The local bourse was not immune to the rout in global equities, as profit-taking activities dominated trading this week. Precisely, the All-Share Index declined by 2.7% w/w to close at 51,778.08 points, driven by sell-offs in MTNN (-7.9%), BUAFOODS (-7.9%), AIRTELAFRI (-1.2%), INTBREW (-15.0%) and some banking names.
June 17, 2022/Cordros Report
Global Economy
The Federal Open Market Committee (FOMC) voted to increase the target range for the federal funds rate by 75bps to 1.50% – 1.75% (previously: 0.75% – 1.00%), representing the third consecutive rate increase and the biggest hike since 1994. Moreover, the Committee stated that it would continue reducing the size of the Federal Reserve’s balance sheet with a monthly roll-off of USD47.5 billion from 1st June and an increase to USD95.00 billion per month starting in September. According to the Committee, the decision to hike rates by 75bps was necessitated by the elevated inflationary pressures amidst (1) pick-up of economic activity, (2) robust job gains in recent months, and (3) low unemployment rate. Given the underlying tone of the Committee and the Russia-Ukraine conflict’s near-term impact on inflation amid strong labour market conditions, we expect the Committee to further increase the policy rate by at least 50bps at its next meeting in July. Indeed, the Fed’s “dot plot” now suggests a more aggressive path for interest rates, as the Fed expects the key policy rate to hit 3.4% by year-end.
The Monetary Policy Committee (MPC) of the Bank of England (BOE) increased the key policy rate for the fifth consecutive time, with members voting by a majority of 6 – 3 to hike the bank rate by 25bps to 1.25% – the highest rate since January 2009 (1.50%). According to the Committee, an increase was warranted at the meeting given the (1) tight labour market conditions, (2) broader domestic inflationary pressures, and (3) risks that the inflationary pressures have become more persistent. That said, the Committee highlighted that the market-implied path for the bank Rate had risen materially since the MPC’s previous meeting, reaching around 2.90% by year-end. Given the improved labour market data amidst continued inflationary pressures from elevated energy prices, we expect the Committee to further hike rates in the coming months. However, we think a prolonged Russia-Ukraine conflict could have a significant spillover effect on the UK economy, prompting the Committee to be less hawkish later in the year.
Global Markets
Global equities logged the steepest declines since 2020 as aggressive interest rate hikes by major central banks to rein in surging inflation stoked recession concerns. Consequently, US (DJIA: -4.7%; S&P 500: -6.0%) stocks were on track for their worst weekly loss as hawkish policy actions from the Fed fueled worries of a possible recession. Likewise, European stock markets (STOXX Europe: -3.9%; and FTSE 100: -3.2%) are on course to close the week in the red as investors reacted negatively to announcements of rate hikes from major central banks. Asian markets were mixed, as the Nikkei 225 (-6.7%) suffered a huge loss mirroring the rout on Wall Street. Conversely, the SSE (+1.0%) eked out a weekly gain as optimism about fiscal and monetary policy support drove bargain hunting in Chinese tech stocks. The Emerging (MSCI EM: -4.4%) and Frontier (MSCI FM: -3.8%) markets stocks mirrored the downbeat mood across global stocks consequent upon losses in South Korea (-6.0%) and Kuwait (-3.0%), respectively.
Nigeria
Economy
According to the National Bureau of Statistics (NBS), headline inflation rose to an 11-month high, increasing by 89bps to 17.71% y/y in May (April: 16.82% y/y). Analysing the breakdown provided, we highlight that food inflation (+113bps to 19.50% y/y) rose to its highest level in eight months given the (1) unfavourable base effects from the prior year, (2) lingering spillover effect of higher transport costs, and (3) below-average dry season harvest. Similarly, the core inflation (+72bps to 14.90% y/y) rose to its highest print since March 2017 (15.40% y/y) due to the lingering impact of (1) high diesel and aviation fuel prices and (2) currency pressure. We expect domestic prices to maintain an uptrend in the short term, given the lingering increase in energy prices and progressive hikes in electricity tariffs amidst the current shortages of PMS in some parts of the country. Besides that, we expect food prices to remain pressured given the below-average off-season harvest amidst high import prices. Overall, expect the headline CPI to rise by 1.83% m/m, with the unfavourable base effects from the prior year translating to a 90bps increase in y/y inflation rate to 18.61% in June.
Based on the recently released OPEC’s Monthly Oil Market Report (MOMR), Nigeria’s crude oil production (excluding condensates) declined for the fourth consecutive month, averaging 1.26mb/d in May (April: 1.31mb/d) – 28.0% below the OPEC+ production agreement (1.75mb/d) for the month. We highlight that the key factors limiting crude oil production volume include (1) massive theft and vandalism, (2) infrastructure decay, (3) divestments given the challenging business environment amidst companies’ move to cleaner energy sources, and (4) lingering difficulties in restarting some oil wells for operation after the COVID-19 induced shutdown. Notably, oil rig counts remained at 11 as of May, from 16 in 2019. Overall, given the nature of challenges hampering production, we do not expect a significant improvement in crude oil production over the short term. Consequently, despite the rally in crude oil prices, we expect the government’s oil revenue performance to remain underwhelming over the short term.
Capital markets
Equities
The local bourse was not immune to the rout in global equities, as profit-taking activities dominated trading this week. Precisely, the All-Share Index declined by 2.7% w/w to close at 51,778.08 points, driven by sell-offs in MTNN (-7.9%), BUAFOODS (-7.9%), AIRTELAFRI (-1.2%), INTBREW (-15.0%) and some banking names. Consequently, the MTD loss increased to -2.3% while the YTD return moderated to +21.2%. Activity levels were weaker than in the prior week, as trading volume and value declined by 48.6% w/w and 41.0% w/w, respectively. Sectoral performance was broadly negative, following losses in the Banking (-5.2%), Oil and Gas (-1.8%), Consumer Goods (-1.2%), Insurance (-1.2%), and Industrial Goods (-0.1%) indices.
With the significant moderation in the prices of bellwether stocks this week, we expect savvy investors to take advantage of this and make a re-entry into stocks with sound fundamentals and attractive dividend yields. However, we do not rule out the possibility of continued profit-taking activities. As a result, we think the local bourse will likely exhibit a choppy pattern. Therefore, we advise investors to take positions in only fundamentally justified stocks.
Money market and fixed income
Money market
This week, the overnight (OVN) rate contracted by 308bps at 10.9%, despite the tighter liquidity in the financial system. Notably, the average system liquidity settled at NGN9.78 billion (vs NGN140.12 billion in the previous week), following the weak liquidity level at the start of the week and subsequent debits for CBN’s FX auction amid the sole inflow from OMO maturities (NGN20.00 billion).
In the absence of any significant inflows in the system, we expect the OVN rate to remain elevated in the coming week following debits for the monthly FGN bond auction and the CBN’s FX auction.
Treasury bills
The depressed system liquidity underpinned another bearish performance in the Treasury bills secondary market as participants sold off instruments in both market segments to generate funds amid declining offers at the long end of the curve following the outcome of the NTB auction. Consequently, the average yield across all instruments expanded by 43bps to 4.6%. Across the segments, the average yield expanded by 51bps and 19bps to 4.6% apiece at the NTB and OMO segments. At the NTB auction, the CBN offered NGN34.88 billion – NGN5.91 billion of the 91-day, NGN1.10 billion of the 182-day, and NGN27.87 billion of the 364-day – in bills. Demand was strong, with a subscription level of NGN178.46 billion (Bid-to-offer ratio: 5.1x; previously 2.0x) recorded. Eventually, the CBN allotted precisely what was offered NGN34.88 billion – NGN1.44 billion of the 91D, NGN1.28 billion of the 182D and NGN32.15 billion of the 364D bills – at respective stop rates of 2.49% (previously 2.50%), 3.79% (previously 3.84%), and 6.07% (previously 6.44%).
Next week, we expect the yields on T-bills to maintain the same trajectory, following the thin liquidity expected in the system.
Bonds
Proceedings at the Treasury bonds secondary market turned bearish this week as demand weakened following (1) investors’ positioning ahead of next week’s bond PMA and (2) the market’s reaction to the inflation uptick (May 2022 CPI: 17.71%). Thus, the average yield across instruments expanded by 6bps to close at 11.2%. Across the benchmark curve, the average yield expanded at the short (+25bps) end as investors sold off the APR-2023 (+97bps) bond but contracted at the mid (-2bps) and long (-1bp) segments following buying interests on the APR-2032 (-8bps) and JUL-2034 (-14bps) bonds, respectively.
In the coming week, we expect the outcome of the June 2022 FGN auction holding on Monday (20 June) to shape the direction of yields in the Treasury bond secondary market. At the auction, the DMO will be offering instruments worth NGN225.00 billion through re-openings of the 13.53% FGN MAR 2025, 12.5000% FGN APR 2032 and 13.0000% FGN JAN 2042 bonds. Notwithstanding, we reiterate our stance of an uptick in yields in the medium term as the FGN’s borrowing plan for 2022FY and expected fiscal deficit point towards an elevated supply.
Foreign Exchange
Nigeria’s FX reserves increased for the second consecutive week by USD118.47 million w/w to USD38.66 billion (16 June). Across the FX windows, the naira was flat at NGN421.33/USD at the I&E window (IEW) but depreciated by 0.3% to NGN608.00/USD at the parallel market. At the I&E window, total turnover (as of 16 June) decreased by 27.0% WTD to USD376.04 million, with trades consummated within the NGN410.00 – NGN453.55/USD band. In the Forwards market, the rate increased at the 6-month (+0.3% to NGN436.80/USD) contract, but contracted at the 1-year (-0.1% to NGN460.50/USD) contract. The rate was flat at the 1-month (NGN419.57/USD) and 3-Month (NGN426.33/USD) contract.
Although the CBN has enough liquidity to support the FX market over the short term, we highlight that foreign inflows are paramount for sustained FX liquidity over the medium term. Considering the tepid accretion to the reserves given the (1) low crude oil production level and (2) elevated PMS under-recovery costs, FPIs which have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long term. Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would be significant in attracting foreign inflows back to the market.
