In line with market expectations, the Federal Open Market Committee (FOMC) voted to increase the target range for the federal funds rate by 75bps to a range of 2.25% – 2.5% (previously: 1.50% – 1.75%). This represented the fourth consecutive rate hike to the highest level since June 2019. The Fed also continued its policy of reducing the size of the Federal Reserve’s balance sheet which peaked at nearly USD9.00 trillion in mid-March and fell to USD8.90 trillion in late July. Although there was no explicit forward guidance, the committee noted that forecasts will be adjusted in line with new information and policies on a meeting-by-meeting basis. Given the underlying tone of the Committee and the near-term impact of the Russia-Ukraine conflict 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 September.

Economic growth weakened in the United States (US) as a slowdown in business activities weighed on the growth momentum. According to the Bureau of Economic Analysis (BEA), US GDP fell by 0.9% q/q in Q2-22 (Q1-22: -1.6% q/q) – the second consecutive quarterly moderation in 2022. The moderation was due to the lingering impacts of the (1) decline in investment in new inventory, (2) supply chain disruptions, and (3) fading impact of government stimulus on consumption. Accordingly, growth slowed substantially across Personal Consumption Expenditure (+1.0% q/q vs Q1-22: +1.8% q/q) and Gross Private Domestic Investment (+1.9% q/q vs Q1-22: +2.3% q/q). Meanwhile Exports of goods and services (+18.0% q/q vs Q4-21: -5.3% q/q) and import of goods and services (+3.1% q/q vs Q1-22: +17.7% q/q) recorded expansions. On a year-on-year basis, the economy grew by 1.6% y/y in Q2-22 (Q1-22: +3.5% y/y). Although the job numbers remain positive, we expect the economic growth will remain pressured by the sustained passthrough impacts of tight financial conditions and the Russia Ukraine conflict. Indeed, the IMF now expects the world’s largest economy to grow by 2.3% in 2022 – 60bps lower than its estimate in the April projection.

Global Markets

This week, global stocks were broadly positive as investors’ sentiments were shaped by impressive corporate earnings and the expectation that the Fed would reduce the pace of tightening following weaker US GDP growth. Accordingly, US (S&P 500: +2.8% and DJIA: +2.0%) stocks were set for another weekly gain, supported by the rally in tech stocks after earnings releases from Amazon (AMAZN) and Apple (AAPL). European (STOXX Europe: +2.6% and FTSE 100: +1.4%) equities were also on course for a positive close, as investors reacted to corporate earnings and positive economic/GDP data from countries in the Eurozone area. However, the Asian markets (Nikkei 225: -0.4%; SSE -0.5%) posted negative performances, as the strengthening of Japanese yen against the greenback undermined market performance, and major Chinese tech shares (Alibaba & Meituan) were pressured following the downbeat economic growth assessment from China’s top leaders and a lack of new stimulus policies. Elsewhere, the Frontier (MSCI FM: +1.0%) and Emerging (MSCI EM: +0.7%) markets advanced due to the bullish sentiments in Kuwait (+0.4%) and South Korea (+2.4%), respectively.

Nigeria

Economy

According to the provisional data released by the Central Bank of Nigeria (CBN), Nigeria’s Current Account (CA) remained in a surplus position for the fourth consecutive quarter, settling at USD2.58 billion in Q1-22 (Q4-21 revised: USD54.23 million) – the highest print since Q2-18 (USD4.36 billion). The increase was primarily driven by a higher trade surplus (+346.8% q/q to USD3.64 billion) and lower net service payments (-12.9% q/q to USD2.83 billion). The higher trade surplus synchronised neatly with the crude oil rally-induced increase in oil export (+21.9% q/q) amidst a noticeable decline in imports (-3.0% q/q) due to lingering FX shortages. Similarly, the lower net service payments continued to reflect the combined impact of (1) FX liquidity constraints, and (2) persistent currency pressures. Given the CBN’s revision of the 2021 numbers and the Q1-22 print, we now expect the CA to settle at a surplus of USD4.48 billion (or 1.0% of GDP) in 2022E (vs 2021FY: USD1.85 billion deficit or -0.4% of GDP). Our forecast is hinged on (1) an improved trade balance in line with the effect of the rally in crude oil prices on total exports, and (2) higher service and income payments.

According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions at the local bourse declined by 74.2% m/m to NGN156.52 billion in June (May: NGN607.45 billion) – the lowest monthly outturn since September 2021 (NGN118.15 billion). The decline was primarily due to a 79.7% m/m decline in domestic investors’ participation (73.0% of total transactions during the review period). In the same vein, participation from the foreign investors declined by 6.9% m/m, although the contribution to total transactions surged to a 7-month high of 27.0% (vs May: 7.5%). Notably, we highlight that the low participation from the foreign investors reflects the lingering FX liquidity constraints and lack of flexibility in the FX framework. In the short to medium term, we expect domestic investors to continue to dominate market performance, although rising FI yields may constrain buying activities. Also, FPIs who have exhibited a lacklustre interest in domestic equities are likely to remain on the sidelines due to sustained FX liquidity challenges and interest rate hikes by central banks in developed countries.

Capital markets

Equities

Bearish sentiments persisted in the local bourse for the second consecutive week as profit-taking activities dominated market performance with the benchmark index recording losses on four of the five trading sessions. Notably, the All-Share Index ended the week 3.1% lower to close at 50,370.25 points. Precisely, sell-offs of MTNN (-12.6%), STANBIC (-10.0%), NESTLE (-9.8%), and GTCO (-4.3%) stocks drove the weekly loss. Activity levels within the market improved, as trading volume and value increased by 68.5% w/w and 10.0% w/w, respectively. Sectoral performance was negative, following declines in the Insurance (-5.0%), Consumer Goods (-4.6%), Oil and Gas (-1.0%), Banking (-0.4%) and Industrial Goods (-0.2%) indices.

In the interim, we believe the full swing of the H1-22 earnings season will dictate market sentiments and possibly drive positive performance as investors hunt for bargains in fundamentally sound stocks with a consistent history of interim dividend payments. Notwithstanding, we envisage intense selling pressures on stocks of companies that grossly underperform in H1-22. Overall, we reiterate the need for positioning in only fundamentally sound stocks as the weak macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

This week, the overnight (OVN) rate was unchanged at 15.0%, as the funding conditions in the system remained poor, averaging a net short position of NGN138.48 billion this week (vs a net short position of NGN135.74 billion in the previous week).

We expect the OVN rate to trend southwards in the coming week, as a combined NGN485.00 billion comes into the system from FAAC disbursements (c. NGN480.00 billion) and OMO maturities (NGN5.00 billion).

Treasury bills

Bearish sentiments continued to dominate the Treasury bills secondary market this week as illiquidity in the financial system drove sell-offs across the market. As a result, the average yield across all instruments expanded by 53bps to 8.1%. Across the segments, average yield increased by 68bps and 48bps to 9.6% and 7.7% at the OMO and NTB secondary markets, respectively. The CBN held its bi-weekly NTB PMA on Wednesday, offering NGN264.28 billion worth of bills – NGN2.22 billion of the 91-day, NGN3.54 billion of the 182-day, and NGN258.53 billion of the 364-day – to prospective investors. As in the previous auction, the CBN allotted precisely what was offered at respective stop rates of 2.80% (previously 2.75%), 4.10% (previously 4.00%), and 7.00% (unchanged).

Next week, we expect the yields on T-bills to moderate slightly, following the inflows expected to hit the system.

Bonds

Proceedings in the FGN bonds secondary market remained bearish this week as investors sold off positions across the curve in anticipation of an upward repricing of FGN bonds following the FGN 4M-22 fiscal performance. As a result, the average yield across instruments expanded by 9bps to 12.0%. Across the benchmark curve, the average yield expanded at the short (+11bps), mid (+12bps), and long (+5bps) instruments following profit-taking on the JAN-2026 (+35bps), NOV-2029 (+17bps), and MAR-2050 (+34bps) bonds, respectively. 

We maintain our view of an uptick in bond yields in the medium term, as both the FGN’s borrowing plan for 2022FY and the expected fiscal deficit point towards an elevated supply.

Foreign Exchange

This week, Nigeria’s FX reserve recorded its first decline in eight weeks, as it fell by USD169.21 million w/w to USD39.22 billion (28 July). Across the FX windows, the naira appreciated by 0.2% to NGN429.00/USD at the I&E window (IEW) but depreciated significantly by 13.0% to NGN715.00/USD at the parallel market. At the I&E window, total turnover (as of 28 Jul 2022) fell by 53.1% WTD to USD403.64 million, with trades consummated within the NGN410.00 – 444.00/USD band. In the Forwards market, the rate weakened at the 1-month (-0.2% to NGN428.04/USD), 3-month (-0.1% to NGN435.75/USD), 6-Month (-0.2% to NGN448.87/USD) and 1-year (-0.3% to NGN473.02/USD) contracts.

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.