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PBOC Seen Raising Money Rates Twice in 2017 to Cut Leverage

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  • PBOC Seen Raising Money Rates Twice in 2017 to Cut Leverage

China’s central bank will keep a tight rein on money-market rates this year, raising the cost of short-term funds at least twice in moves that will pressure bonds.

That’s the consensus view in a survey of 29 fixed-income traders and analysts, with 20 saying that the People’s Bank of China will increase open-market operation rates by 10 basis points in the second quarter itself. Government bonds will decline for the third quarter in a row in the April-June period, according to the March 24-27 poll. That would be the longest run of losses in six years.

China’s policy makers are walking a fine line between driving money rates higher to reduce leverage in the financial system and preventing a cash crunch. They have already raised the cost of reverse-repurchase agreements twice this year, while benchmark interest rates have been on hold since 2015. A separate survey predicted that the PBOC will keep both benchmark borrowing costs and bank reserve-requirement ratios unchanged throughout the year.

“China is far from the end of efforts to squeeze out bubbles in the financial system,” said David Qu, a Shanghai-based markets economist at Australia & New Zealand Banking Group Ltd. “The PBOC will to some extent follow the Federal Reserve in tightening to keep the rate gap largely steady.”

The overnight repo rate on the Shanghai Stock Exchange jumped as much as 21.67 percentage points to 32 percent, the highest level since Dec. 27. The benchmark Shanghai Composite Index declined 1 percent.

The PBOC kicked off its latest tightening cycle in August after broad monetary loosening helped fuel an unprecedented, 11-quarter bond rally. The central bank resorted to injecting longer-term funds in open-market operations, and raising the cost of loans to commercial lenders. On March 16, while explaining the rationale for its latest open-market borrowing cost increase after a Fed hike, the PBOC said higher rates would help offset a drop in real interest rates and maintain a yield advantage over the U.S.

Taming Credit

PBOC Governor Zhou Xiaochuan told reporters during the National People’s Congress earlier this month that taming the credit binge will be a “medium-term process.” At the Boao forum held over the weekend, he said one of the priorities in China’s structural reforms in the short- and medium-term is lowering leverage.

“The funding market will become more volatile in the second quarter and there will be more frequent hiccups,” said Yan Yan, the Shanghai-based head of fixed income trading at China Guangfa Bank Co. “The pivotal level of funding costs will rise further.”

The survey’s results suggest that:

  • The seven-day repurchase rate, a gauge of interbank funding availability, will average 2.70 percent in the April-June period, compared with 2.61 percent so far this year. The rate closed at 2.81 percent on Thursday.
  • The 10-year sovereign bond yield will end the second quarter at 3.4 percent, according to the median estimate. That compares with a yield of 3.27 percent on Wednesday.
  • Nine respondents forecast that the sovereign yield curve will bear steepen, while eight expect rangebound trade and seven see a bear flattening.
  • The PBOC will boost the costs of funds offered in reverse-repurchase operations, according to all but two of the 29 respondents.
  • The credit premium of five-year AA grade corporate bonds over top-rated peers will widen by as much as 50 basis points, according to 18 respondents. The gap was last at 49 basis points, the narrowest since at least 2010.
  • The participants in the Bloomberg survey included China Guangfa Bank Co., Hengfeng Bank Co., Genial Flow Asset Management Co., Mao Dian Asset Management, JD Finance, Tebon Securities Co., SDIC Essence Futures Co. and Nanhua Futures Co. Twenty-one traders and analysts asked not to be identified as they are not allowed to comment on the matter publicly.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, 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 Decline for Third Consecutive Day on Weaker Economic Data and Inventory Concerns

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Oil prices extended their decline for the third consecutive day on Wednesday as concerns over weaker economic data and increasing commercial inventories in the United States weighed on oil outlook.

Brent oil, against which Nigerian oil is priced, dropped by 51 cents to $89.51 per barrel, while U.S. West Texas Intermediate crude oil fell by 41 cents to $84.95 a barrel.

The softening of oil prices this week reflects the impact of economic headwinds on global demand, dampening the gains typically seen from geopolitical tensions.

Market observers are closely monitoring how Israel might respond to Iran’s recent attack, though analysts suggest that this event may not significantly affect Iran’s oil exports.

John Evans, an oil broker at PVM, remarked on the situation, noting that oil prices are readjusting after factoring in a “war premium” and facing setbacks in hopes for interest rate cuts.

The anticipation for interest rate cuts received a blow as top U.S. Federal Reserve officials, including Chair Jerome Powell, refrained from providing guidance on the timing of such cuts. This dashed investors’ expectations for significant reductions in borrowing costs this year.

Similarly, Britain’s slower-than-expected inflation rate in March hinted at a delay in the Bank of England’s rate cut, while inflation across the euro zone suggested a potential rate cut by the European Central Bank in June.

Meanwhile, concerns about U.S. crude inventories persist, with a Reuters poll indicating a rise of about 1.4 million barrels last week. Official data from the Energy Information Administration is awaited, scheduled for release on Wednesday.

Adding to the mix, Tengizchevroil announced plans for maintenance at one of six production trains at the Tengiz oilfield in Kazakhstan in May, further influencing market sentiment.

As the oil market navigates through a landscape of economic indicators and geopolitical events, investors remain vigilant for cues that could dictate future price movements.

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Commodities

Dangote Refinery Cuts Diesel Price to ₦1,000 Amid Economic Boost

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Aliko Dangote - Investors King

Dangote Petroleum Refinery has reduced the price of diesel from ₦1200 to ₦1,000 per litre.

This price adjustment is in response to the demand of oil marketers, who last week clamoured for a lower price.

Just three weeks ago, the refinery had already made waves by lowering the price of diesel to ₦1,200 per litre, a 30% reduction from the previous market price of around ₦1,600 per litre.

Now, with the latest reduction to ₦1,000 per litre, Dangote Refinery is demonstrating its commitment to providing accessible and affordable fuel to consumers across the country.

This move is expected to have far-reaching implications for Nigeria’s economy, particularly in tackling high inflation rates and promoting economic stability.

Aliko Dangote, Africa’s richest man and the owner of the refinery, expressed confidence that the reduction in diesel prices would contribute to a drop in inflation, offering hope for improved economic conditions.

Dangote stated that the Nigerian people have demonstrated patience amidst economic challenges, and he believes that this reduction in diesel prices is a step in the right direction.

He pointed out the aggressive devaluation of the naira, which has significantly impacted the country’s economy, and sees the price reduction as a positive development that will benefit Nigerians.

With this latest move, Dangote Refinery is not only reshaping the fuel market but also reaffirming its commitment to driving positive change and progress in Nigeria.

The reduction in diesel prices is expected to provide relief to consumers, businesses, and various sectors of the economy, paving the way for a brighter and more prosperous future.

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Crude Oil

IEA Cuts 2024 Oil Demand Growth Forecast by 100,000 Barrels per Day

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Crude Oil

The International Energy Agency (IEA) has reduced its forecast for global oil demand growth in 2024 by 100,000 barrels per day (bpd).

The agency cited a sluggish start to the year in developed economies as a key factor contributing to the downward revision.

According to the latest Oil Market Report released by the IEA, global oil consumption has continued to experience a slowdown in growth momentum with first-quarter growth estimated at 1.6 million bpd.

This figure falls short of the IEA’s previous forecast by 120,000 bpd, indicating a more sluggish demand recovery than anticipated.

With much of the post-Covid rebound already realized, the IEA now projects global oil demand to grow by 1.2 million bpd in 2024.

Furthermore, growth is expected to decelerate further to 1.1 million bpd in the following year, reflecting ongoing challenges in the market.

This revision comes just a month after the IEA had raised its outlook for 2024 oil demand growth by 110,000 bpd from its February report.

At that time, the agency had expected demand growth to reach 1.3 million bpd for 2024, indicating a more optimistic outlook compared to the current revision.

The IEA’s latest demand growth estimates diverge significantly from those of the Organization of the Petroleum Exporting Countries (OPEC). While the IEA projects modest growth, OPEC maintains its forecast of robust global oil demand growth of 2.2 million bpd for 2024, consistent with its previous assessment.

However, uncertainties loom over the global oil market, particularly due to geopolitical tensions and supply disruptions.

The IEA has highlighted the impact of drone attacks from Ukraine on Russian refineries, which could potentially disrupt fuel markets globally.

Up to 600,000 bpd of Russia’s refinery capacity could be offline in the second quarter due to these attacks, according to the IEA’s assessment.

Furthermore, unplanned outages in Europe and tepid Chinese activity have contributed to a lowered forecast of global refinery throughputs for 2024.

The IEA now anticipates refinery throughputs to rise by 1 million bpd to 83.3 million bpd, reflecting the challenges facing the refining sector.

The situation has raised concerns among policymakers, with the United States expressing worries over the impact of Ukrainian drone strikes on Russian oil refineries.

There are fears that these attacks could lead to retaliatory measures from Russia and result in higher international oil prices.

As the global oil market navigates through these challenges, stakeholders will closely monitor developments and adjust their strategies accordingly to adapt to the evolving landscape.

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