Global Economy

The Federal Open Market Committee (FOMC) voted to increase the target range for the federal funds rate by further by 75bps to 3.75% – 4.00%, bringing the key policy rate to its highest level since December 2007 (4.25%). In its decision to hike rates further by 75bps, the Committee highlighted that recent indicators point to modest growth in spending and production, job gains have been robust in recent months, and the unemployment rate has remained low, while inflationary pressures remain elevated. Notably, the Committee stated that in determining the pace of future rate increases, it would take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. However, at the post-meeting press conference, the Fed’s chairman struck a more hawkish tone highlighting that the terminal rate is being assessed higher than was projected in September, although the pace of rate hikes may slow from December. We lean towards the chairman’s tone, given that better-than-expected growth in Q3-22 and a strong labour market imply a continued hiking cycle. Accordingly, we believe there is no pause in sight just yet for the rate hikes.

Similarly, the Monetary Policy Committee (MPC) of the Bank of England (BOE) increased the key policy rate to a 14-year high, voting to hike the bank rate by 75bps to 3.00%. In terms of voting pattern, seven members voted for a 75bps increase; one member preferred to increase the bank rate by 50bps, while the remaining member voted for a 25bps hike. As noted by the Committee, a key consideration for the hike is the labour market, which remains tight. In addition, there have been continuing signs of firmer inflation in domestic prices and wages that could indicate greater persistence. Notwithstanding, the Committee highlighted that further increases in the Bank Rate may be required for a sustainable return of inflation to target, albeit to a peak lower than priced into financial markets. Given the tight labour market conditions and higher inflationary pressures, we expect the Committee to hike rates further in the coming months. Indeed, the median expected path for Bank Rate in the latest Market Participants Survey (MaPS) now has a peak of 4.5% in May 2023, higher than the 3.50% in the previous survey.

Global Markets

Unlike in the prior week, negative sentiments dominated the global equities market as investors digested the better-than-expected October payrolls report and the implication for the pace of future rate hikes from the Federal Reserve. Accordingly, US stocks (DJIA: -2.6%; S&P 500: -4.6) posted losses on the back of disappointing Fed commentary that signaled rates could stay higher for longer to combat inflation. European stocks (STOXX Europe: -0.3%; and FTSE 100: +2.0%) posted mixed performances as investors reacted to further rate hikes from the Bank of England amid renewed expectation over an imminent relaxation of China’s COVID-19 curbs. Asian markets posted positive performances — the Japanese equities (Nikkei 225: +0.3%) and the SSE (+5.3%) closed higher on the expectation that Beijing will roll back its Covid-Zero policy. Elsewhere, the Emerging market (MSCI EM: +1.8%) closed positively, primarily driven by robust gains in China (+5.3%), while the Frontier market (MSCI FM: -1.5%) declined following losses in the Vietnamese (-2.9%) market.

Nigeria

Economy

The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in October (from the total revenue generated in September) rose by 12.9% m/m to NGN760.24 billion (September: NGN673.14 billion). The distributed amount is composed of distributable statutory revenue (NGN502.14 billion), revenue from Valued-Added Tax (NGN189.93 billion), inflow from Electronic Money Transfer Levy (NGN8.17 billion), and a NGN60.00 billion augmentation. In addition, we understand that a significant increase in Oil & Gas Royalties and marginal growth in Petroleum Profit Tax (PPT) and revenue from Excise duties were responsible for the higher disbursed amount to the three tiers of government even as the FGN augmented it with NGN60.00 billion. We maintain our expectation that the non-oil revenue will continue to support aggregate revenue, given the sustained improvement in economic activities and the impact of the provisions of the 2021 Finance Act. However, we expect the oil revenue to remain underwhelming given the low crude oil production volume and high under-recovery costs.

According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions in the domestic equities market declined by 33.9% m/m to NGN81.90 billion in September (August: NGN123.97 billion) – the lowest print since April 2017 (NGN54.90 billion). The persistent low market participants’ participation in the local bourse reflects the troika impact of (1) higher yields in the fixed-income market, (2) lingering FX liquidity constraints, and (3) a lack of flexibility in the FX framework. For the review month, we highlight that the domestic transactions (76.0% of gross transactions) and foreign transactions (24.0% of gross transactions) declined by 35.0% m/m and 30.3% m/m, respectively. Notably, domestic investors remain net sellers for the second consecutive month, while foreign investors’ participation is at its lowest level in 14 months. Looking ahead, 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 (1) sustained FX liquidity challenges, (2) global uncertainties, and (3) interest rate hikes by central banks in developed countries.

Capital Markets

Equities

Bullish sentiments returned to the Nigerian equities market amid bouts of profit-taking activities. Accordingly, the All-Share Index advanced by 0.8% w/w to close at 44,269.18 points. Particularly, bargain hunting in DANGCEM (+8.8%) and BUACEMENT (+2.9%) spurred the positive outturn. Consequently, the MTD and YTD returns settled at +1.0% and +3.6%, respectively. On activity levels, the trading volume and value increased by 135.5% and 9.0% w/w, respectively. Sectoral performance was largely bearish following losses in the Oil and Gas (-5.4%), Consumer Goods (-2.3%), Banking (-1.9%), and Insurance (-1.3%) indices. On the flip side, the Industrial Goods (+5.4%) index was the sole gainer of the week.

Looking ahead, we expect investors to rebalance their portfolios based on an assessment of corporate earnings released for Q3-22. However, the increased FI yields may continue to constrain buying activities. Consequently, we expect market performance to remain mixed in the week ahead as investors rotate their portfolios towards stocks with attractive dividend yields amid intermittent profit-taking activities. Overall, we advise investors to take positions in only fundamentally justified stocks as the weak macro story remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate crashed by 767bps w/w to 8.8% this week, as the system liquidity improved primarily due to the combination of FAAC disbursement (NGN465.95 billion) from the prior week and inflows this week from OMO maturities (NGN20.00 billion). For clarity, the average system liquidity closed higher this week at a net long position of NGN407.81 billion vs a net short position of NGN15.48 billion in the previous week.

We expect the OVN rate to tilt upwards in the coming week, as we believe the inflow from OMO maturities (NGN105.00 billion) may not be enough to offset the debit for CBN (NTB, OMO & FX) auctions. 

Treasury bills

This week, sentiments in the NTB secondary market turned bullish following the healthy system liquidity as local banks sought to sterilize their idle cash by demanding T-bills. As a result, the average yield across all instruments contracted by 6bps to 10.0%. Across the market segments, the average yield contracted both at the NTB and OMO secondary market by 7bps to 11.9% and 2bps to 10.2%, respectively.

Next week, we expect yields in the T-bills secondary market to trend northwards, given the anticipated squeeze in the system. Notwithstanding, we believe participants will shift focus to next week’s NTB PMA, as the CBN is set to roll over NGN193.03 billion worth of maturities.

Bonds

Bearish sentiments persisted in the FGN bonds secondary market this week, as the average yield across all instruments expanded by 20bps to 14.5%. We highlight that investors’ anticipation of higher bond yields drove sell-offs across the short and mid-spectrum of the curve this week. Consequently, across the benchmark curve, the average yield inched higher at the short (+38bps) and mid (+35bps) segments, following profit-taking on the MAR-2024 (+105bps) and NOV-2029 (+37bps) bonds, respectively. Meanwhile, the average yield contracted at the long (-6bps) end, following investors’ interest in the MAR-2035 (-34bps) bond.

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

Foreign Exchange

This week, Nigeria’s FX reserves maintained its decline for the ninth consecutive week, falling by USD101.78 million w/w to USD37.37 billion (01 November). At the I&E window (IEW), the naira depreciated by 0.2% to NGN445.50/USD. At the IEW, total turnover (as of 03 November) declined by 9.8% WTD to USD327.07 million, with trades consummated within the NGN424.00 – NGN460.25/USD band. In the Forwards market, the naira appreciated at the 1-month (+0.1% to NGN449.03/USD) and 3-month (+0.1% to NGN458.39/USD) contracts but depreciated at the 2-months (-0.1% to NGN453.39/USD) and 1-year (-0.3% to NGN502.47/USD) contracts. Conversely, the naira was flat at the 6-month (NGN476.49/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. Moreover, considering the tepid accretion to the reserves given the (1) low crude oil production level and (2) elevated PMS under-recovery costs, FPIs that 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 significantly attract foreign inflows back to the market.