Oil overshadows dovish US Fed as rally is lost on Nigeria
Global equities and currencies are rallying on the back of dovish remarks from Federal Reserve Chairman, Jerome Powell, who hinted at slowing rate hikes in the United States, but the party is lost on Nigeria thanks to a renewed collapse in oil prices that has dampened investor sentiment.
The S&P 500 and Dow posted their biggest percentage gains in eight months, while the Nasdaq saw its largest advance in over a month following Powell’s speech to the Economic Club of New York.
The South African, Kenyan and Egyptian stock markets all closed positive Wednesday.
The Nigerian stock market missed out of the rally, having dipped 0.48 percent Wednesday and a further 1.33 percent Thursday, according to Bloomberg data.
That compares with a 1.17 percent average jump in emerging market equities Thursday, as well as a 0.26 and 0.05 percent rise in frontier and developed market equities respectively.
At the heart of Nigeria’s inability to share in the global market rally is the decline in oil prices which threatens to pile pressure on the economy of Africa’s largest oil producer.
Brent crude, the international benchmark, fell to $59 per US dollar, a third straight week of decline and the lowest since October 2017.
The naira has weakened to a one year-low in the market-driven Investors and Exporters (I & E) window since fears over a supply glut pushed oil prices down from as high as $86 per barrel in October.
The naira was quoted at N370 per US dollar Thursday at the I & E window.
“Emerging market currencies could remain supported after dovish remarks from Federal Reserve Chairman Jerome Powell weighed heavily on the US dollar,” said Lukman Otunuga, an analyst at FXTM.
However, the Naira may struggle to reap the full benefits of a weakening dollar due to heavily depressed oil prices, according to Otunuga.
“Although expectations of the Fed raising interest rates less than expected may reduce capital outflows, the Naira remains heavily influenced by oil markets,” Otunuga added.
Sinking oil prices not only impacts government revenues, but economic growth and the nation’s ability to enact the 2019 budget which pegged the oil price at $60 per barrel.
Investors were all ears for Wednesday’s speech from Federal Reserve Chairman Jerome Powell at the Economic Club of New York.
A couple of keywords were all that was needed to boost investor appetite that sent the Dow Jones Industrial Average 617 points higher – the strongest daily rally since March.
“Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy,” said Powell.
The term “just below” is different from being “a long way from neutral” in a statement he made on October 3 when markets started falling from their peak and entering into correction territory later that month.
While it may be difficult to quantify neutral interest rates, the signal the markets got is a Fed turning dovish.
While investors still believe that a December rate hike is a done deal, they now expect only one more to come in 2019 as opposed to three suggested by the Fed’s projections from September’s meeting.
Powell also believes that growth will remain solid with low unemployment and inflation near target.
Such an environment accompanied by slower rate hikes should be supportive to risk, but given that markets are already pricing in a dovish Fed in 2019, analysts want to see improvement elsewhere to confirm that equity bulls are back in control.
The latest drop in Treasury bond yields was mainly attributed to the shift in the Fed’s outlook.
This will lower the required rate of return for equity which is good news for stocks.
However, any further drops from here, could imply that markets are becoming more fearful of other factors, including escalating trade tensions, expectations of weaker global and domestic economic growth, slower corporate earnings growth, and geopolitical risks.
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