The United States Federal Reserves spooked the market on Wednesday, after it announced an increase in interest rates and hinted that two more hikes could be coming this year.

According to reports,“Ten-year U.S. Treasury note yields hit a one-week high, while two-year note yields rose to a three-week peak after the Fed’s decision to raise its benchmark overnight lending rate a quarter of a percentage point, to a range between 1.75 percent and 2 percent.”

Over the last few weeks, investors had anticipated a rate hike this week and flew to safety by dumping several emerging-market assets. A rate hike or tightening is a signal that the United States Federal Reserve (Central Bank) wants to cut back on the monetary expansion that has ensued since the global economic crisis of 2008.

Following the great recession of 2008-2010 that gripped developed markets across the world, United States, Japan, and Europe dropped rates to as low as zero percent, thereby injecting money into the banking system. Some of this cash found its way into emerging markets like Nigeria and was a major contributory factor to rise in the value of the stock market pre-oil price crashes in 2014.

Economies of developed markets have since picked up in the last two years with modest GDP Growth rates, and unemployment rates at historical lows. As stability returns to developed markets, attention has now turned towards sustainability while reducing the risk of any market melt-down due to cheap credit flowing across the world.

Reaction to FED rake hike

As the announcement of the rate hike filtered in, the United States Stock market skidded into losses, as investors pondered over the potential consequences. One such consequence is the squeeze in margins that could affect thousands of hedge funds, pension funds and mutual funds across the globe.

For example, by borrowing at interest rates of less than 0%, fund managers divert such credit into risky markets that offer yields of  4% and above, making them some nice profits. However, with the Federal Reserve now increasing rates, margins are expected to shrink, despite the fact that some of the risks remain. This perhaps is one of the reasons why investors are fleeing emerging markets like Nigeria.

How does it affect Nigeria and your investments

If you have been following events in the stock, forex and fixed income markets, then you may have noticed that we are already experiencing the consequences of this rate hike. Last May, the Nigerian Stock Market closed in negative territory for only the 8th time in over 30 years.

This resulted in a complete wipeout of the gains recorded in the stock market for the whole year. For example, Nigerian pension funds took a major hit in May from the month’s volatile stock markets, suffering a drop in their performance for the first time in a very long while, analysts at Quantitative Financial Analytics have said.

According to the analysis, the pension funds that suffered the losses are those with equity market exposure of greater than 11%, as pension funds that allocated less than 11% of their assets to equities were spared the pain.

One of the major factors for the decline is attributed to the sell-offs experienced in the hands of foreign portfolio investors who have mostly exited their positions ahead of the rate hikes.

MSCI Nigeria Index tracked by foreign investors investing in Nigeria's equity market.
MSCI Nigeria Index tracked by foreign investors investing in Nigeria’s equity market.

That is not all. The Central Bank has also increased its defence of the naira by first mandating commercial banks and bureau de change operators to sell forex to Nigerians who require it for retail usage such as traveling or paying for school fees abroad. They went further and merged the rates at which FX is sold by both commercial banks and the BDCs.

Latest data from the CBN also indicates that the spate of the rising forex reserves recorded in the last few weeks has reduced with the CBN dipping its hands to fund a potential liquidity in the market.

Nigeria’s external reserves has since dipped from about $47.9 billion to about $47.4 billion.

Any reason to panic?

As opined in our series of articles covering this development, Nigeria’s economic fundamentals still remain resilient and we are cautiously optimistic that we will weather the storm. We could experience more sell-offs (even though June has largely been positive) but this could be an opportunity to pick up some of the stocks that have eluded investors since the rally that began last year.

 

 

2 COMMENTS

  1. Gravity or relativity or the law of motion are more or less,the some nairametric are pick stories about the dollar to suit their purposes.let us take the dollar in it’s power and purchasing power,in our human history,there is a beginning and an end.
    The dollar is being used by about 60 % by other countries,now the question subject to diminishing return.i.e will the dollar subject to historical materialism,the answer is yes,because Britain was the most powerful country,because of it empire and it’s colonies,by 1892,america have overtaken Britain in everything,the second world war,changed everything.it buried Britain and the raising of America,as a superpower,the only Joseph Stalin said fu-k it,he planned to match America in power,and they almost succed.
    It is because of the large size of it’s economy,can America sustain it’self for another 50 years,starting from 1970.the answer is no,to amend it’self,they started running deficit in all area,national federal budget,balance of trade,or secured national debt,they are in trouble in economic area.
    If they increases taxes,it may throw them into recession.japan have taken America power in manufacturing,through innovation,the next country to erode American’s power as a superpower is China.americans manufacturing as percentage of it’s GNP is only 8%,in most Asian country,their manufacturing % of it’s GNP is above 20 %.
    To solve this problem for the American Mr Trump “The Lone Ranger ” started this trade war by raising tarrif,nairametric should think better.if they raises public bank interest,their is a 50 % of recession in America,with this trade war,the Chinese have the americans by the ball,as the americans owes the Chinese about 2 trillion dollarin American bonds

  2. Sorry folks,i did rushed my comment on this issue,if America raises it’s public bankit will affect Nigerian economy,i was baffled HOW TO GET THIS ANY WHAT YOU WILL GET,TO PUT IT MILDLY,I AM SHOCKED where do I start,i do not think the issue of the dollar USUAGEcan be done by any analyst,in one day,but concidential,i have started reading a book written by the Greek former finance minster,and I have not finish reading the book,the gist of the author,that the central bank of Europe DID BULLIED GREECE AIDED BY GERMANY TO ACCUMULATE THIS HUGE DEBT,OF WHICH GREECE CANNOT PAY FOR 2000 YRS.the author was the former minister of Greece during that period.
    Now,back to Nigeria, in our trade to u.s,we sells oil to America,and we get dollar,which we uses as our forex.Time may not be in our favour,on why the dollar came to be a major forex deposit in Europe,however the major factor in the growth in Germany,started after the second world war,or you call it second European war,came through aid called the “Marshall aid”after the American secretary of state to the sum of 12 billion dollar.
    Now Germany’s economy is bigger than Britain by more than 1 trillion dollar in GNP,japan’s economy is bigger than Germany,The asia through Japan wanted to do away from IMF and world bank,in setting Asian investment world fund or bank.
    Now Nigeria do not sell any oil to America any more for more than 20 yrs or 15 yrs,the American produces about 10 million barrels of yearly through shale.NOW YOU ARE SAYING THAT IF AMERICA INCREASES PUBLIC BANK INTEREST,IT WILL AFFECT NIGERIAN ECONOMY,our tie to America have been cut off many years ago,and the americans onlyoption left for them is military action,which they did n Iraq and Agfanistan.
    Now we are reading Chinese currency swap and deposit by the Chinese in foreign countries,they did with Nigeria,with agentina,with Britain,the Germany by-pass,the European central bank by a deal allowing yuan deposit in germany’s bank.
    I think I have done justice to this article,as ugodre is not paying me enough money.uba pays him,some americans pays him,aand he does not want to give some dash money,now I am on hunger strike

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