Culled—Proshare

March 10, 2020

by FBNQuest Research                   

It was a bloodbath, leading one commentator to note that almost the only stock to show any sign of life when the market opened in London yesterday was a provider of funeral services (Dignity). Liquid and freely traded commodity currencies such as the Canadian dollar and the Norwegian krone tanked as the price of UK Brent sank towards US$30/b. The longest tenor Nigerian sovereign Eurobond (the ’49) closed down 16 points at the London close. The S&P 500 shed 7.6% on the day. Significantly, bond markets in the US and elsewhere were not spared.                                                                                                              

Saudi has despaired of cooperation from Russia in extending and deepening output restraint by OPEC+. The proposal for a further cut of 1.0mbpd by OPEC and 500,000 b/d by its allies was rejected by Moscow so Saudi responded with steep discounts in its official selling prices for April and hinted that it would ramp up production from the current 9.7mbpd.

We are now faced with a market free-for-all since the existing accord on restraint only runs until the end of this month. Saudi and Russia could still make up their differences. If they don’t, market volatility will prevail until a consensus emerges about the full impact of the coronavirus and its duration.

There is a need to clarify chatter about breakeven production costs. By the narrowest measure (ie the cost of extraction), Saudi has among the cheapest oil in the world. Yet when we view breakeven in a fiscal context, we have to factor in its ambitious development agenda (ie the oil revenue required for the diversification of the economy). The appetite for a price war with Russia and the US shale oil industry then becomes much weaker.

Unlike in 2008, there is little room for a tough monetary response from the leading central banks. The Fed moved on its own last week because the others have limited ammunition left. An uncoordinated fiscal response is more likely.

Before the bloodbath, the FGN was talking about a possible reworking of the 2020 budget. The argument is now compelling. Also before the bloodbath, a Eurobond issue was in the air to calm nerves. At what price, afterwards?

The future of the CBN’s fx arrangements is inevitably on the wires. There is no wish to change a system seen to be working. That change may be forced upon the CBN but for now none will be made in our view, and imaginative administrative and other measures may well be introduced to hold the line.

These tumultuous conditions in financial markets have been triggered by the Saudi-Russian spat within OPEC+, of course. They have developed, however, in the fertile breeding ground that is the markets’ fear of uncertainty. No amount of forecasting and modelling could anticipate the next step in the US-Chinese trade dispute in H2 2019, and similarly none can plausibly point to a timeframe for the end of the coronavirus crisis.