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Two Months on, Flexible FX Policy Fails to Lift Equities Market

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Stock - Investors King

The Nigerian equities market has recorded negative performance two months after the implementation of a flexible foreign exchange (FX) policy by the Central Bank of Nigeria (CBN). This is contrary to expectations that the policy will spur inflow of foreign portfolio and domestic investors and lift the market.

The market has shed N151billion in market capitalisation between June 15 when the policy was announced and last Friday. One of the reasons cited for low portfolio inflow into the market was uncertainty about the nation’s FX policy and the CBN’s capital controls.

Available data from the NSE revealed that Foreign Portfolio Investment (FPI) accounted for 40.43 per cent (N189.45 billion) of total transactions on the nation’s bourse in the first five months of the year, down from 57.04 per cent (N519.34 billion) during the same period the previous year.

So when the CBN announced a flexible policy, it was highly expected that the market would rebound on positive reactions to the policy by foreign and domestic investors.

Although reactions were positive initially, leading to a rise of 1.12 per cent in the Nigerian Stock Exchange (NSE) All-Share Index (ASI) from June 20 to 30, it began a down ward trend since July to last Friday. In all, the market has declined by N151 billion in capitalisation, falling from N9.579 trillion pre-flexible policy to N9.428 trillion last Friday. The ASI has fallen by 1.6 per cent, from 27,891.96 to 27,450.91.

A market analysts, Jude Fejokwu said the market had a transient boost during the last nine trading days of June before returning to a persistent decline after global markets recovered post-Brexit.

Looking at the impact of the policy on the market, analysts at Cordros Capital Limited (CCL), said although the CBN may have responded to the agitations of the FPIs with its decision to lift restrictions on the local currency, early signs since the kick-off date show that the programme has had no immediate impact on FPI activities in equities.

“FPI consensus is that the Naira is not sufficiently devalued at N282-285/US$. Overlaying this on reports from the grapevine that the liquidity of the local currency exchange rate is still (indirectly) largely under the control of the apex bank (judging by the relative stability of the NGN) risks Nigeria from being eliminated from the MSCI Frontier Market Index at the next index review in September and further dampens expectations of expansionary foreign investment flows into Nigeria’s risky assets in the near term,” they said.

The hike in the Monetary Policy Rate to 14 per cent also had a negative impact on the equities market. According to analysts, they expect attractive yields in the fixed income market (as a result of the hike in MPR) to shift investors focus from equities.

“Also, lower oil price and lack of FX liquidity are expected to continue to dampen economic and corporate outlook. We believe that all these factors will weigh on investors’ confidence in the equities market,” they added.

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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Markets

Knot-Tying Masterclass Continues

One of the more pleasing aspects of being aboard a slow boat into the rainforests of Borneo these past few days was the complete loss of mobile telephony signals.

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By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA

One of the more pleasing aspects of being aboard a slow boat into the rainforests of Borneo these past few days was the complete loss of mobile telephony signals. The temptation to look at emails, chats, social media, or news from the markets was compulsorily removed, thanks to the national park being bigger than all of Bali. Phones (sorry; devices) become mere cameras to capture orangutans and others, or scenery for posterity. Experiences are experienced instead of captured for the “Gram, books are read, conversations are had. I could have done without the leeches and insect bites, but that’s all part of nature’s plan, and if I’m honest, in my long career in the great game we call the financial markets, I’ve noticed they attract plenty of leeches and biting insects of their own.

I certainly haven’t missed much in my short absence. Yes, volatility remains elevated across every asset class to be sure, although a US holiday overnight meant a 12-hour break from the noise. (New Yorkers don’t do 8-hour days, lunch is for wimps) What is clear is that the strategy of watching the rooster fight from the sidelines instead of getting involved remains the sensible one. The financial markets continue to tie themselves in knots so complicated, that they would give even the saltiest mariner a headache, as they try to price in a recession no recession and its impact on asset prices. Nobody is saying it, but really, it is a cover for looking for an excuse to pick the low in the stock market, which is struggling still to cope with the transition back to the real world after being back-stopped by the world’s central bank for the past 20 years.

Other asset classes are trying to price in a recession as well. US 10-year yields are now back to near 3.0% and I must say I got this one completely wrong, I thought it would be nearing 4.0% by now. That said, the US yield curve from 2-year to 30-year continues to flatten dramatically, with only a 24 bps difference as of Friday. We seem to be on the way to an inversion sooner than later, signalling a recession. Not much of a reason to bottom-fish equities I’d have thought.

Oil fell by over 5.0% on Friday for much the same reason, but frankly, with Russian sanctions and OPEC’s production targets merely a fantasy on paper, we’re going to have to see things get a lot worse in the world economy to see Brent crude under $100 a barrel. That ties in nicely with my outlook that inflation may be nearing a peak, but the risk is that it stays elevated for longer than the market is pricing, even if it peaks in the US. Don’t consign stagflation to the cupboard just yet. Elsewhere inflation in the world is still on its way up, as evidenced by European data last week and yesterday’s Indonesian inflation numbers.

The crypto space is also in the Accident and Emergency department still, waiting to be seen by a doctor. Bitcoin flirted with $18,000.00 while I was away but held the crucial $17,500.00 region. The dead cat bounce to $20,000.00 isn’t inspiring confidence with another crypto lender halting withdrawals, deposits, and trading on its platform yesterday. This one, I believe, was conjuring up to 40% potential returns through the magic of Defi. Cryptos have proven to be neither a hedge for deflation, stagflation, or inflation, even gold has done a better job and that’s saying something. Nor have they usurped the US Dollar or other fiat currencies. All I can say about the crypto space is a saying I heard before the global financial crisis and used a lot during it when a bank CEO would proclaim “we have plenty of capital.” That is “there is never just one cockroach.”

Perhaps the biggest surprise is that despite US yields tanking last week on recession fears, USD/JPY remains near 136.00. That is becoming a dangerous trade in my opinion, especially if US 10 years fall below 3.0%. Still, the US Dollar remains firm across the board, with the modest recovery in risk sentiment recently not translating into material strength in Asia currencies or major currencies versus the greenback. In fact, looking at the likes of the Euro, Yen, Aussie or Won, you might argue the opposite. The price action in the currency markets is perhaps a less-than-subtle warning to temper those bullish animal spirits in other asset classes.

That said, it looks like the bottom-fishers of the equity, bond and crypto-space may hold the reins in the first past of the week. US Treasury Yellen and China Vice-Premier Liu have held a construction phone call this morning and the market is alive with speculation that US President Biden will cut tariffs on a swath of Chinese goods this week to lower inflation. ​ Following on from an impressive recovery by US manufacturing PMIs last week, China’s Caixin Services PMI leapt massively to 54.5 this morning for June, a giant recovery from May’s 41.4.

Japan’s Jibun Bank Services PMI for June also rose to 54.0 from 52.3 in May. Both China and Japan are emerging from varying degrees of virus restrictions, but the strength of the China’s PMI recovery is a surprise. Whether it can last is another matter and once again I’ll focus on China once again and beat the drum of warning. China’s covid-zero policy is NOT one and done and President Xi said as much last week. Already, a flare-up of virus cases elsewhere has led to some restrictions being reimposed. Readers should be under no illusion that flare-ups in Beijing and Shanghai will not lead to a reimposition of movement restrictions. Tread carefully on bottom-fishing in China asset markets. And I have even mentioned the still ongoing implosion in the private property developer sector there.

Elsewhere in Asia, inflation warning signs continue to make some noise. Having started the post-covid recovery later than the United States and Europe, Asia is starting to see the inflation pass-through happening. South Korean Inflation YoY for June rose to 6.0% today from 5.40% in May, you can lock and load a Bank of Korea rate hike at the next meeting, it’s just by how much. Philippine Inflation YoY for June has risen to 6.10% from 5.90% in May as well. On Friday, Indonesian inflation jumped to 4.40%, led by food inflation. An ominous development for a country of 270 million, mostly poor, citizens. Although core inflation remained benign, two of the most reluctant rate hikers, the Philippines and Indonesia, are going to be forced to act, or see pressure mounting on their currencies, causing a negative feedback loop of involuntary tightening via a lower currency. Likewise, India may need to accelerate hikes as well as soaring energy prices torpedoed the current account yesterday, which slumped to $-25.64 billion. And that’s with cheap Russian oil. This might partially explain why lower US yields are producing no peace dividend for Asian currencies against the US Dollar.

Another central bank facing the music in a couple of hours is the Reserve Bank of Australia. Home Loan and Building Permits soared yesterday, as did ANZ Job Advertisements. S&P Global Services PMI for June edged only slightly lower to 52.6, with the Composite PMI also printing at 52.6 from 52.9 last month. The lucky country remains far too lucky it seems, and despite a 50bps hike last month, the battlers aren’t going down without a fight. Another 50bps is priced in for the RBA today, and if they stay on the fence and do just 25bps, the Australian Dollar is going to have a very bad day. It will probably only book modest gains anyway with 50bps unless the RBA statement is very hawkish. There is an outside chance the RBA could look at the data and go 75bps and surprise markets, I’m not betting my remaining hair on it though.

Although I said the stock market bulls may have the momentum in the first half of the week, the first challenge to that will loom in the dark hours of tomorrow evening Singapore time. Wednesday sees the release of May JOLTs Job-Opening data, expected to still be just above 11.0 million jobs. JOLTs Job Quits should come in around 4.4 million. That is hardly consistent with a US economy on the verge of a recession although some may argue that May is now history. Junes ISM Non-Manufacturing PMI, Activity, Employment, New Orders and Non-Manufacturing sub-indexes might take the heat out of a high JOLTs number unless they surprise to the upside.

Later that evening, the FOMC Minutes are due to be released, although I would be surprised if the committee is blinking on its inflation fight yet. That would create an intolerable credibility gap that already has a few holes below the waterline after the past 12 months. Before we know it, Friday is here and another US Non-Farm Payrolls release for June. Time flies when you’re getting whipsawed every day. Jobs are expected to fall from last month’s monster 390,000 print to a still-healthy 270,000. Maybe there is some risk of downward back-month revisions, but that forecast is still not consistent with a US economy on the verge of a big slump. The scope for bond market volatility is high is “peak-Fed” has to be revised higher again. The US Dollar will lap it up like a cat with a plate of high-fat milk, but equity markets are unlikely to feel the same love.

It looks like another week to be patient and observe from the sidelines. Otherwise, strap in everybody, and keep practising those complicating sailing knots, they will be used this week.

Asian equities China tariff rally fades.

US OTC equity markets were closed overnight for the July 4th holiday, but US futures posted consistent gains as markets pinned their hopes on a reduction of US tariffs on Chinese goods this week. S&P 500 futures are 0.40% higher, Nasdaq futures have rallied by 0.85%, and Dow futures have gained 0.55%.

That theme saw Asian markets open higher this morning, but that rally seems to have faded as the session marched on. Concerns around the latest China virus flare-up and the prospect of restrictions seem to be weighing on Asian markets and rightly so. Lower tariffed goods to the US will mean little if supply chain disruptions from China occur again. That has led to a mixed day across Asia.

Japan’s Nikkei 225 is 0.55% higher today, well of the intraday highs, while South Korea’s Kospi has rallied by 1.20%. Mainland China has moved into the red, the Shanghai Composite falling by 0.25%, with the CSI 300 falling by 0.60% despite an impressive recovery by the Caixin Services PMI data. Hong Kong’s Hang Seng has now fallen into negative territory, down by 0.05%.

Singapore is 0.30% lower, with Taipei easing by 0.25%, Kuala Lumpur clinging to a 0.05% gain, while Jakarta is outperforming, rising by 0.90%. Manila has also surprised, rallying by 1.20%, with Bangkok adding 0.25%. Australia is clinging onto some of its earlier gains ahead of the RBA policy decision, with 0.50% priced in. Still, its high beta to China means it is well off earlier highs in the day. The ASX 200 and All Ordinaries are 0.30% higher.

Europe had a mixed session overnight, and with a US holiday and a slow news day, there will be little to inspire a strong direction move this afternoon. I expect a neutral opening. With US futures gaining during the US holiday, and China tariff cuts expected this week, I expect US markets to focus their efforts on this direction and open higher tonight, potentially lifting European markets later in the day.

US Dollar remains firm.

A US holiday overnight torpedoed volatility in currency markets, but overall, the US Dollar continues to maintain its gains versus the DM and EM currency space, despite insipient bullish sentiment in other asset classes and falling US yields. It seems that while markets tie themselves in knots in other asset classes, the US Dollar remains the favoured seats to watch the fun and games from in the stadium. The dollar index was almost unchanged at 1.0516 overnight, where it remains in Asia. ​ Support remains at 1.0350 and 102.50. ​ With resistance at 105.00 now eroded, the index’s next resistance is at 1.0585.

EUR/USD is steady at 1.0430 in Asia. Resistance is well and truly in place at 1.0600, followed by 1.0650. It remains uncomfortably close to the critical 1.0350 support region. Failure signals further losses to 1.0200 initially and potentially to parity in the weeks ahead.

Sterling has edged 0.10% higher to 1.2110 in Asia. A probe of the 1.2200 upside came to nought overnight and it remains initial resistance, followed by 1.2300. Support at 1.2080 and then Friday’s low at 1.1975. More important support at 1.1950 held and failure now signals a test of the 1.1400 pandemic low.

USD/JPY climbed by 0.35% to 135.70 overnight, adding another 0.35% to 136.20 in Asia. The resilience of USD/JPY continues to surprise, given the moves lower by US yields. Perhaps markets are pricing in an imminent inversion of the US yield curve and sharply higher short-term rates, but the excessive bullishness of USD/JPY is, in my opinion, becoming a dangerous trade if the US/Japan yield differential narrows. Perhaps US data this week will show a healthier US economy and put inflation-fighting back on track, perhaps not. Additionally, far too many “experts” are now calling for 140+, always a dangerous sign in my books. USD/JPY has resistance at 136.65 and 138.00, and support at 134.25 and 132.00.

Asian currencies are steady today, with a US holiday overnight giving Asian currency markets a reason to sit this session out. The US Dollar is maintaining its gains across the Asian FX space, with USD/PHP now at 55.000, while USD/IDR is approaching 15,000, and USD/KRW trading on each side of 1300.00. The India trade data did the INR no favours and USD/INR remains near record highs at 78.930 this morning. The Chinese Yuan remains a paragon of managed currency stability, thanks to components in its index slumping. USD/CNY is at 6.6935 today, comfortably in the middle of its two-month 6.6400 to 6.8100 range. If US data and/or the FOMC minutes, come in on the firmer side this week, receding recession fears and higher rate expectations will leave Asian FX vulnerable to another bout of downside pressure.

Oil is steady in Asia.

Oil price continued their recovery from Thursday’s recession-fear sell-off as the supply-demand balance in the real world continues to underpin prices in the futures market. Brent crude rose by 2.15% overnight, easing 0.35% to $113.40 a barrel in subdued Asian trading. WTI rose by 1.90% to $100.55 overnight, easing by 0.30% to $110.10 a barrel in Asia.

Notably, Brent crudes retreat last week saw its ascending 2022 trendline support at $108.50 a barrel tested and held in textbook fashion. The support line is at $109.00 today and we can reasonably assume that Brent crude’s downside is limited unless we get a couple of daily closes below it. That would open a deeper test lower, potentially extending to $100.00. On the topside, the $120.00 region looks unlikely to break thanks to global recession nerves, unless we get more negative developments related to Russia.

WTI looks the more vulnerable of the two, as recession nerves rachet up in the United States. Again, US data this week has upside risks in this respect. WTI is ranging each side of its 2022 ascending trendline support, today at $108.50 a barrel. A close below the 100-day moving average at $106.95 likely signals a test of $104.00 and potentially $100.00 a barrel. Resistance lies at $112.00 and $114.00 a barrel for now.

Gold underwhelms again.

Gold fell to $1784.00 an ounce last Thursday in what looked like a series of stop-losses going through the market after $1800.00 failed. It immediately recouped those losses and has been trading sideways around $1810.00 an ounce since then. Gold has risen slightly to $1811.00 in Asian trading today.

Overall, gold bugs will have taken a modicum of comfort that the fall below $1800.00 an ounce was short-lived, but the ensuing rally is uninspiring, to say the least. It suggests that any further US Dollar strength this week could see the downside tested once again as it refuses to react positively to the flattening and move lower by the US yield curve. The series of lower daily highs traced out over the last month continue to warn of the path of least resistance for gold.

Gold has resistance layered at $1820.00, its sloping downtrend line, then $1840.00, $1860.00, and $1880.00, the latter appearing an insurmountable obstacle. Support is at $1784.00 and then $1780.00 an ounce. Failure of the latter sets in motion a much deeper correction, potentially reaching $1700.00 an ounce.

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Crude Oil

JPMorgan Says Crude Oil Could Hit $380 a Barrel on Russia Sanctions

JPMorgan, an American multinational investment bank and financial services, had said crude oil prices could hit $380 a barrel if the United States and European sanctions force Russia to retaliate by cutting crude oil output.

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Crude oil - Investors King

JPMorgan, an American multinational investment bank and financial services, had said crude oil prices could hit $380 a barrel if the United States and European sanctions force Russia to retaliate by cutting crude oil output.

According to JPMorgan analysts, the plans of western nations to cap the price of Russian oil in a move to tighten the screws on Vladimir Putin for invading Ukraine may backfire given Moscow’s robust fiscal space. Meaning, Russia could drop its oil production by 5 million barrels without really damaging its economy and allow sanctions imposed by western nations to push crude oil to $380.

This, they said could lead to a disastrous outcome as a 3 million barrel cut on daily supplies is estimated to push London crude prices to $190 a barrel while the worst-case scenario of 5 million could force the world to start buying a barrel at $380.

“The most obvious and likely risk with a price cap is that Russia might choose not to participate and instead retaliate by reducing exports,” the analysts wrote. “It is likely that the government could retaliate by cutting output as a way to inflict pain on the West. The tightness of the global oil market is on Russia’s side.”

Meanwhile, on Monday Brent crude oil rose 55 cents, or 0.5%, to $113.2 a barrel at 2:09 pm Nigerian time after falling over $1 in early trade.

U.S. West Texas Intermediate (WTI) crude oil appreciated by 44 cents, or 0.4%, to $107.94 a barrel, after also falling $1 earlier.

“Oil fundamentals remain supportive. Strong time spreads point to a tight market and clearly OPEC is still struggling to hit its agreed output levels,” said Warren Patterson, head of commodity research at ING.

“The group appears to be battling to maintain current output levels, with production falling over June.”

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Energy

Nigeria Sells $1 Billion Worth of Natural Gas to Portugal in 2022 – NNPC

The Federal Government of Nigeria has sold natural gas worth $1 billion to Portugal in 2022, according to the Nigerian National Petroleum Company (NNPC).

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Gas-Pipeline

The Federal Government of Nigeria has sold natural gas worth $1 billion to Portugal in 2022, according to the Nigerian National Petroleum Company (NNPC).

Mele Kyari, the Chief Executive Officer, NNPC, was quoted as saying at the Nigeria-Portugal Business and Trade Forum attended by President Muhammadu Buhari.

The NNPC boss said Portugal has been purchasing Nigeria’s energy for decades now and explained that President Buhari is on a state visit to Portugal for the second United Nations Ocean Conference.

He said “President Muhammadu Buhari is on a state visit to Portugal for the second United Nations Ocean Conference.

“On the sidelines of the event, President Muhammadu Buhari is leading a high-level Nigerian business delegation to the Nigeria-Portugal Business & Trade Forum.

“On the President’s delegation is the CEO NNPC Ltd, Mallam Mele Kyari, who highlighted the age-long energy partnership between the two countries, stressing that Nigeria supplies 70 per cent of energy imports to the European nation.”

On its Twitter page, the NNPC further quoted Kyari as saying, “This year alone, we have sold over a billion-dollar worth of natural gas to Portugal.”

NNPC boss also noted that there were ample opportunities to grow the energy supply to Portugal.

He told participants at the forum that Nigeria had invested in critical infrastructure to ensure domestic gas availability and increase gas supply to the international market.

 

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