June 28, 2021/United Capital Research

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Macro Overview 

President Muhammadu Buhari inaugurated the National Steering Committee of the National Poverty Reduction with Growth Strategy (NPRGS), chaired by Vice-President Yemi Osinbajo. The committee is charged with implementing the policies outlined in the NPRGS document, with the overall aim of lifting 100.0m Nigerians out of poverty in 10 years.
 
According to the GMD of NNPC, total petroleum products consumption shot up to 102 million litres in May-2021, above realistic consumption levels of 60 million litres. The GMD reported that the excess was smuggled to neighbouring countries, costing the government money as the FG subsidises every litre of petrol imported into Nigeria. Thus, he announced a collaboration between the NNPC, EFCC and other law enforcement agents, aimed at cracking down on the criminals involved in petroleum products smuggling.

The Nigerian insurance industry’s assets rose by N401.0bn to N2.0tn as of the end of 2020 from N1.6tn as of the end of 2019, according to statistics from the Central Bank of Nigeria (CBN).

Furthermore, other statistics showed that as of the end of 2020, policies held by individual Nigerians were 1,034,383, corporate and non-individual policies were 891,128 bringing total policies written to 1,925,511. Meanwhile, insurance penetration during the period under review was a measly 0.7%.

Meter Asset Providers (manufacturers of prepaid meters) are demanding an increase in the price of meters following the rise in inflation and foreign exchange rates, among other economic variables.

We expect the macroeconomic space to remain quiet during the week in the face of sparse expected macroeconomic data or policy statements.
          
Global Economy: Global markets rebound as central banks allay inflation fears  
Global markets recovered from the previous week’s fall, helped by easing inflation worries and positive economic data. Notably, IHS Markit’s June Purchasing Manager’s Index (PMI) exceeded forecasts, rising to a new high of 62.6, showing strong expansion in economic activity. Investor sentiment was also buoyed by US President Joe Biden’s announcement of a $1.0tn infrastructure investment proposal reached by a bipartisan group of 10 senators. In the US, the DJIA, S&P 500 and Nasdaq closed 3.4%, 2.7% and 2.4% higher w/w, respectively.
 
European stocks gained w/w as well, boosted by a reiteration of expansionary monetary policy from the European Central Bank (ECB) amid strong economic data and positive market sentiment from the US. IHS Markit June PMI for the Eurozone also came in strong at 59.1, vs 57.1 in May. Consequently, the STOXX Europe 600 Index gained 1.2% w/w. In the UK, Bank of England (BoE) policymakers kept the key rate constant at 0.1% and voted to maintain the asset purchase program until Dec-2021. The BoE also stuck to the narrative of transitory inflation.
 
Chinese equities also had a strong week. The Shanghai Composite Index rose 2.3% w/w, led by financial stocks in reaction to fresh financial system liquidity support by the People’s Bank of China (PBoC).
 
Oil markets climbed for the fifth straight week, as demand continues to outstrip supply in key markets. Brent Crude settled at $76.18/bbl. as WTI closed at $74.05/bbl. Notably, JPMorgan Chase & Co. increased estimates for 2021 global crude oil demand by 200,000bpd.
 
We maintain our upbeat outlook for global markets as economic recovery in major markets continues to pick up steam.
 
Domestic Equities: Bearish performance persists
This week, the local bourse witnessed heavy selloffs despite the positive news of declining yields in the fixed income market. Sell pressures in AIRTELAF (-10.0% w/w), DANGCEM (-3.9% w/w) and BUACEMENT (-3.4% w/w) weighed on the benchmark All Share Index (ASI), closing lower by 2.6% w/w to print at 37,658.26 points, while YTD loss worsened to 6.5%. Investors’ wealth declined in consonance with the bearish index performance, closing lower by N516.3bn w/w to print at N19.6tn. In what is akin to investors buying the dip of the market, activity level improved, as average volume and value traded rose 21.9% w/w and 25.7% w/w, to close at 245.3m units and N2.6bn, respectively. 

Despite the negative close, w/w sectoral performance was positive, reflecting the bearish sentiment was driven by large cap sectors (Industrials & Telecoms). Out of the core 5 sector within our coverage, 3 sectors closed northwards. Leading the losers, the Industrial Goods index (-3.3% w/w), declined following sell pressures in DANGCEM (-3.9% w/w) and BUACEMENT (-3.4% w/w). Similarly, the Insurance index (-0.8% w/w) fell, as price depreciation in LASACO (-8.7% w/w) and AIICO (-3.7% w/w) weighed. Conversely, the Banking index (+0.9% w/w) and Consumer Goods index (+0.6% w/w) led the gainers, following price upticks in STANBIC (+2.7% w/w), FIDELITY (+2.2% w/w), VITAFOAM (+17.8% w/w) and HONYFLOUR (+10.7% w/w). Lastly, the Oil & Gas index gained 12bps following gains in CONOIL (+2.0% w/w) and OANDO (+1.0% w/w).

Investor sentiment as measured by the market breadth weakened to 0.9x, from 1.7x in the prior week, as 33 tickers advanced while 37 declined.

This week, we expect the equities market to record a rebound following bullish sentiments observed towards the end of the prior week. In addition, the market appears to be technically oversold in the short term and is poised for a potential rebound higher.

Money market: System liquidity tightens
System liquidity in the past week remained tight following the CBN’s retail FX auction and the DMO’s oversold bond auction (N325.8bn sold vs. N150.0bn offered) as dealers funded settlement for the bonds sold. Thus, financial system liquidity remained tight, as OBB and OVN rates closed upwards by 320bps and 380bps to close at 22.0% and 23.0%.

In the secondary NT-bills market, the average yield inched upwards by 5bps to close at 6.9%, while the average yield on secondary OMO market bills printed at 9.7%, posting a flattish close.

 In the coming week, we expect the money markets to trade in a tight range as investors focus on developments on the upcoming NTB auction where the CBN scheduled to rollover N81.5bn worth of bills. Taking a cue from recent NTB and the bond auction, we expect stop rates to trend lower in view of huge demand.
 
Bond Market: Marginal rates closer lower at June bond auction
In the bond market, the Debt Management Office (DMO) held a bond auction offering N150.0bn, a total of N325.8bn was sold, showing government’s clear desperation for debt financing. The bills were oversubscribed by 1.3x, 2.6x and 4.5x for the 2027s, 2035s and the 2050s, with the bulk of investor interest coming at the longer end of the curve, indicating strong Investor appetite for FGN instruments. Stop rates for the 2027s and 2035s dipped by 36bps and 50bps to print at 12.7% and 13.5%, respectively, while the 2050s, which replaced the 2049s from the preceding month, closed at 13.7%.

In the secondary market, Investor sentiment in the bonds market was tilted towards the bulls, as the average yield across the curve fell 6bps to close at 11.9%, indicating renewed buying interest as yields trended lower in the primary market.

In the sovereign Eurobond market, market proceedings were tight as the average yield on sovereign Eurobonds rose by 1bps to close at 5.7% w/w. In the corporate Eurobond market, the average yield closed flat at 4.0%. The Eurobonds market is clearly showing resilience, remaining unperturbed, despite rising risks of policy normalisation by the US Federal Reserve.

In the coming week, we expect a quiet trading week in the secondary market. However, we expect the market to remain tight, with some interest in the mid-long end of the curve. For Eurobonds, we expect investors to begin to pay attention to policy normalization discourse in developing economies, although stable oil prices could prevent a downturn.
 
Currency Market: Naira weakens at the I&E window
The naira depreciated at the parallel market, down 0.4% w/w to close at N500.0/$, from N498.0/$ the prior week. At the I&E window, the Naira also depreciated marginally w/w to close at N411.7/$1, losing N0.67/$1 from last week’s close. Lastly, external reserves declined by 0.7% w/w to close at $33.5bn in the previous week. 

We expect the naira to continue to trade in a stable range in the parallel market and I&E window, until expected positive factors (Eurobond issuance & Multilateral borrowings inflow) crystalise.

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