June 19, 21023/United Capital
Global Markets: Halt in Fed’s Rate Hike Drove Bullish Investors’ Sentiments
Last week, US markets were broadly bullish as investors reacted to economic data and the Fed’s interest rate decision. Consequently, the major indices all logged decent gains, which had the S&P 500 (+2.6% w/w) close above 4,400 for its fifth (5th) straight winning week and the Nasdaq (+3.2% w/w) its eighth (8th) straight week of gains. The week started on a positive note after Goldman Sachs raised its 2023 year-end S&P 500 price target to 4,500pts from 4,000pts. Similarly, the rally for the week was catalysed by the release of the May Consumer Price Index (CPI) report on Tuesday followed by the May Producer Price Index (PPI) report, FOMC decision, and Fed Chair, Powell’s press conference on Wednesday. The CPI and PPI reports were in line with markets expectations as stakeholders were comfortable with the inflation trend. Total CPI inched sluggishly by 0.1% m/m in May-2023. Core CPI, which excludes food and energy, increased 0.4% m/m, as expected, driven by a 0.6% increase in the shelter index and a 4.4% upsurge in the index for used cars and trucks. On a year-over-year basis, total CPI advanced 4.0%, compared to 4.9% in Apr-2023, marking the smallest change since the 12 months ending Mar-2021. Core CPI rose 5.3% y/y, versus 5.5% in Apr-2023, with the shelter index (+8.0%) accounting for over 60% of the total increase. The key takeaway from the report was that inflation rates are moving in the right direction, although core inflation in particular will still be viewed by the Fed as “too high,” which is why the prospect of another rate hike in July will be kept alive. In addition, bolstering bullish sentiments; the FOMC voted unanimously to keep the target range for the fed funds rate unchanged at 5.00-5.25%. The latest dot-plot showed an upward thrust in the median projection for the fed funds rate in 2023 to 5.60% from 5.10%. The DIJA (+1.2% w/w) and the Russell 2000 (+0.5% w/w) posted weekly gains.
European shares closed at a three-week high on Friday (16-Jun-2023), underpinned by a rally in luxury and defensive stocks at the end of a week that was dominated by major central bank policy decisions. The ECB announced a 25 basis points increase in its three key policy rates, as expected. The continent-wide European Stoxx 600 index gained 1.5% w/w in the policy-packed week, its best performance in over two months. China-focused luxury stocks such as LVMH and Richemont gained nearly 3.0% each at the end of the week, boosting the broader Stoxx 600. France’s luxury-heavy CAC 40 advanced 2.4% w/w and was among the highest regional gainers, while Germany’s DAX (+2.6% w/w) closed at a fresh all-time high. Defensive shares such as healthcare gained 0.9%, and utilities climbed 1.3% to a four-week peak.
In the same vein, Asian equities rallied last week. The bullish sentiments form North America and Europe trickled into Asian market. Further bolstering bullish sentiments, the Bank of Japan left its interest rate on excess reserves (-0.10%) and yield curve control unchanged. Also, the People’s Bank of China announced a 10 basis points cut in the one-year medium-term lending facility rate to 2.65% from 2.55%. This followed China’s weaker than expected retail sales, industrial production, and fixed asset investment data for May. Thus, the Shanghai composite (+1.3% w/w). Hang Seng (+3.4% w/w) Japan’s Nikkei 225 Index (+4.5% w/w), Taiwan SE weighted index (+2.4% w/w) and the Indian Sensex (+1.2% w/w) all posted weekly gains.
In the crude oil space, oil prices rose last week. Within the week crude prices increased following the decision by the People’s Bank of China (PBOC) to lower its short-term lending rate for the first time in ten (10) months. In addition, substantial increase in demand from Chinese refineries following the release of more stimulus from the country’s Central Bank further bolstered prices. At the end of the week oil rose and posted a weekly gain, as higher Chinese demand, and OPEC+ supply cuts lifted prices, despite expected weakness in the global economy and the prospect for further interest rate hikes. Thus, Brent Crude futures climbed by 2.4% w/w to print at $76.61/bbl.
This week would be a shortened week in the US and China due to the respective Juneteenth and Dragon Boat holidays. The direction of the financial markets would be largely dependent on the release of inflation numbers for May-2023 and interest rate decision in the UK. Additional macroeconomic releases would be Jun-2023 PMI data for German, the UK, and the US.
Macro Highlight and Outlook
The National Bureau of Statistics (NBS) released Nigeria’s May 2023 Consumer Price Index (CPI) report. The report revealed yet another increase in y/y inflation rate, climbing by 19bps to print at 22.41% y/y from 22.22% in April 2023. On a divisional level, intensified pressure in the inflation of prices of food and non-alcoholic beverages were the main drivers of the headline inflation print. On a month-on-month perspective, headline inflation rate recorded a 3bps climb to print at 1.94% m/m from 1.91% m/m in April 2023.
Similarly, the Central Bank of Nigeria (CBN) has directed Deposit Money Banks (DMBs) to remove the rate cap on the Naira at the official Investors and Exporters’ (I&E) Window of the foreign exchange market. This is to allow for a free float of the national currency (Naira) against the Dollar and other global currencies.
Meanwhile, the Nigerian Government is currently drafting a proposed National Pay Policy, according to the National Salaries Incomes and Wages Commission (NSIWC). This is amid demands by the Trade Union Congress of Nigeria (TUC) for an increase in the minimum wage to N200,000 by the end of June 2023 and a tax holiday for employees earning below that threshold.
In another news, the Organisation of the Petroleum Exporting Countries (OPEC or the group) has said, although Nigeria’s economy faced challenges in H1-2023, it may recover in the coming months. The group in its latest Monthly Oil Market Report for May said the recovery projection was hinged on Nigeria’s Purchasing Manager Index for Apr-2023, which recovered strongly to 53.8 compared with only 42.3 in Mar-2023.
Moreover, the Finance Bill 2023 which was signed into law on 28 May 2023 by former President, Muhammadu Buhari imposes a 0.5% levy on goods imported into Nigeria from outside Africa. This is in addition to current custom duties and other approved charges.
TotalEnergies has discovered oil and gas at the OML 102 offshore oilfield in Nigeria. ML 102 is operated by TotalEnergies Nigeria with a 40% interest, alongside state-oil firm NNPC Ltd which holds the remaining 60%.
This week, we expect the National Bureau of Statistics (NBS) to release Nigeria’s Q1-2023 Terms of Trade Report. Other than that, we expect the macroeconomic space to be relatively quiet.
Domestic Equities: The Market Extends its Bullish Run… ASI Up 5.5%
Last week, the local equities market continued its northward trajectory. There were share price appreciations across board equally, strong performances by MTNN (+9.6% w/w) and AIRTELAF (+7.8% w/w) were the primary All-share index movers. As a result, the benchmark All Share Index (NGX-ASI) appreciated by 549bps w/w to print at 59,000.96 points. Hence, YTD return strengthened to 15.2%, while market capitalisation gained N1.6tn to print at N32.1tn. Equity turnover improved as the average value rose and volume traded rose by 150.4% w/w and 68.5% w/w to N15.5bn and 1.1bn units, respectively. Investors’ sentiment strengthened to 3.2x, as 77 tickers appreciated while 24 depreciated.
Across sectors, overall w/w performance was bullish as four of five (5) sectors under our coverage closed bullish. The Banking Index (+12.6% w/w) led the gainers, following buy-interests in ZENITHBA (+10.7% w/w), ETI (+22.2% w/w) and ACCESSCO (+9.6%). It was followed by the Oil/Gas index (+12.0% w/w) and the Insurance index (+9.0% w/w), driven by buy interest in TOTAL (+21.0% w/w), SEPLAT (+10.0% w/w), WAPIC (+40.4% w/w) and AIICO (+19.4% w/w). The Consumer goods index rose 4.1% w/w, due to gains in BUAFOODS (+4.5% w/w). The Industrial Goods index (-1.6% w/w) was the sole loser, following share price depreciation in BUACEM (-6.5% w/w).
This week, we expect the bullish sentiments in the market to linger in the short-term, driven by positive sentiments by investors on account of interesting pronouncement and policies implementation by the new administration. However, we foresee pockets of profit-taking activities as some investors would book their gains from the bourse’s recent rally.
Money Market Review: Funding Rates Inched Higher
Last week, after the pre-existing liquidity was cleaned up by CRR debit, the financial system opened the week with modest liquidity with a balance of N198.8bn. In the absence of any maturity, the financial system closed the week with a balance of N194.4bn. Thus, funding rates between banks inched higher during the week. The Open Repo Rate (OPR) and Overnight Rate (OVN), two measures of funding rates between banks, increased by an average of 8bps w/w and 18bps w/w, to close the week at 11.7% and 12.2%, respectively.
At the primary market, the CBN conducted its penultimate NT-Bills auction for the month, rolling over maturing bills to the tune of N34.6bn across the 91-day, 182-day, and 364-day bills. As expected, the auction was oversubscribed by 8.3x, with total bids printing at N286.1bn. Stop rates across the 182.day and 364-day bills tapered by 88bps and 121bps to print at 5.12% and 8.24%, respectively. Conversely, stop rate on the 91-day bill inched higher by 41bps to print at 4.89%.
Conversely, the secondary NT-Bills market was relatively quiet, with investors’ turning more toward standoffish sentiment amid the relatively liquid financial system. Thus, the average yield on NT-Bills inched up by a 2bps margin to settle at 6.29% (previously 6.27%).
This week, we expect investors to continue to lean toward standoffish sentiment, with a preference to sell. The existing negative real returns in the market will remain a strong driver for increased demand for higher rates. The tussle for pricing power will continue, with fund managers and treasuries standing a better chance to demand higher rates. In the aftermath of the bond auction, we expect the financial system to run into a deficit. This is expected to serve as a strong propeller for the long-anticipated rate reversal, particularly at the short end of the yield curve. Overall, we expect FTD and money market rates to inch higher in the last two trading days of this week, amid all the supporting fundamentals (incl. the intensified outlook for inflation in the short term, which is expected to further widen negative return).
Bond Market: Bond Yields Set Tone for Uptick…
The secondary bonds market was relatively quiet. Short selling opportunities were presented. As a result, the average yield across all sovereign bond tenors inched higher by 2bps w/w to close the week at 13.78% (previously 13.76%). In the same vein, the average yield on corporate bonds nudged higher by 17bps w/w to close at 13.73% (previously 13.56%).
Conversely, sentiments were bullish at the secondary market for Nigerian Eurobonds. This was propelled by the floating of the currency (Naira) at the foreign exchange (FX) market. That said, the average yield across the curve tapered by 102bps w/w to settle at 10.93%. (Previously 11.95%).
This week, the DMO will approach the market with a total offer of N360bn, across the re-issued 2029s, and the newly issued 2033s, 2038s, and 2053s. At the auction, we expect marginal rates to trend higher, setting the tone for an upward reversal of rates across the curve. At the secondary market, we expect bearish sentiments to dominate. This would be driven by the reinforced demand for higher rates, amid supporting fundamentals. For the Eurobonds market, we expect bearish sentiments to resurface.
Currency Market: Naira Depreciated Significantly at the I&E Window
Last week, the Naira depreciated by 40.3% w/w at the Investors & Exporters (I&E) window to close at N663.0/$, from its previous close of N472.5/$. The decline in the value of Naira is as a result of the decision by the government to unify the official exchange rates in the different FX markets. At the parallel market, we continue to find offer quotes in the N750.0/$- N767.0/$ range. Activities in the I&E window improved, with average FX turnover climbing by 61.6% w/w to settle at $186.2mn. Lastly, Nigeria’s external reserves fell by 56bps to settle at $34.6bn.
This week, we expect the foreign exchange rate in the I&E window to be determined by the forces of demand and supply in the market.
