June 5, 2023/United Capital
Global Markets: Mixed Investors’ Sentiments
Last week, the US markets rallied. At the start of the week, opening on Tuesday after the holidays with mixed sentiments. Among others, investors weighed the uncertainty around the debt ceiling deal passing in both chambers of Congress. In addition, worries about Fed policy following pro-hike statements from committee members and the Conference Board’s Consumer Confidence Index dipped to 102.3 in May-2023 from an upwardly revised 103.7 in Apr-2023. In the same period a year ago, the index stood at 103.2. The key takeaway from the report was that expectations remain downbeat, which incorporates a notable worsening in the outlook in May among consumers over 55 years of age. Midweek the significant indices all turned lower due to concerns about global growth. However, at the week’s tail end, the market was broadly bullish, triggered by positive labour numbers. Market participants were digesting weekly initial jobless claims and the ADP Employment Change for May-2023 that reflected continued strength. May-2023 ADP Employment Change was 278.0K. The key takeaway from this report was that job growth is still strong but that pay growth is slowing. While the Weekly Initial Claims was 232.0K, the prior print was revised to 230.0K, and the critical takeaway from the report is that businesses overall remain reluctant to cut staff size in large numbers, leaving the level of initial jobless claims well below what is typically seen in a recession environment. Finally cementing the rally for the week was the uncertainty about the debt ceiling, which had loomed over the market for weeks which finally eased after both chambers of Congress passed a deal. The bill now heads to President Biden for signing. Furthermore, the Employment Situation Report for May-2023 helped push recession and rate hike fears to the backburner for now. The employment report featured a 339,000 increase in nonfarm payrolls, a moderation in y/y average hourly earnings growth to 4.3% from 4.4%, and a bump in the unemployment rate to 3.7% from 3.4%. Thus the S&P 500 (+1.8% w/w), Nasdaq (+2.0% w/w) and DJIA (+2.0% w/w) all experienced weekly gains.
In European markets closed mixed. The pan-European STOXX 600 index (+0.2% w/w) recorded gains primarily due to investors’ sentiments after the US debt ceiling deal was passed by both chambers of Congress and the eurozone’s inflation numbers were released. The eurozone’s CPI moderated to 6.1% year-over-year in May from 7.0% in April, while core CPI dropped to 5.3% year-over-year from 5.6%. German equities rallied in tandem (DAX closed +0.4% w/w). In the UK, the local equities posted weekly losses. The FTSE 100 declined 0.3% w/w, extending the previous week’s drop, on worries that further monetary tightening by the Bank of England could strain corporate earnings and as investors flagged stagflation risks. Similarly, the French CAC lost 0.7% w/w.
The Asian markets were bullish. The US debt ceiling deal, passed by both chambers of Congress, spurred bullish sentiments in the market. In addition, within the week, we saw China’s Caixin manufacturing PMI for May jump back into expansion territory with a 50.9 reading (prior 49.5). South Korea’s consumer inflation eased for a fourth consecutive month in May-2023 to the lowest in 19 months. Still, core inflation remained elevated, clouding views on whether the central bank may cut interest rates soon to boost economic growth. The consumer price index (CPI) rose 3.3% y/y in May-2023; Statistics Korea data revealed declining from a 3.7% y/y rise in the previous month. The Shanghai Composite rose by 0.5% w/w. The Taiwan TSEC index rose 1.2% w/w, and the Hang Seng Index rose 1.1% w/w. Last week, Japan’s government pledged to pull the economy out of deflation through bold monetary policy, flexible fiscal policy and a growth strategy. The government hopes the Bank of Japan achieves its 2.0% inflation target in a stable, sustained fashion accompanied by wage growth. The benchmark Nikkei index closed at a three-decade high gaining 2.0% w/w. While the Indian Sensex closed flat.
Last week oil prices declined due to concerns about whether the US Congress will pass the US debt ceiling pact. In addition, the pressure on oil prices arose as mixed messages from major producers clouded the supply outlook ahead of the OPEC+ meeting. Furthermore, weaker-than-expected manufacturing data from China, the world’s largest crude importer, raised fears about demand growth in H2-2023. Also, the U.S. Dollar index surged, hitting a two-month high, on expectations that the Federal Reserve will raise interest rates again in its Jun-2023 meeting. In the last few trading days of the week, oil prices rose as markets cheered the approval of a bill to raise the U.S. debt ceiling and avoid a default, although uncertainty ahead of the OPEC meeting over the weekend kept gains in check. Nonetheless, oil posted weekly losses, with Brent Crude losing 1.0% w/w to print at $75.97/bbl.
This week, we expect a relatively quiet market. Investors would pay attention to data from Canada, the UK and the US PMI numbers, which would provide insights into the state of these economies. We also expect the markets to react to the outcome of the OPEC+ meeting that was held over the weekend.
Macroeconomic Highlights and Outlook
Last week, Nigeria’s state oil firm, Nigerian National Petroleum Company Limited (NNPCL), hiked petrol prices to as high as N557.0/ltr. ($1.21) from N189.0/ltr., days after new President Bola Tinubu said fuel subsidies would be scrapped. The NNPCL stated that the recent increase in fuel pump prices will lead to enhanced market competition in the downstream sector. The NNPC GCEO, Mele Kyari, emphasised that the adjustment, aligning pump prices with market rates, will promote competition and efficiency in the industry.
The Central Bank of Nigeria has debunked the claim that it has devalued the Naira. A statement signed by the Acting Director of Corporate Communications, Isah AbdulMumin, indicated that the Dollar traded at N465/$1, contrary to reports.
Nigeria experienced a 60% increase in liquefied petroleum gas (LPG) prices in 2022, according to the African Development Bank (AfDB). The lack of infrastructure and reliance on imports contribute to Nigeria’s high LPG prices, hindering progress in achieving energy access and security in the country.
The Nigerian-Indonesia Chamber of Commerce and Industry has disclosed that the trade balance between Nigeria and Indonesia has increased significantly by 80.8% to reach $4.7bn in 2022, from $2.6bn in the prior year.
The Senior Special Assistant to the National president of the Association of Nigerian Licensed Customs Agents (ANLCA) on Government Warehouse, Mr. Olawale Cole, has called on President Bola Ahmed Tinubu, to review import duties and levies on used vehicles also known as ‘Tokunbo’ and general cargoes.
The Federal Government borrowed N6.07tn from the Central Bank of Nigeria through Ways and Means Advances in 2022, according to recent data from the apex bank. This pushed the Federal Government’s borrowing from the CBN from N17.46tn in December 2021 to N23.53tn in December 2022.
According to the National Bureau of Statistics (NBS), the Nigerian Insurance sector contracted by 8.0% y/y in Q1-2023 from a growth of 2.2% y/y and 7.7% y/y in Q4-2022 and Q1-2022, respectively. The decline in economic performance can be attributed to the cash crunch crisis that emanated from the Central Bank of Nigeria’s (CBN) naira redesign policy.
The new President of Nigeria, Bola Tinubu, has officially inherited over N16.3tn uncompleted projects from his predecessor, Muhammadu Buhari. The projects were identified through the national monitoring and evaluation platform EYEMARK, which was launched by Buhari in Dec-2022.
The House of Representatives approved an amendment to the Central Bank of Nigeria Act, raising the ceiling of Ways and Means Advances from the apex bank from 5.0% to 15.0%. The House gave the approval at an emergency sitting, in concurrence with the Senate.
This week, we expect the Nigerian Bureau of Statistics (NBS) to publish its Nigerian Capital Importation Report for Q1-2023. On the sectoral level, we expect the NBS to release its Pension Asset and Membership data for Q1-2023, Telecoms data for Q1-2023, and Selected Banking Sector data for Q1-2023. Overall, we expect the macroeconomy to be influenced by potential ministerial appointments and economic policy decisions by the new administration.
Domestic Equities: Positive Sentiments Spurred a Rally in the Market…ASI up 5.4%
Last week, the local equities market closed northwards as the bulls maintained their dominance in the market. In particular, the market opened the first trading day of the week spurred by positive sentiments following the announcement of some attractive policies from the new government in power. Notably, share price appreciations in large-cap stocks such as MTNN (+7.5% w/w), DANGCEM (+7.4% w/w) and BUAFOODS (+11.0% w/w) dragged the local bourse northwards. As a result, the benchmark All Share Index (NGX-ASI) climbed by 538bps w/w to print at 55,822.8 points. Hence, YTD return strengthened to 8.9%, while market capitalisation gained N1.6bn to print at N30.4tn. Activity level improved as average value and volume declined by 72.0% w/w and 64.6% w/w to N11.7bn and 646.4mn units, respectively. Investors’ sentiment strengthened to 2.9x, as 66 tickers appreciated while 23 depreciated.
Across sectors, overall w/w performance was mainly bullish as all the five (5) sectors under our coverage closed in the green zone. The Oil & Gas (+10.5% w/w) sector led the gainers, following buy-interests in downstream players like CONOIL (+45.8% w/w) and TOTAL (+11.8% w/w) due to the reviewed petroleum prices. Trailing was the Consumer goods (+8.5% w/w) sector, buoyed by gains in BUAFOODS (+11.0% w/w) and NESTLE (+8.9% w/w). This was followed by the Industrial goods (+5.8% w/w) and Banking (+4.9% w/w) sectors, due to bargain-hunting activities in DANGCEM (+7.4% w/w), BUACEMEN (+4.6% w/w), ZENITHBA (+5.9% w/w) and ACCESSCOR (+8.8% w/w). Lastly, the Insurance gained 1.2% w/w, on account of price appreciations in NEM (+5.3% w/w) and AIICO (+5.2% w/w).
On corporate results, First Bank Plc released its FY-2022 audited and Q1-2023 unaudited results. In FY-2022, First Bank’s topline revenue grew by 6.3% y/y to N805.1bn. However, the bank’s Profit After Tax (PAT) fell by 9.9% y/y to N136.2bn due to increases in operating costs and impairment losses. On the other hand, First Bank’s results in Q1-2023 were more impressive as the bank’s revenue and PAT grew by 42.3% y/y and 54.5% y/y, respectively. Lastly, the bank proposed a final dividend of N0.50k per share for FY-2022.
This week, we expect mild bullish sentiments in the market as we believe that the positive sentiments will further drive some buy-interests among investors. However, we note that there may be pockets of profit-taking activities as investors will seek to book their gains off the previous week’s rally.
Money Market Review: Funding rates inch higher
Last week, the financial system opened liquid with a balance of N206.5bn. The observed liquidity came to be, despite CRR debit to the tune of N66.0bn. Throughout the course of the week (in the aftermath of the inauguration ceremony of the new President of FGN), the financial system remained liquid, helped in part by the leftover FAAC inflow from the previous week and the OMO maturities of N20.0bn. Ultimately, the system rounded up the week strong (in terms of liquidity), with a balance of N167.2bn. Funding rates remained depressed through the week, although ticking higher on a weekly average. The average Open Repo Rate (OPR) and Overnight Rate (OVN) inched higher by 13bps w/w and 7bps w/w to close the week at 11.9% and 12.4%, respectively (previously 11.8% and 12.3%).
In the secondary NT-bills market, we observed buy-interests among investors, which was bolstered by the observed system liquidity. As a result, the average yield on NT bills fell by 45bps w/w to close at 6.35% (previously 6.80%).
This week, we expect a tussle for pricing power between fund managers and treasuries. However, we see the demand for higher rates outweighing, paving the way for an upward reversal of the yield curve. A strong buttress for our expectation is the zero-liquidity expected in June (across all the key segments of the fixed-income market). We expect the demand and supply of money to provide extra support for the actualization of our expectations. FTD, money market, and funding rates are projected to begin ascent this week. The CBN’s “CRR debit” is most likely to remain pivotal on one hand (keeping in view the recent increase of the ceiling of the Ways and Means from 5.0% to 15.0%), while the FG’s objective to ease interest rates will provide some incentives for the CBN to want to keep the financial system relatively liquid in a bid to delay the inevitable (an upward reversal of rates).
Bond Market: Bullish Sentiments in Sovereign Bonds Market
Last week, the secondary bonds market closed mildly bullish supported by the observed liquidity in the financial system. Overall, the average yield across sovereign bonds declined by 10bps w/w to close at 13.88% (previously 13.98%). Similarly, corporate bonds traded on a bullish note, driven by the inflow of N4.5bn coupon payments received. Thus, the average yield on corporate bonds tapered by 10bps w/w to 13.76% (previously 13.86%).
In the Nigerian secondary Eurobonds market, investors were bullish. The sentiment was majorly influenced by the $105.9mn coupon payments that were received, as investors sought to reinvest their funds. Ultimately, the average yields across the Eurobond curve closed lower by 69bps w/w to settle at 11.38% (previously 12.07%).
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 N2.8bn worth of coupon payments to instigate mild bullish sentiments among investors. We anticipate that broad-based investor sentiment toward Nigerian Eurobonds will mirror sentiments in the Sub-Saharan African region. The anticipated zero coupon payment in Jun-2023 will encourage bearish sentiments on the one hand, but the positives from Ghana securing its $3.0mn IMF loan arrangement are anticipated to hoist bullish flags across the board.
Currency Market: Naira Depreciated at the I&E Window
Last week, the Naira depreciated by 3bps w/w at the Investors & Exporters (I&E) window to close at N464.67/$, from its previous close of N464.51/$. Average daily market activity at the I&E window improved by 13.2% w/w to $159.1mn from the previous week’s average of $140.6mn. At the parallel market, we saw quotes in the N740/$- N750.0/$ range. Lastly, the most recent CBN data shows Nigeria’s external reserves at $35.1bn (as of Tuesday, 30 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.