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

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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.

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.

Gold

Gold Gained Ahead of Joe Biden Inauguration 2021

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Gold Gained Ahead of Joe Biden Inauguration 2021

Gold price rose from one and a half month low on Tuesday ahead of President-elect Joe Biden’s inauguration on Wednesday.

The precious metal, largely regarded as a haven asset by investors, edged up by 0.2 percent to $1,844.52 per ounce on Tuesday, up from $1,802.61 on Monday.

According to Michael McCarthy, the Chief Market Strategies, CMC Markets, the surged in gold price is a result of the projected drop in dollar value or uncertainty.

He said, “The key factor appears to be the (U.S.) currency.”

As expected, a change in administration comes with the change in economic policies, especially taking into consideration the peculiarities of the present situation. In fact, even though Biden, Janet Yellen and the rest of the new cabinet are expected to go all out on additional stimulus with the support of Democrats controlled Houses, economic uncertainties with rising COVID-19 cases and slow vaccine distribution remained a huge concern.

Also, the effectiveness of the vaccines can not be ascertained until wider rollout.

Still, which policy would be halted or sustained by the incoming administration remained a concern that has forced many investors to once again flee other assets for Gold ahead of tomorrow’s inauguration.

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Crude Oil

Crude Oil Holds Steady Above $55 Per Barrel on Tuesday

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Crude Oil Holds Steady Above $55 Per Barrel on Tuesday

Brent Crude oil, against which Nigerian crude oil is priced, rose from $54.46 per barrel on Monday to $55.27 per barrel as of 9:03 am Nigerian time on Tuesday.

Last week, Brent crude oil rose to 11 months high of $57.38 per barrel before pulling back on rising COVID-19 cases and lockdowns in key global economies like the United Kingdom, Euro-Area, China, etc.

While OPEC has left 2021 oil demand unchanged and President-elect Joe Biden has announced a $1.9 trillion stimulus package, experts are saying the rising number of new cases of COVID-19 amid poor vaccine distribution could drag on growth and demand for oil in 2021.

On Friday, Dan Yergin, vice-chairman at IHS Markit, said in addition to the stimulus package “There are two other things that are going with it … one is of course, vaccinations — in the sense that eventually this crisis is going to end, and maybe by the spring, lockdowns will be over.”

“The other thing is what Saudi Arabia did. This is the third time Saudi Arabia has made a sudden change in policy in less than a year, and this one was to announce (the) 1 million barrel a day cut — partly because they are worried about the impact of the surge in virus that’s occurring,” he said.

Also, the stimulus being injected into the United States economy could spur huge Shale production and disrupt OPEC and allies’ efforts at balancing the global oil market in 2021.

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Crude Oil

Crude Oil Pulled Back Despite Joe Biden Stimulus

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Crude Oil Pulled Back Despite Joe Biden Stimulus

Crude oil pulled back on Friday despite the $1.9 trillion stimulus package announced by U.S President-elect, Joe Biden.

Brent crude oil, against which Nigeria’s oil is priced, pulled back from $57.38 per barrel on Wednesday to $55.52 per barrel on Friday in spite of the huge stimulus package announced on Thursday.

On Thursday, OPEC, in its latest outlook for the year, said uncertainties remain high in 2021 with the number of COVID-19 new cases on the rise.

OPEC said, “Uncertainties remain high going forward with the main downside risks being issues related to COVID-19 containment measures and the impact of the pandemic on consumer behavior.”

“These will also include how many countries are adapting lockdown measures, and for how long. At the same time, quicker vaccination plans and a recovery in consumer confidence provide some upside optimism.”

Governments across Europe have announced tighter and longer coronavirus lockdowns, with vaccinations not expected to have a significant impact for the next few months.

The complex remains in pause mode, a development that should not be surprising given the magnitude of the oil price gains that have been developing for some 2-1/2 months,” Jim Ritterbusch, president of Ritterbusch and Associates, said.

Still, OPEC left its crude oil projections unchanged for the year. The oil cartel expected global oil demand to increase by 5.9 million barrels per day year on year to an average of 95.9 million per day in 2020.

But also OPEC expects a recent rally and stimulus to boost U.S. Shale crude oil production in the year, a projection Investors King experts expect to hurt OPEC strategy in 2021.

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