China Evergande Saga Rolls On, Oil Near Multi-Year Highs

Written on 22/10/2021 by Lukman Otunuga, Senior Research Analyst at FXTM

Image Credit: Forbes.com

It has certainly been another eventful week for financial markets with investors juggling various developments. From the Evergrande saga, to mixed corporate earnings and President Biden’s confidence over his two spending proposals. Even in the US equity space, there was some action with Intel shares falling 8% after trading hours following a weaker than expected sales report. There was also a selloff in the social media stocks after Snap said its advertising business declined due to Apple’s privacy changes. 

The main development grabbing financial headlines remains the Evergrande drama. Earlier in the week, concerns were intensified over the troubled property giant defaulting after the planned sale of its property services arm collapsed. However, there were reports that Evergrande remitted $83.5 million to a trustee account at Citibank which was a welcome development to markets. Nevertheless, this does not change the fact that the property developer still has $300 billion in liabilities. Should a default become reality, this could hurt over one million Chinese homebuyers who have bought apartments from the company. The ripple effect may hit construction workers, the property sector and even impact consumption which contributes to economic growth. While there seems to be a sense of confidence over China having the tools and policy space to prevent this from becoming a systematic crisis, the unease continues to weigh on global sentiment.

Should the Evergrande drama negatively impact China’s economy and growth, the ripple effects may be felt by countries that have strong trade ties with the world’s second-largest economy. One of Nigeria’s main trading partners is China with total trade of almost $13 billion in 2020. As the Evergrande ranges on and impacts global risk sentiment, the drop in appetite for risk is likely to hit emerging-market assets. 

Commodity spotlight – Oil

Oil prices remain near multiyear highs thanks to a weaker dollar and encouraging report from the EIA mid-week. 

As oil prices continue to rise, this may enforce more pressure on OPEC+ to increase output. Already, the United States and India have asked the cartel to pump more but the group remains wary of additional non-OPEC+ supply growth next year. All eyes will be on the next OPEC meeting on November 4th which could spark fireworks regardless of the outcome. 

In regards to the technical picture, Brent bulls have the October 2018 high at $86.71 on their radar with the next key level of interest at $88.52 – a level not seen since June 2012. This is certainly good news for oil-producing countries, especially those heavily rely on the commodity like Nigeria. As oil prices continue to rise, this could boost export earnings, FX reserves and government revenues. However, rising international oil prices may also increase how much the government contributes to the fuel subsidies.

Nigeria GDP: IMF Vs FG
The International Monetary Fund (IMF) hijacked the financial headlines on Thursday after forecasting that Africa’s economic recovery from Covid-19 could be the weakest across the globe.

According to the financial institution, the sluggish progress on the vaccination front across the continent may result in a slower economic recovery unlike other countries. Economic growth for sub-Saharan Africa is projected to hit 3.7% this year and 3.8% in 2022. For Nigeria, growth is seen hitting 2.6% in 2021 amid higher oil prices and 2.7% in 2022. While the 2.6% is higher than the 2.4% growth the world bank expects this year, it is still far below the 4.2% projection in the 2022 budget of economic growth and sustainability. This is not the first time the IMF and FG have had growth projections that illustrate completely different pictures of the economy. The question is whether Nigeria will surprise the global stage by matching the Federal governments expectations or grow in line with what the IMF and World bank forecasts.

Dollar weakness ongoing
The greenback remains on the defensive after printing multi-month highs on the DXY last week. Overnight, US Treasury yields hit levels not seen since May with a high at 1.67% and this has helped the dollar stabilise above 93.50. The DXY is heavily weighted to European FX and should find some support above 93 and the 50-day moving average at 93.27.

Europe is not well positioned in the global energy crisis with both energy and supply chain disruptions hindering the recovery. The ECB’s cautious stance towards any kind of policy normalisation remains a feature as well, with news that German Bundesbank President Weidmann will resign at the end of the year not helping the hawks’ cause on the Governing Council.
The recent euro rally has halted at a key short-term resistance level around the August low at 1.1665 in EUR/USD. A minor bull channel is still intact, though the daily RSI has paused at 50 which could mean a period of sideways trading. A break below the recent range at 1.16 would point to a renewed push south towards the October low at 1.1524. A meaningful move through 1.1665 will see the world’s most traded currency pair trade into trendline resistance from the June highs above 1.17.

Oil hovering near highs

The oil market pushed higher again yesterday after a constructive inventory report from the EIA. Crude oil inventories at Cushing fell, leaving them at their lowest levels since 2018. Oil strategists say if this trend continues, there will be growing concerns over hitting tank bottoms.

Persistent strength in prices also means pressure on OEPC+ to increase output is growing. The US and India have already asked the cartel to pump more, but the group is wary of additional non-OPEC+ supply growth next year. The next OPEC+ meeting is scheduled for November 4.
Bulls have the October 2018 high at $86.71 firmly in their sights with the June 2012 spike low at $88.52 the next long-term marker. Initial support sits at $83.66/73.

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