Rising Crude Oil Price Driving Short-Term Stability

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Domestic Scene
· The rising price of crude oil in the international market puts the Nigerian economy in a good position to maintain macroeconomic stability in the short-to-medium term

· The latest Purchasing Managers’ Index (PMI) report that the Central Bank of Nigeria (CBN) published for the month of October 2017 shows that economic activities in the manufacturing and non-manufacturing sector in Nigeria strengthened

· The Composite Non-Manufacturing Index (CNMI) expanded to 55.0 points in October 2017, from 55.3 points in September 2017

· FSDH Research believes it is time for the CBN to unify the foreign exchange rate. We recognise this may have some implications on the pump price of Premium Motor Spirit (PMS)

· We expect the inflation rate in Nigeria to drop marginally to 15.91% in October 2017 from 15.98% in September 2017

· FSDH Research expects the accretion to the external reserves to continue in the short-to-medium term as the positive macroeconomic factors further firm-up

· We expect that the yields on the Federal Government of Nigeria (FGN) Bonds should remain at the current level or trend marginally upward as the FGN encourages longer tenored funds

· We expect the stability in the economy and the increased liquidity in the foreign exchange market to lift the equity market in November 2017.

International Scene
· The Organization of the Petroleum Exporting Countries (OPEC) reviewed upwards its global growth forecast to 3.6% for 2017 in its monthly report for October 2017, from 3.5% in its September 2017 monthly report

· OPEC noted that geopolitical developments and the pace of monetary policy normalisation, particularly in the U.S and the Euro-zone, will need close monitoring

· Meanwhile, the World Bank’s Global Monthly Report, October 2017 edition, stated that the ongoing global growth moderated slightly in Q3 2017, after reaching an almost seven-year high of 3.6% (quarter-on-quarter) in Q2 2017.

Global Developments

In the countries we monitored, the prices of government bonds recorded more decreases than increases in October 2017, compared with September 2017. The 8.80% September 2023 Turkey Government Bond recorded the highest month-on-month price decrease of 4.15% to 87.80. This was followed by the 7.75% February 2023 South Africa Government Bond, with a decrease of 2.12% to 97.31. The 16.39% January 2022 Nigeria Government Bond recorded the highest month-on-month price increase of 3.32% to 105.

This was followed by the 7.60% April 2021 Russia Government Bond, with a price increase of 0.25% to 100.81. The Kenya, Russia, India, South Africa, China, and Russia Bonds closed the month at positive real yields. Other bonds we monitored closed the month at negative real yields. The Kenya Government Bond offered the most attractive real yield amongst the selected bonds in October 2017.

The United States (U.S) economy grew by 3% (quarter-on-quarter) in Q3 2017 according to the advanced estimate the U.S Bureau of Economic Analysis (BEA) released. This is marginally lower than the 3.1% recorded in Q2 2017, which was the fastest growth rate since Q1 2015. The BEA noted that the 3% growth rate was achieved despite the disruptions caused by hurricanes Harvey and Irma. The report also showed that inventories rose sharply and trade recorded the highest contribution in nearly four years amid a fall in imports.

This it said, helped to offset a slowdown in consumer spending and fixed investment and a drop in construction. The inflation rate in the U.S increased to 2.2% year-on-year (Y-O-Y) in September 2017, from 1.9% in August 2017. Meanwhile, The United States Federal Reserve (U.S Fed) kept its Federal Funds Rate (Fed Rate) unchanged at 1%-1.25% at its November 2017 meeting. It is unclear if the monetary policy stance will change in the U.S before the current Chair of the U.S Fed leaves office in February 2018.

The Global GDP

The Organization of the Petroleum Exporting Countries (OPEC) reviewed upwards its global growth forecast to 3.6% for 2017 in its monthly report for October 2017, from 3.5% in its September 2017 monthly report. Growth for 2018 was also reviewed up to 3.5% from 3.4% for the same period.

OPEC said the upward reviews for 2017 and 2018 are from the ongoing positive momentum in Q2 2017 in the Organization for Economic Cooperation and Development (OECD) growth, as well as the potential tax reform in the U.S in 2018. Other factors are: the ongoing growth dynamic in the Euro-zone; Japan, strong growth in China and India, and an improving situation in Russia.

OPEC noted that geopolitical developments and the pace of monetary policy normalisation, particularly in the U.S and the Euro-zone, will need close monitoring. It added that other downside risks to global growth outlook are the high valuations in equity and bond markets, combined with low volatility. In addition, the report stated that debt levels remain high in some key economies.

Meanwhile, the World Bank’s Global Monthly Report, October 2017 edition, stated that the ongoing global growth recovery moderated slightly in Q3 2017, after reaching an almost seven-year high of 3.6% (quarter-on-quarter) in Q2 2017. The report added that among major economies, growth in the U.S was temporarily held back by the two major hurricanes, while growth slowed in China

int added that, activity continues to expand at a robust pace in the Euro-Area, and is showing signs of continued recovery in commodity-exporting Emerging and Developing Economies (EMDEs). FSDH Research believes that the growth in the global economy will further support crude oil demand, with a positive effect on crude oil price.

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