August 22, 2022/United Capital Research
Macro Highlight and Outlook
The National Bureau of Statistics (NBS) published the Consumer Price Index (CPI) report for Jul-22. Headline inflation rose 104bps to 19.6% for the month, the highest level since Jan-2017, with the inflation basket expanding 1.8% m/m. Food inflation rose to 22.0% y/y, and core inflation remained elevated at 16.3% y/y.
In a recently released circular, the CBN, the Monetary Policy Committee (MPC), reviewed the minimum interest rate payable to savings deposits to 4.2% (previously 0.15%)- 30.0% of the MPR.
According to the Nigeria Inter-Bank Settlement System (NIBSS), Nigerians spent a total of N1.7tn electronically on utility bills such as power, Pay T.V. subscriptions, and other everyday utilities in the first seven months of 2022. This represents a 32.1% increase from the N1.3tn that was spent in the corresponding 2021, indicating an increasing acceptance of electronic channels for bills payment by Nigerians.
The Minister of Finance, Budget and National Planning, Zainab Ahmed, in her presentation to the House of Rep AdHoc Committee, disclosed the F.G.’s proposed new date to end payments on under-recovery between the landing cost and regulatory pump price of PMS,
She further stated that the subsidy regime was not sustainable and might force the government to borrow more in 2023. According to the Finance Minister, the F.G. has plans to pay subsidies for only H1-2023, as contained in the 2023-2025 Medium Term Expenditure Framework and Fiscal Strategy Paper.
The Central Bank of Nigeria (CBN) has reversed its 5.0% intervention loans granted before Jul-2022 to cushion the effect of COVID-19 on the economy to 9.0% effective September.
The Nigerian Customs Service, through its National Public Relations Officer, Timi Bomodi, disclosed that the NCS had collected a total of N68.0bn from beer, spirits and other alcoholic drinks manufacturers between Jan-2022 and Jun-2022.
In the coming week, we expect the National Bureau of Statistics to release the Capital Importation report for Q2-2022.
Global Markets: Bullish run halted by economic data and market sentiment.
Last week, Major US indices started the week by extending recent gains. They were mixed throughout the week. Nonetheless, Friday’s selloff put an end to the weekly rally. This was triggered by European inflation data, which printed above expectations, pushing global yields higher. U.S. economic data was mixed. Retail sales rose 3bps m/m to $596.8bn, up 10.1% y/y. On the contrary, U.S. housing data continues to deteriorate, as the U.S. Fed’s Empire Manufacturing collapsed by its 2nd largest amount on record to -31.3 from 11.0 in Jun-2022. Also, released Fed minutes conveyed mixed messages. Consequently, the Nasdaq fell 2.6% w/w, the S&P 500 declined by 1.2%, and the DJIA fell 0.2% w/w.
Following estimates of persistent inflation in Europe, yields rose 10bps on the prospect that the ECB and the BOE would get more aggressive. Overall, the Pan-European STOXX 600 fell 0.8% w/w, while the French CAC 40 and the German DAX declined 0.9% w/w and 1.8% w/w, respectively. However, the U.K.’s FTSE rose 0.7% w/w owing to the weakened pound.
In Asia, China’s industrial, retail and home sales data was underwhelming, setting the tone for the week. China’s industrial production decreased by 46bps to print at 0.3% m/m compared to 0.8% m/m in Jun-2022. This led the PBOC to unexpectedly cut MLF 7-day/1yr lending rates by 0.1% to 2.8%. It is also expected to cut its 1/5yr LPR rates in line with a string of modest policies the Bank has instituted to stabilise the economy and stimulate economic growth ahead of the CCP’s 20th National Congress. Thus, the Shanghai Composite index fell 0.6% w/w. Japan’s Nikkei 225 index climbed 1.3% w/w, finishing the week on a 2-day bullish run. This trailed U.S. equities as positive U.S. economic data from the previous week Initially strengthened hopes of less aggressive U.S. Fed rate hikes.
Crude oil prices dipped 4.5% to $95.10/bbl at the start of the week, with weak Chinese Industrial production data, given the sluggish demand in the country, being the main driver. The 2-day downtrend continued as prices dipped for a third consecutive day, hitting a new monthly low on the back of supply concerns, with progress towards a revitalised Iran nuclear deal and growth concerns from weaker Chinese demand. A 2-day rally followed, initiated by US EIA data showing U.S. crude stockpiles fell by 7.0mn bbl. in the previous week, exceeding the 275k bbl. Expectation, even as U.S. oil production fell 100.0k bbl. of the prior week. Brent futures closed the week at $96.72/bbl.
The market will continue to react to economic data releases this week. For Europe, the outlook for European markets is gloomy in the short term, given its inflexibility in sourcing alternative energy suppliers. We expect energy markets to be driven by Tuesday’s API inventories, Wednesday’s EIA inventories and rig count data to be released on Friday.
Domestic Equities: Local bourse continued bearish… ASI down by 59bps w/w
Last week, the local bourse continued in bearish momentum for the third consecutive week, as investors switched assets given the prevalent rising yield environment in the fixed income market. Worthy of note is the fact that profit-taking across OKOMUOIL (-10.0% w/w), ACCESSCO (-5.7% w/w), and WAPCO (-2.7% w/w) drove the overall negative performance of the bourse last week. That said, the benchmark NGX-All Share Index (NGX-ASI) declined by 59bps w/w to close the week at 49,370.6 points. As a result, YTD return moderated to settle at 16.0%, with market capitalisation printing at N26.6tn, thus bagging a total loss of N244.0bn. Overall, the activity level improved last week, as the average value of stocks traded climbed 19.9% w/w to print at N2.5bn. However, the average volume of stocks traded moderated by 20.2% w/w to print at 164.5m units traded. Investor sentiment from last week’s trading session improved to 1.6x from 0.8x as 20 tickers appreciated while 32 depreciated, as measured by market breadth.
On a sectoral level, overall w/w performance was bearish as three (3) out of the five (5) sectors we cover closed in the red, with the remaining two (2) closing green. The Insurance (-1.4% w/w) sector led the laggards owing to increased profit taking in NEM (-13.4% w/w), WAPIC (-6.8% w/w), and CHIPLC (-1.6% w/w) among others. Trailing behind were the Consumer goods (-1.0% w/w) and Oil & Gas (-0.9% w/w) sectors on the back of share price depreciation in PZ (-17.1% w/w), FLOURMIL (-4.1% w/w), DANGSUGA (-2.4% w/w), HONYFLOU (-14.5% w/w), CADBURY (-11.0% w/w), INTBREW (-2.0% w/w), ETERNA (-10.2% w/w), OANDO (-1.0% w/w), ARDOVA (-2.0% w/w). On the other side of the coin, the Banking (+0.7% w/w) and Industrial sectors (+0.3% w/w) closed the week green, on the back of increased bargain hunting in ZENITHBA (+3.3% w/w), UBN (+3.5% w/w), UBA (+0.3% w/w), and BUACEMEN (+1.7% w/w).
This week, we expect the local bourse to continue broadly bearish as investors continue to sit on the sidelines and switch assets given attractive yields in fixed income instruments. Also, we anticipate that investors and fund managers will continue to cherry-pick stocks with strong underlying fundamentals.
Money Market Review: System liquidity remains tight
Last week, the financial system opened tight with a liquidity deficit of N3.7bn. Despite inflows from N100.0mn worth of OMO maturity, settlement for the bond auction shrunk liquidity further. As a result, like in previous weeks, banks were forced to rely on the repo and CBN Standing Lending Facility (SLF) window to fund short-term obligations. Overall, system liquidity closed the week at approximately N346.9bn in deficit. Consequently, the Open Repo Rate (OPR) and Overnight Rate (OVN) climbed by 267bps and 200bps to close the week at 14.67% and 15.0%.
The Central Bank of Nigeria (CBN) conducted an OMO Primary Market Auction (PMA), rolling over N50.0bn worth of bills across the 96-day, 194-day and 362-day tenors. However, the apex bank opted to sell none of the bills as investors bided higher than previous auctions and were not willing to match the rates demanded.
In the secondary NT-bills market, investors’ sentiment was broadly bullish. As a result, the average yield on NT-bills dropped by 7bps w/w to close at 7.86%. (previously, 7.93%). However, the average yield on OMO bills rose marginally by 1bps w/w to print at 11.2%.
We expect the Central Bank to conduct an NT-bills auction, rolling over N285.5bn worth of bills. We believe the stop rates across all tenors will increase as investors demand higher rates amidst tight system liquidity and an elevated interest environment. Also, we expect N45.0bn worth of OMO maturities to hit the financial system this week.
Bond Market: Marginal rates across all tenors closed higher
Last week, the Debt Management Office (DMO) conducted its August FGN bond auction, with N225.0bn worth of papers on offer across three (3) tenors, 2025s, 2032s and 2042s. Overall, investor demand was weak, with submitted bids amounting to N211.1bn. The 2025s and 2032s were undersubscribed by 0.3x and 0.5x, while the 2042s were oversubscribed by 2.4x as investors’ interest was primarily skewed towards the longer tenor paper. The DMO undersold the auction yet again, allotting a total of N196.57bn vs 225.0bn on offer. The marginal rates across the 2025s, 2032s, and 2042s climbed 1.5ppts, 50bps, and 25bps, to print at 12.5%, 13.5% and 14.0%, respectively, with investors remaining standoffish sentiments towards to market amidst a generally illiquid financial system.
In the secondary bonds market, activities mirrored the primary market as bearish investor sentiment drove the market. Overall, the average yield across sovereign bonds rose by 13bps w/w to close at 12.82% (previously 12.69%). In tandem, corporate bonds traded on a bearish note, albeit with steeper movements in the yield curve as the average yield on corporate bonds rose 39bps w/w to 13.96% (13.57).
In the Nigerian Eurobonds, the market sentiments were still extremely bearish as average yields rose by 165bps w/w to close at 12.17% (10.52%).
Looking ahead, we expect activities in the secondary markets to remain bearish and pivot toward investors rebalancing their portfolios post auction.
Currency Market: The Naira appreciated at the I&E window
Last week, the Naira appreciated the Investors & Exporters (I&E) window to close at N429.05/$, gaining 13bps w/w from its previous N429.63/$. At the parallel market, we found offer quotes in the region of N676-N686./$. In the I&E window, average F.X. turnover improved, climbing 12.6% w/w to $83.7mn.
Lastly, Nigeria’s external reserves rose by 77bps w/w, gaining $297.5mn to close at $39.2bn.
This week, we expect to witness continued uncertainty around the Naira, particularly in the parallel market.
