Monday, 7 October 2019

OIL PRICES SLIP AS GLOBAL ECONOMIC OUTLOOK DARKEN

Lukman Otunuga,
FXTM Senior Research Analyst

The taps on oil prices are set to leak in the week ahead due to growing evidence of a global slowdown and rising fears of falling demand for Crude oil.

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Disappointing economic data from the US coupled with gloomy outlooks from major institutions like the World Trade Organisation, Organisation for Economic Co-operation and Development and International Monetary Fund are fanning fears over a coordinated global slowdown.

Although the commodity is attempting to rebound on Monday morning, this has nothing to do with a change of sentiment towards the commodity but Dollar weakness. Given how the dynamics influencing Oil markets have certainly swung back to demand-side factors, the path of least resistance for Oil points south.

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A flare up in US-China trade tensions is likely to re-ignite concerns over the global economy – ultimately strengthening the demand-side drivers. While geopolitical tensions may spark negative supply side shocks, this most likely will be countered by global growth fears and trade uncertainty.

What do weaker Oil prices mean for Nigeria?
Weakening oil prices will not only reduce Nigeria’s government revenues but also the ability for the nations to move forward with its 2020 budget which pegged Oil prices at $57 per barrel. If the Central Bank of Nigeria is unable to defend the Naira amid falling external reserves, hopes of an interest rate cut will fall as inflationary pressures return, especially after Nigeria’s central bank governor stated that inflation needs to slow to 9% or less before easing monetary policy.

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Some light at the end of the tunnel for emerging markets?
There is still some light at the end of the tunnel for emerging markets, but this will depend on the outcome of the high-level US-China trade talks this week. Given the unfavourable global macroeconomic conditions, there is a lot at stake. While a breakthrough US-China trade deal is unlikely, an interim agreement to delay further tariff increases will be warmly welcomed by financial markets.

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Another week packed with major data releases
This will be another week packed with data releases from major economies with US PPI in sharp focus on Tuesday. Investors will comb through the FOMC meeting minutes on Wednesday for further clues on rate cut timings in 2019. Markets are predicting an 80% probability of a rate cut in October. In the United Kingdom, there will be more Brexit drama served with UK GDP and manufacturing production figures. Across the Atlantic, the US CPI and Michigan consumer sentiment could influence rate cut speculations beyond October.

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