May 30, 2023/United Capital
Global Markets: Mixed Review
Last week, the S&P 500 index closed higher by 0.3% w/w. Similarly, the NASDAQ Composite was up 2.5% w/w. This outcome had three drivers: signs that consumer spending remains resilient, progress on debt ceiling negotiations and AI optimism. The week began with an announcement by PacWest Bancorp, one of the regional banks in the spotlight, that it has sold a portfolio of construction loans to Kennedy-Wilson Holdings, which caused a sharp rally in regional banks. During the week, there were concerns about global growth as the manufacturing PMI in the US, and Europe came in below expectations. Investors were also concerned about the strength of China’s economic rebound, and there was news about a new COVID wave in China. Meanwhile, U.S. equity markets stabilised as Nvidia (the Company) announced spectacular earnings during the week. The Company is at the epicentre of the AI arms race. Following the announcement, its stock was up >$180.0bn in market capitalisation, 1.5x the value of Intel and Qualcomm. Marvell Technologies also posted solid earnings, citing AI-driven demand. The ICE Semi Index rallied, up 10.0% w/w and 40.0% YTD. At the week’s close, markets moved higher following press reports suggesting that an agreement to raise the debt ceiling by $31.4bn was impending. This would allow defence spending to increase by 3.0% while capping discretionary spending around current levels. Finally, another round of economic data points to resilience in economic activity, highlighting that inflation remains stubbornly high. The U.S. Q1-2023 GDP was revised higher to 1.3% y/y from 1.1% y/y due to an increase in consumer spending. However, the PMIs were mixed as Manufacturing PMI dropped to 48.5 (from 50.2) while services PMI rose to 55.1 (from 53.6) in May-2023.
In Europe, equity markets closed lower due to a gloomier economic outlook. Major indexes weakened, with UK’s FTSE 100 fell 1.7%, Germany’s DAX down 1.8% w/w, France’s CAC 40 down 2.3%, and Italy’s FTSE MIB down 2.9% w/w. Germany’s economy (the continent’s economic engine), has entered a technical recession. The German Federal Statistical Office estimates showed that GDP fell by 0.3% q/q in Q1-2023, following a 0.5% q/q decline in Q4-2022. According to the Economic Minister, Robert Habeck, this is due to the immense weight of inflation, which has seen household consumption falls 1.2% q/q in Q1-2023. Government spending has also fallen 4.9% in Q1-2023.
In Asia, China’s benchmark CSI 300 index fell 2.4% w/w. The Hang Seng Index also fell 3.6%w/w. This was due to fears that the country’s post-pandemic recovery was losing momentum. As expected, Chinese banks kept their one- and five-year loan prime rates steady, following the People’s Bank of China (PBOC)’s decision to keep its one-year policy loan rate unchanged earlier in the month. Conversely, the Japanese Nikkei 225 was up 0.4% w/w, propelled by substantial PMI numbers. The data showed that Japan’s PMI manufacturing rose to 50.8 (from 49.5), signalling an improvement in operating conditions, while PMI services rose to 56.3 (from 55.4).
Commodities were broadly weaker during the week. Natural gas prices moved lower in the US and Europe as US Natural Gas closed -10.7% w/w and Dutch Natural Gas closed -17.4% w/w. There was weakness across the metals complex, with Gold (-1.8% w/w), Silver (-2.6% w/w) and Copper (-1.6% w/w) closed lower. The exception was Oil following Saudi Arabia’s Energy Minister’s warning that bearish oil traders would be “ouching” ahead of this week’s OPEC+ meeting. Brent Crude rose 1.8% w/w.
The position of the aforementioned Debt Ceiling negotiations will set the tone for this week. Asides from this, the focal point for Investors and Economists will be on economic data with global highlights, including China PMIs and EU CPI. Also, CB Consumer Confidence, ISM Manufacturing and Labour market data will be closely watched, with the BLS Employment Report capping off the week. We expect to hear from Fed Officials before their media blackout window begins next weekend (03- to 25-Jun). Finally, on Saturday (03-Jun), the OPEC and non-OPEC Ministerial Meeting will be held.
Macro Highlight and Outlook
Last week Monday, 22 May 2023, the former President, Muhammadu Buhari, alongside with other five (5) African Presidents commissioned the Dangote refinery (the Refinery). At full capacity, the Refinery which is said to be the largest in Africa can meet 100.0% of Nigeria’s demand for all refined products and have a surplus for export. The first tranche of petroleum products from the refinery will be supplied to the market by the end of July and early August.
Domestic banks and foreign banks majorly financed the Refinery. However, prior to the commissioning of the Refinery, the Governor of the Central Bank of Nigeria (CBN, or Apex Bank), Godwin Emefiele stated that Dangote Group has remitted 70.0% of the loans obtained from the Apex Bank to build the Refinery.
Shortly after the commissioning of the Refinery, at a stakeholders’ engagement on gas utilization in Nigeria, the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) announced that no unlicensed Petroleum Product Dealer would be allowed to load products from 01 June 2023. Thus, the NMDPRA vowed to shut down such businesses beginning from the first day of supply of petroleum products from the Refinery.
Similarly, the Nigerian National Petroleum Company Limited (NNPC) has signed OML 130 agreements with the China National Offshore Oil Corporation. The suite included a Production Sharing Contract, Heads of Agreement Amendment, Settlement Repayment Agreement, Concession Contracts for 1 PPL and 3 PMLs, and Lease & License Instruments. The OML 130 is a deepwater block located 130.0 kilometres offshore Niger Delta at water depths of over 1000 meters.
In a related news, the NNPC has resumed oil exploration in the Lake Chad Basin in Borno State. According to NNPC Energy Service Ltd. (ENSERV)’s officials, the project is being done under NNPC Frontier Exploration Service for the Nigerian Upstream Petroleum Regulatory Commission (NUPRC).
Based on recent developments in the Energy Sector, the Federal Government has signed the Nigeria Upstream Petroleum Measurement Regulation, 2023 and six (6) other regulations into law. The objective of the new laws is to address crude oil theft and inaccurate measurements of petroleum products in the country.
According to the monthly Price Watch released by the National Bureau of Statistics (NBS), the price of petrol rose by 47.2% y/y in Apr-2023. This further exacerbating the inflationary pressures due to the knock-on effects on transportation and energy costs.
In a similar data released by the CBN, Oil and Gas companies paid N346.0bn as a penalty for gas flaring in five years. The fines have had little effect in discouraging companies from flaring gases as there has been an increase in flared gases largely attributed to the relatively low fines and lack of adequate infrastructure. The FG through the Society of Petroleum Engineers, Nigeria Council disclosed the FG would increase flare penalties.
The National Information Technology Development Agency (NITDA, or the Agency) stated that, Nigeria receives almost 30.0% of Africa’s Foreign Direct Investment (FDIs). The Agency further noted that the Nigerian tech ecosystem had attracted about $4.4bn investment in 2015, 2019 and 2020 commutatively, while ICT has contributed about 18.5% to the nation’s Gross Domestic Product (GDP).
Last week Tuesday and Wednesday (23 to 24 May 2023), the Monetary Policy Committee (Policy Makers or MPC) held its 291st meeting to take its next monetary policy decision. After a thorough consideration of the state of the economy, the Policy Makers unanimously voted to increase the monetary policy rate (MPR or the benchmark rate) by 50bps from 18.0% to 18.5%.
In the same vein, the Nigeria Gross Domestic Product (GDP) Q1 2023 report was released by the National Bureau of Statistics (NBS) on Wednesday, 24 May 2023. Excerpts from the report shows that Nigeria’s GDP plunged from 3.5% in Q4-2022 to 2.3% in Q1-2023. The decline in the Q1-2023 GDP was attributed to the effects of the cash crunch that resulted because of the inadequately implemented Naira redesign policy.
The CBN has revoked the licenses of one hundred and seventy-nine (179) Microfinance Banks, four (4) Primary Mortgage Banks and three (3) Finance Companies in the country. This just reiterates the regulators commitment to ensuring an efficient and healthy banking sector. Based on the foregoing, the Nigeria Deposit Insurance Corporation has assured depositors of the closed banks of speedy payment of their insured sums from the sale of the defunct banks’ assets.
This week, we expect the NBS to release Nigeria’s Q1-2023 Capital Importation report, Telecoms Data report and Selected Banking Data report.
Domestic Equities: The Bulls Prevailed…ASI is up 1.5% w/w
Last week, the local equities market closed green in four (4) out of five (5) trading sessions, owing to increased bargain-hunting activities across fundamentally sound stocks. Relatively lower share prices and strong corporate developments/actions in the market stimulated investors’ sentiment. Notably, buy interests in banking stocks like ACCESSCO (11.8% w/w), UBA (+11.4% w/w), ZENITHBA (+3.9% w/w), NESTLE (+10.0% w/w), and MTNN (+1.5% w/w) among others, drove the bourse’s northward close last week. As a result, the benchmark All Share Index (NGX-ASI) climbed by 1.5% w/w to print at 52,973.9 points. Hence, YTD return strengthened to 3.4%, while market capitalisation gained N429.6bn w/w to print at N29.0tn. However, the activity level was mixed, as the average value of shares traded climbed 5.6% w/w to print at N6.8bn, while the average volume of shares traded declined by 30.3% w/w to print at 390.5mn units.
Across sectors, overall w/w performance was mainly bullish as four (4) of the five (5) sectors we cover closed green. The Banking (+5.6% w/w) sector led the gainers due to increased bargain-hunting activities in ACCESSCO (+11.8% w/w), UBA (+11.4% w/w), ZENITHBA (+3.9% w/w). Following behind Insurance (+3.6% w/w) due to share appreciation in AIICO (+6.9% w/w), NEM (+6.0% w/w), and MANSARD (+5.1% w/w). The next sector was Oil & Gas (+3.2% w/w) due to price increases in TOTAL (+14.5% w/w), SEPLAT (+2.1% w/w), and the last sector under our purview was Consumer goods (+3.1% w/w) hinged on price appreciation in NESTLE (+10.0% w/w), DANGSUGA (+7.0% w/w), INTBREW (+6.5% w/w), and UNILEVER (+9.9% w/w). , On the flip side, sell pressure in BUACEMEN (-2.9% w/w) weighed down the Industrial goods (-0.7% w/w) sector, despite the notable buy-pressure in WAPCO (+3.5% w/w).
As indicated by the RSI (@ 57.7pts compared to the “overbought region” @ 70.0pts), we see more room for extended bargain hunting among listed corporates as investors look to reinvest dividends received across fundamentally sound stocks. We expect the slow reversal of yields in the fixed-income market to play a vital role in our expectations. More risk-averse investors will look to book some profit off profitable positions. Finally, as we advance, the recent 50bps hike in MPR and the potential upward reversal of yields will remain substantial downsides to the bourse’s performance.
Money Market Review: Buoyant System Liquidity Drove Rates Lower in the PMA
Last week, the financial system opened illiquid with a deficit of N8.1bn. During the week, coupon payments to the tune of N17.9bn and N393.5bn worth of FAAC inflows hit the system. This helped to bolster system liquidity. The financial system closed the week buoyant, with a balance of N278.4bn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 355bps w/w and 373bps w/w to close the week at 11.8% and 12.3%, respectively.
The CBN conducted an NT-bills Primary Market Auction (PMA) rolling over a total of N180.5bn worth of bills across the 91-day, 182-day and 364-day papers. At the auction, investors’ demand was strong, supported by the liquidity in the system. Most of the bids were particularly skewed towards the tail-end of the curve. Thus, the auction was oversubscribed, with total subscriptions printing at N811.14bn, implying a bid-to-cover ratio of 4.5x. Notably, the Apex Bank opted to sell just the amount on offer. Consequently, the stop rates on the 91-day, 182-day and 364-day bills declined by 221bps, 145bps and 100bps, settling at 2.29%, 4.99% and 7.99%, respectively.
In the secondary NT-bills market, we observed buy-interests among investors as the unmet bids in the PMA trickled into the market. As a result, the average yield on NT bills fell by 18bps w/w to close at 6.80% (previously 6.98%).
This week, we expect the liquidity in the financial system to be depressed in the absence of any significant maturity. Thus, we expect the money market and funding rates to tick upwards on the back of the relatively illiquid system. Although we anticipate N20.0bn worth of OMO maturities to hit the system, we believe the CBN’s retail FX auctions and CRR debits will mop up the liquidity. Lastly, we expect the recent hike in the benchmark interest rate to support the expected upward reversal of the yield curve.
Bond Market: Bullish Sentiments in Sovereign Bonds Market
Last week, the secondary bonds market closed bullish as marginal buy-interests among investors due to the N17.9bn coupon payments inflow drove rates lower. Overall, the average yield across sovereign bonds declined by 7bps w/w to close at 13.98% (previously 14.05%). Similarly, corporate bonds traded on a bullish note, driven by the inflow of N2.1bn coupon payments, as the average yield on corporate bonds fell by 14bps w/w to 13.86% (previously 14.00%).
In the Nigerian secondary Eurobonds market, sentiments were largely bullish as investors sought to reinvest their funds from the $42.6mn coupon payments. Thus, the average yields in the market closed lower by 56bps w/w to settle at 12.07% (previously 12.63%).
Looking forward, we expect bearish sentiments to resume in the sovereign secondary bonds market hinged on the expected illiquidity in the financial system. However, in the corporate bonds market, we expect the anticipated N4.5bn worth of coupon payments to drive bullish sentiments among investors. Similarly, we expect some buy-interests in the Eurobonds market as investors seek to reinvest the $105.9mn inflows from coupon payments.
Currency Market: Naira Depreciated at the I&E Window
Last week, the Naira depreciated by 30bps w/w at the Investors & Exporters (I&E) window to close at N464.51/$, from its previous close of N463.0/$. At the parallel market, we saw increased activity largely attributed to speculators and investors’ responses to yesterday’s inauguration of the new elected President. We saw quotes in the N755/$- N767.0/$ range. Lastly, the most recent CBN data shows Nigeria’s external reserves at $35.2bn (as of Tuesday, 23 May 2023).
This week, we expect continued pressure on the Naira across all market segments, given that FX pressures will persist as Dollar earnings remain weak, and demand outweighs supply.
