark for Nigerian crude oil, declined by 63 cents to $76.57 a barrel while U.S. WTI crude oil lost 58 cents to $71.74 a barrel.

Last week, the Organization of the Petroleum Exporting Countries and its allies, collectively known as OPEC+, agreed to maintain voluntary output cuts of approximately 2.2 million barrels per day through the first quarter of 2024.

Despite this effort to tighten supply, market sentiment remains unresponsive.

“The decision to further reduce output from January failed to stimulate the market, and the recent, seemingly coordinated, assurances from Saudi Arabia and Russia to extend the constraints beyond 1Q 2024 or even deepen the cuts if needed have also fallen to deaf ears,” noted PVM analyst Tamas Varga.

Adding to the unease, Saudi Arabia’s decision to cut its official selling price (OSP) for flagship Arab Light to Asia in January for the first time in seven months raises concerns about the struggling demand for oil.

Amid the market turmoil, concerns over China’s economic health cast a shadow, potentially limiting fuel demand in the world’s second-largest oil consumer.

Moody’s recent decision to lower China’s A1 rating outlook from stable to negative further contributes to the apprehension.

Analysts will closely watch China’s preliminary trade data, including crude oil import figures, set to be released on Thursday.

The outcome will provide insights into the trajectory of China’s refinery runs, with expectations leaning towards a decline in November.

Russian President Vladimir Putin’s diplomatic visit to the United Arab Emirates and Saudi Arabia has added an extra layer of complexity to the oil market dynamics.

Discussions centered around the cooperation between Russia, the UAE, and OPEC+ in major oil and gas projects, highlighting the intricate geopolitical factors influencing oil prices.

Crude Oil

U.S. Crude Production Hits Another Record, Posing Challenges for OPEC

Published

4 days ago

December 5, 2023

Investors King

U.S. crude oil production reached a new record in September, surging by 224,000 barrels per day to 13.24 million barrels per day.

The U.S. Energy Information Administration reported a consecutive monthly increase, adding 342,000 barrels per day over the previous three months, marking an annualized growth rate of 11%.

The surge in domestic production has led to a buildup of crude inventories and a softening of prices, challenging OPEC⁺ efforts to stabilize the market.

Despite a decrease in the number of active drilling rigs over the past year, U.S. production continues to rise.

This growth is attributed to enhanced drilling efficiency, with producers focusing on promising sites and drilling longer horizontal well sections to maximize contact with oil-bearing rock.

While OPEC⁺ production cuts have stabilized prices at relatively high levels, U.S. producers are benefiting from this stability.

The current strategy seems to embrace non-OPEC non-shale (NONS) producers, similar to how North Sea producers did in the 1980s.

Saudi Arabia, along with its OPEC⁺ partners, is resuming its role as a swing producer, balancing the market by adjusting its output.

Despite OPEC’s inability to formally collaborate with U.S. shale producers due to antitrust laws, efforts are made to include other NONS producers like Brazil in the coordination system.

This outreach aligns with the historical pattern of embracing rival producers to maintain control over a significant share of global production.

In contrast, U.S. gas production hit a seasonal record high in September, reaching 3,126 billion cubic feet.

However, unlike crude, there are signs that gas production growth is slowing due to very low prices and the absence of a swing producer.

Gas production increased by only 1.8% in September 2023 compared to the same month the previous year.

While the gas market is in the process of rebalancing, excess inventories may persist, keeping prices low.

The impact of a strengthening El Niño in the central and eastern Pacific Ocean could further influence temperatures and reduce nationwide heating demand, impacting gas prices in the coming months.