Global Markets Tumble As Oil Prices Dip To Five Year Lows

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Monday, March 09, 2020 /07:00 PM / TheAnalyst/Proshare Research / Header Image Credit: The Guardian 

 

Global commodities, equities and fixed income markets have gone into free falls as the Organization of Petroleum Exporting Countries (OPEC) and other non-OPEC countries failed to reach agreement on a cut back in oil output by an additional 1.6m barrels per day. The failure of Saudi Arabia and Russia to agree on further oil supply cuts has sent global markets into turmoil. The last time oil prices was as low as US$26 was in February 2016. In April 2016 oil prices had climbed back up to US$36 per barrel or the same as Monday's close (see chart 1 below).


Chart 1 Oil Price movement 2015-2020

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Source: Bloomberg, FT


Trading activities on Monday 09, March 2020 saw asset classes suffer massive losses. To be sure, trading business got so bad that the New York Stock Exchange (NYSE) had to impose a 15-minute circuit breaker to allow bearish market sentiments cool off as equity prices plunged. The Dow Jones dropped by 1,900 basis points or -7% as Saudi Arabia announced oil price cuts to retain global market share. The drop in the Dow Jones Industrial average was -19% off its February 2020 peak. Stocks tumbled sharply in Asia and Europe as the implications of Saudi's market price-adjustment started to sink in (see Chart 2 below).


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Chart 2 European Stock Price Movement Q1 2019-Q1 2020

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Source: Bloomberg, FT


The shock -21% cut in Saudi Arabia oil price signaled a break in OPEC solidarity and a demonstration of the Arab country's aggressive intention to retain market share no matter the cost. The consequence of Saudi Arabia's beggar-thy-neighbour oil policy may prove dire for global market stability as marginal oil producers are forced out of the market while Oil Company majors revise investment plans and pull back on crude oil processing.


Russia's Finance Ministry has said that Russia had enough financial resources to cover budget shortfalls amid oil prices at between US$25 and US$30 per barrel for the next six to ten years. The announcement by the finance ministry demonstrated the preparedness of a Russian standoff against the Saudi Arabian market shock.


Nigeria in A Bind

Nigeria is still stunned by the unravelling of the oil market and the plunge in oil prices. The US$57 per barrel assumption upon which the 2020 budget rests has been blown to smithereens as oil prices closed around US$36 per barrel at the end of trading on Monday.  The consequence of the fall in oil prices is a reduction in revenue expectations and a widening of the 2020 fiscal deficit. To cover the deficit the Federal Government of Nigeria (FGN) may need to increase the sale of treasury bills at higher yields (or lower bond prices). The expected reduction in revenue would also affect the country's foreign reserves and reduce the Central Bank of Nigeria's (CBN's) ability to continue with its heterodox foreign exchange management strategy. A few things are clear:

  • Exchange rate adjustments would become necessary between Q1 and Q2 2020.
  • Interest rates will go back up as the CBN tightens monetary policy. This may involve an increase in the monetary policy rate (MPR) from 13.5% to between 14% and 15%
  • Banks may see cash reserve ratios rise from 27.5% to 30%
  • Fiscal borrowings will be reviewed as lenders re-price loans to Nigeria against new credit rating outlooks
  • Federation Account Allocation Committee (FAAC) amounts shared by the three tiers of governments on a monthly basis will fall. Sub national governments with relatively low internally generated revenue (IGR) will see a slump in their monthly incomes affecting both recurrent and capital expenditures. States with high debt to IGR ratios will find themselves struggling without success to cover recurrent spending. The reasonable response in fairer times would be to increase IGR, but with the economy contracting this would be difficult or perhaps impossible (see table 1 below).  


Table 1 State Debt/IGR Ratios

 

State

Debt/IGR

1

Adamawa

14.45

2

Yobe

6.34

3

Jigawa

3.80

4

Zamfara

7.30

5

Abia

4.52

6

Imo

6.64

7

Delta

5.19

8

Cross-river

9.63

9

Osun

18.09

10

Lagos

1.83

11

Kaduna

3.44

12

Ekiti

29.65

Source: NBS, Data reference is to Q3 2018


  • Nigeria's GDP growth will fall below 2% per annum in 2020 and with population growth at 2.6% the prognosis for the country is unflattering
  • Nigeria's subsidy should narrow at an oil price of US$36 per barrel and disappear at a price of US$31 per barrel. The lower international price would cushion the adverse effect of domestic subsidies on government's fiscal balance.

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Fixed Income Blues

The fixed income domestic market saw yields spike on Monday as investors engaged in large sell-offs. Investors afraid of lower credit ratings for Nigeria's public debt instruments decided to exist the fixed income market as prices tumbled and yields went up.

 

Equities Deep Dive

The local equities market went into a tailspin at the close of business on Monday as market traders went into full bearish mode on the back of news of Saudi Arabia's oil price cut. The market dropped to a year-to-date (YTD) yield of -4.5% and between Friday 06, March 2020 and Monday 09, March 2020, the bourse fell -2.41%.

 

Table 2: Global Stock Markets

Exchanges

Countries

Mar-06

Mar-09

% Chg

KS11

South Korea

1955.6

1954.77

-0.04%

Hang Seng

Hong Kong

25206.73

25040.46

-0.66%

SSE 180 Index (Shanghai)

China

8514.98

8455.66

-0.70%

SSE Composite Index (Shanghai)

China

2966.72

2943.29

-0.79%

^KLSE

Malaysia

1437.29

1424.16

-0.91%

Straits Times(STI)

Singapore

2815.93

2782.37

-1.19%

All Share Index

Nigeria

26279.61

25647.54

-2.41%

^JKSE

Jakarta

5266.28

5136.81

-2.46%

MICEX Index

Russia

2816.7

2719.51

-3.45%

Nasdaq

USA

8575.62

8221.97

-4.12%

S&P500

USA

2972.37

2836.02

-4.59%

Dow Jones Ind. Avg.

USA

25864.78

24650.37

-4.70%

NIFTY

India

10989.45

10451.45

-4.90%

Nikkei 225

Japan

20749.75

19698.76

-5.07%

IPC

Mexico

41388.78

39072.23

-5.60%

Swiss Market Index

Switzerland

9736.82

9189.87

-5.62%

FTSE 100

UK

6462.55

6051.88

-6.35%

BEL-20

Belgium

3435.09

3209.53

-6.57%

AEX General

Netherlands

531.29

495.49

-6.74%

DAX

Germany

11541.87

10751.32

-6.85%

CAC 40

France

5139.11

4771.21

-7.16%

ATX

Austria

2615.56

2394.93

-8.44%

S&P/TSX Composite Index

Canada

16553.99

15114.93

-8.69%

Bovespa

Brazil

97996.77

89271.13

-8.90%

MerVal

Argentina

35222.43

31905.29

-9.42%

S&P/MIB Index

Italy

23320.2

20531.5

-11.96%

Source: Proshare Research, Rediif Money

 

Table 3: African Stock Markets

Exchanges

Countries

Mar-06

Mar-09

% Chg

Zimbabwe

All Share Index

464.81

471.34

1.40%

Malawi

 Malawi All Share Index 

29187

29193.8

0.02%

Botswana

DCI

7598.73

7599.43

0.01%

Botswana

LASI

839.66

839.71

0.01%

Botswana

FCI

1551.35

1551.35

0.00%

Botswana

DRSI

1088.71

1088.71

0.00%

Botswana

FRSI

772.09

772.09

0.00%

Kenya

FTSE NSE Kenya Govt. Bond

96.49

96.49

0.00%

Ghana

GSE Composite Index

2175.58

2175.58

0.00%

Tanzania

Dar es salaam Stock Exchange All Share Index

2055.94

2055.91

0.00%

BRVM

BRVM-10

136.74

136.42

-0.23%

BRVM

BRVM-C

146.46

145.73

-0.50%

Kenya

FTSE ASEA PANAFRICAN Index

1258.65

1243.33

-1.22%

Tunisia

Tunisia BVMT Index

7112.99

6922.09

-2.68%

Kenya

20 SHARE INDEX

2400.56

2335.95

-2.69%

South Africa

Industrial 25

68491.2

65982.4

-3.66%

South Africa

Financial 15

13363.7

12809.8

-4.15%

Kenya

FTSE NSE Kenya 15 Index

208.76

198.23

-5.04%

Kenya

ALL SHARE INDEX

156.17

147.98

-5.24%

Casablanca

Casablanca

11474

10806.4

-5.82%

South Africa

JSE All Share Index

52064.7

48990.4

-5.90%

Kenya

FTSE NSE Kenya 25 Index

215.92

202.98

-5.99%

South Africa

JSE Top 40 Tradable Index

46759.7

43842.7

-6.24%

Mauritius

SEMTRI

7838.11

7253.58

-7.46%

Mauritius

SEMDEX

2048.46

1895.69

-7.46%

Egypt

EGX 70

1172.87

1083.43

-7.63%

Egypt

EGX 100

1266.78

1167.19

-7.86%

Mauritius

SEM7

401.04

367.28

-8.42%

Egypt

EGX20 Caped

14134.7

12615.1

-10.75%

Egypt

EGX 30

12347.7

10983.5

-11.05%

South Africa

Resource 10

42815.3

37888.1

-11.51%

Source: Proshare Research, Rediif Money

 

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