August 23, 2021/United Capital Research

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Macro Overview 

The National Bureau of Statistics (NBS) released the inflation figures for Jul-2021. Notably, the headline rate rose by 17.38% y/y, 37bps lower than the rate recorded for the month of June (17.75%). On a m/m basis, the headline inflation rate ticked upwards by 0.93% m/m (vs. 1.06% in Jun-2021). Also, we observed price increase across all components of the index. Inflationary pressures remain elevated, driven by food supply-side constraints as well as FX-linked pressures. Nevertheless, the high base impact from H2-2020 continues to support the deceleration in inflation. Read our inflation report here – “July Inflation Note: Sustained disinflation in July as headline inflation prints at 17.38%”.
 
Also, in the past week the President of the Federal Republic of Nigeria, Muhammadu Buhari, signed the Petroleum Industry Bill (PIB) into law. The bill would see the introduction of two new regulatory bodies in the oil & gas industry, one for the upstream segment and another for the downstream segment. NNPC would become a limited liability company managing the government’s interest in the oil & gas sector via existing Joint Ventures (JVs) and Product Sharing Contracts (PSCs). See our 3-part series on the Petroleum Industry Act (PIA) here – “Petroleum Industry Bill (PIB) Series 1: At long last!”, “Petroleum Industry Act (PIA) Series 2: Analysing contentious issues” and “Petroleum Industry Act (PIA) Series 3: A little too late?”.
 
This week is expected to be an interesting week for the macroeconomic space. The NBS is expected to publish the Q2-2021 GDP report which would provide update on the strength of economic rebound in Q2-2021. We expect the low base of Q2-2020 (considering the economy contracted by 6.1%) to magnify GDP growth. From our macroeconomic desk, we project GDP growth of 7.4% y/y in Q2-2021, to restore the economy back to pre-pandemic levels.
           
Global Markets: Market sentiments dampened by Covid-19 resurgence    
Last week, global markets slumped on the back of waning optimism amid rising Covid-19 cases and reintroduced lockdowns across the globe. Furthermore, signs that that growth might be peaking emerged, as data from the US Commerce Department showed that retail sales declined 1.1% y/y in Jul-2021 after months of recovery. Notably, the S&P 500 reached an all-time high of 4,480 index points, before retreating for the week due to profit taking as well as a hawkish signal from the Federal Reserve. According to minutes from the Federal Reserve’s policy meeting, slowing asset purchases might begin as early as December. Noteworthy to highlight, prior to the meeting, the Fed’s balance sheet had surged to new historic highs. For the week, the Dow Jones Industrial Average, S&P 500 and the NASDAQ fell by 1.1%, 0.6% and 0.7% w/w, respectively.
 
In Europe, major benchmarks suffered losses amid the worrying spread of the delta variant of Covid-19. Also, Eurozone inflation for Jul-2021 came in at 2.2% y/y, higher than 1.9% y/y in Jun-2021. The Stoxx 600 ended the week 1.5% lower, as country specific indexes; France’s CAC 40 (-4.0% w/w), Germany’s XETRA DAX (-1.1% w/w) closed in bearish territory. In the UK, Inflation figures from the Office of National Statistics (ONS) showed the headline rate rose 2.0% y/y in Jul-2021, lower than 2.5% y/y in Jun-2021. Nevertheless, the UK FTSE 100 shed 1.8% w/w, in line with the broader global financial market performance.
 
Asian stock markets also recorded sharp losses as the region reintroduced lockdowns. The Japanese government doubled down on the coronavirus state of emergency, extending it to Sep-2021 and expanding the scope to seven more prefectures. Japan’s gross domestic product (GDP) grew by 1.3% (annualised) in Q2-2021, following a 3.7% contraction in Q1-2021. Nevertheless, Japan’s Nikkei 225 and China’s Shanghai Composite fell by 3.5% w/w and 2.5% w/w, respectively.
 
In the oil market, Brent crude lost a substantial 7.7% w/w to close at $65.2/bbl. This was due to growing concerns of demand headwinds, such as renewed lockdowns due to resurgence in Covid-19 caseloads, which has thrown a wrench in plans to fully restart global economic activity, limiting mobility and oil demand.
 
In the interim, we expect any further negative developments on Covid-19 resurgence could hurt global markets further. On a longer-term view, we expect market participants to look to the monetary authorities for guidance on monetary policy direction. That said, we expect the increased risks to recovery may prompt authorities, particularly in the United States, the Eurozone, and China, to remain accommodative for longer than expected.
 
Domestic Equities: Local bourse closes the week tight…ASI down 13bps w/w
Last week, trading in the equities market was broadly tight with a bearish bias. Buyers appeared to remain cautious following the previous week’s rally while sellers were determined not to book profits following the sustained decline in fixed income yields. That said, the local bourse ended the week on a bearish note, posting a weekly loss of 0.1%. The All-Share Index closed the week at 39,483.1 points while YTD loss moderated to 1.8%. Similarly, investors’ wealth was pressured as market capitalisation dropped N20.5bn w/w to settle at N20.6tn. Activity level improved last week as average volume and value traded weakened by 46.2% w/w and 2.6% w/w to 173.0m units and N2.5tn, respectively.

In the previous week, sectorial performance was mainly bearish as four of the sectors we cover closed in the red while one closed in green. The Consumer Goods sector (-6.3% w/w) was the biggest loser, as a result of sell pressures in NESTLE (-9.1% w/w), NB (-8.8% w/w) and price adjustment (for dividend of N1.65/s) in FLOURMILL (-4.8% w/w). The Oil and Gas sector (-1.2% w/w) followed, after price-adjustment (for dividend of N4.00/s) in TOTAL (-2.0% w/w) and profit taking activities OANDO (-1.0% w/w) weighed on the index. Similarly, the Insurance (-1.0% w/w) and Banking (-0.8% w/w) sectors declined as selloffs in LINKASSURE (-4.8% w/w), SOVRENIN (3.8% w/w), ETI (-7.0% w/w), and JAZIBANK (-6.5% w/w) dragged their respective indexes southwards. On the flipside, the Industrial sector (+1.9% w/w) ticked higher due to bargain hunting in DANGCEM (+3.3% w/w) and WAPCO (+1.8% w/w).
Investor sentiment, as measured by the ratio of advancers to decliners, strengthened to 1.1x, from 1.0x the prior week, as 36 stocks appreciated, and 33 stocks depreciated.

In the coming week, we expect equity investors to remain fixated on developments in the fixed income market as there will be a NT-bills primary market auction during the week. We expect the stop rate on the 364-day bill to close southwards, albeit slower than the pace from the previous auction. We think sustained decline in stop rates coupled with possible positivity from big banks’ earnings could push the bourse into positive territory for the week.  

Money market review: System liquidity tightens
This week, at the interbank market, system liquidity trended lower as debits from the oversold FGN bond auction (N260.0bn allotted vs. N150.0bn offered) weighed despite OMO maturities worth N91.0bn. Consequently, the Open Buy Back (OBB) and Overnight (OVN) rates both ticked higher by 658bps to 23.33% and 23.83%, respectively.
 
In the NT-bills secondary market, performance was flattish with marginal bearish sentiments as average yield rose marginally by 2bps to close at 4.69% from 4.67% in the previous week’s session. The turgid yield movement in secondary market NT-bills yields showed the market took a breather after consecutive weeks of strong bullish sentiments. On other hand, we saw bullish sentiments in the secondary OMO bills market as average yield closed lower at 5.95%, 170bps short of the previous Friday’s close.
 
Looking ahead, we expect system liquidity to trend higher as a result of FAAC inflows expected this week. Also, we expect OMO maturities worth N157.3bn to hit the financial system in the coming week. These inflows are expected to ease the pressure on interbank rates. Also, the Central Bank of Nigeria (CBN) is scheduled to conduct an NT-bills auction worth N157.2bn on Wednesday to rollover an equivalent maturing amount. At the auction, we expect the trend of huge demand from investors and overselling by the CBN to continue. That said, we expect the stop rates to trend southwards, sparking another round of bullish sentiments in the secondary NT-bills market. 
 
Bond Market update: FGN bond auction oversubscribed
Last week, the Debt Management Office (DMO) conducted a FGN bond auction, selling a total of N260.0bn, compared with the N150.0bn volume on offer across the three maturities. Investors’ demand was strong as all bonds on offer were oversubscribed with the 2028s, 2036s and 2050s recording subscriptions rate of 1.21x, 1.15x and 1.69x respectively. In addition, the marginal rates closed lower, with the 2028s, 2036s and 2050s closing at 11.6%, 12.75% and 12.80%, from 12.35%, 13.15% and 13.25% at the previous auction.

In the secondary market, performance was reflective of the outcome of the auction in the primary market as investors who could not get their orders filled flocked to the secondary market, driving average yield downward by 18bps to 11.38% from 11.56% in the previous week. In the corporate segment, average yield simultaneously declined by 22bps w/w to 12.03% from 12.25%.

In the Eurobond market, yield movement was marginal with some bearish bias as average yield rose 3bps to close at 6.0%. Similarly, average yield rose marginally by 9bps at the corporate Eurobond market to close at 4.1%.   

In the coming week, we expect demand-led trading activities in the secondary bonds market as investors continue to attempt to lock-in investments in the face of declining yields. That said, we expect dealers to attempt to book profit for the month which could keep the market in equilibrium.
 
Currency Market: Naira depreciates at I&E window
Last week, the naira depreciated at the I&E window, down by 4bp w/w to close at N411.67/$1, as against last week’s close of N411.50/$1. On the other hand, at the parallel market, the naira closed the week flat at N520.00/$1. In terms of activity level at the I&E window, average turnover at the window declined 25.8% w/w to print at $122.3m, compared to $158.6m in the prior week. Lastly, external reserves declined by 12bps w/w to close at $33.5bn in the previous week.
 
The resurgence in Covid-19 caseloads is expected to retain some mid-term pressures on oil price and could limit the scope for relaxation of oil output caps. This could potentially weigh on external reserves and the outlook for the naira. 

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