July 10, 2023/United Capital Research

Global Markets: Renewed Worries on Global Economic Growth Stifled Sentiments

Last week, the global equities market closed mixed on the back of geopolitical angst and concerns about global economic growth. In the US, the ISM Manufacturing Index for Jun-2023 fell to 46.0pts from 46.9pts in May-2023. This indicates that the manufacturing sector is in a contraction state as optimism about the H2-2023 weakens amid recession concerns. This weighed on investors’ sentiments, and we observed sell-offs across US equities. In the fixed-income market, the yield on the 2-YR note climbed by 7bps to 5.01%, while the 10-YR note yield rose 10bps to 4.04%. The upward movement in yields was ascribed to the release of the FOMC minutes, which solidified the possibility of a 25bps rate hike in the forthcoming Fed’s meeting in Jul-2023. The bump in rates stoked valuation concerns in the stock market as participants considered the possibility of the Fed being more aggressive than expected with its tightening action. As a result, the US indices closed in the red zone as the DIJA (-2.0% w/w), S&P 500 (-1.2% w/w) and NASDAQ Composite (-0.9% w/w) closed the week lower.

In tandem, the European markets recorded w/w losses as investors reacted to the weaker-than-expected economic data releases. The HCOB Eurozone Composite Purchasing Managers’ Index (PMI) was revised downwards to 49.9pts in Jun-2023 from a preliminary estimate of 50.3pts and below May’s final reading of 52.8pts. The figure signalled a stalling of the eurozone economy due to a deepening downturn in factory output and a softer expansion in services activity. On price level, the consumer price inflation rate in the Euro Area decreased to 5.5% y/y in Jun-2023, down from the 6.1% y/y recorded in May-2023. Although this is the lowest level since Jan-2022, it remains significantly above the European Central Bank’s target of 2.0%. In addition, the core inflation printed at 5.4%, supporting the view that policymakers are likely to continue raising rates in the coming months. In the UK, the FTSE 100 declined by 3.6% w/w as renewed evidence of a slowing economy coincided with expectations that the Bank of England (BoE) will deliver multiple rate hikes in the coming months. Lastly, the UK Composite PMI printed at 52.8pts in Jun-2023, down from 54.0pts in the previous month, pointing to slow growth in private sector outputs. At the end of the week, the France’s CAC declined (-3.9%), Germany’s DAX (-3.4% w/w) and Europe’s STOXX (-3.1% w/w).

On the other hand, the Asian market closed positive despite a slowdown in China’s PMI numbers. Notably, the Caxin China General Services PMI fell to 53.9pts in Jun-2023 from 57.1pts in the previous month, thus, fueling concerns about the country’s sluggish post-pandemic recovery. However, the market did not react to this as we observed buy-interests among investors, particularly in high-growth technology stocks. In addition, easing geopolitical concerns lifted sentiments as US Treasury Secretary, Janet Yellen, is set to kick off her visit to Beijing this new week to meet with senior officials in China. Lastly, China’s foreign exchange reserves climbed to $3.19tn at the end of Jun-2023, up from $3.18tn recorded in May-2023, as the Dollar fell against other major currencies. As a result, the capitalisation-weighted Shanghai Composite Index (+0.2% w/w), Indian SENSEX (+0.9% w/w) and Japanese NIKKEI (+2.4% w/w) closed higher.

In the oil market, crude oil prices climbed due to the announcement of the supply cuts  by Saudi and Russia. On Monday, Saudi Arabia, the world’s biggest crude exporter, announced that it would extend its voluntary output cut of 1.0mbpd to Aug-2023. However, Russia and Algeria noted that they would lower their August output and export levels by 500,000bpd and 20,000bpd, respectively. As a result, oil prices closed higher on a weekly basis, with Brent Crude gaining 4.8% w/w to print at $78.47/bbl.

This week, the spotlight will be on prospective speeches by several Fed officials and other major central bank officials around the globe. In the US, economic releases such as the Consumer Price Index (CPI), Producer Price Index (PPI), and trade data reports will shape market activities for the week. In addition, the inflation numbers and trade data for China and India would be released this week. Finally, we expect  investors to closely monitor companies’ performances as the Q2-2023 earnings season is set to begin.

Macroeconomic Highlights and Outlook

The World Bank has projected that inflation may hit 25.0% in 2023 due to petrol subsidy removal. In the aftermath of the petrol subsidy removal, petrol price climbed by more than 300.0%, selling between N485.0/litre–N550.0/litre in places like Lagos and Ibadan. This has tripled cost of transportation and thus prices of goods and services in the local economy. Standard of living rose astronomically in June, with prices up in the ceiling.

However, the Washington-based bank noted that although there will be a significant increase in 2023, headline inflation will fall by the first quarter of 2024. The bank’s position comes on the back of the fact that the subsidy removal creates additional fiscal space and reduces reliance on financing from the CBN, curbing growth of the money supply. It will likely cause a temporary increase in inflation in the upcoming months before contributing to disinflation in the medium term.

Last week, President Bola Ahmed Tinubu, GCFR, signed four executive orders, suspending the 5.0% excise tax on telecommunication services and the excise duty escalation on locally manufactured products as well as deferred the implementation of the changes outlined in the 2023 Finance Act from May 23, 2023, to September 1, 2023, ensuring compliance with the stipulated 90-day advance notice for tax changes. The executive orders aim to curb multiple taxations, as complained by many Nigerians and the business community.

The Bank also proposed that to limit the risk of so-called second-round effects, where one-off price increases trigger more generalized inflation including through wage-price spirals, it will be important to adopt macro-fiscal policy settings that are conducive to price stability.

The foreign exchange segment of the economy was marked by a downward trend in the first half of the year, as reflected in the 35.0% y/y decline in the volume of Dollars traded (turnover) in the Investors and Exporters (I&E) window to $13.1bn in H1-2023 from $20.2bn in H1-2022 . In addition, Naira depreciated against the Dollar by 81.0% y/y to N769.3/$ (vs. N425.1/$), while the nation’s external reserves declined by 7.7% to $34.2bn in the period under review. This will persist in the short-term but is set to ease off as the strategic  policies of the new administration begin to crystalise.

In a significant move to address the liquidity crunch in Nigeria’s foreign exchange market, the Central Bank of Nigeria (CBN) has granted permission to International Oil Companies (IOCs) to resume the sale of US Dollars to banks.

According to a report from CBN, Deposit Money Banks and Merchant Banks deposits with the Central Bank of Nigeria (CBN) increased to N579.3bn in Jun-2023, a 25.4% m/m increase from N461.9bn in May-2023, and a 118.3% y/y increase from N265.3bn in Jun-2022.

A circular was issued by the Director of Financial Policy and Regulation (CBN),  warning the Deposit Money Banks (DMBs) and Other Financial Institutions (OFIs) in the country to be wary of transactions of businesses and persons in the Russian Federation, the Democratic People’s Republic of Korea, Iran and Cameroun.

The CBN disclosed that its action flowed from the decisions taken by members of the Financial Action Task Force (FATF)  at a plenary  which was held last month (June 21-23). The FATF is the global money laundering and terrorist financing watchdog. It sets international standards that aim to prevent these illegal activities and the harm they cause to society.

In addition, Cameroon, Croatia and Vietnam were added to the list of jurisdictions under ‘Increased Monitoring. The Democratic People’s Republic of Korea, Iran and Myanmar remain on the list of high-risk jurisdictions, subject to ‘Call for Action.’

Amid high cost of fuel in the country, UTM FLNG, a Nigerian gas company, has concluded plans to set up the first Floating Liquefied Natural Gas (FLNG) facility in Nigeria and the very first developed by an indigenous private African company, the aim is to stabilize gas price and create job opportunities. This will also improve the local supply of gas.

The Group Chief Executive Officer of The Nigerian National Petroleum Company, Mele Kyari, on Thursday announced that the NNPCL would be constructing another international gas pipeline worth about $8.0bn.

The Chief Executive Officer of NMDPRA, Farouk Ahmed, said the oil marketers reached an agreement to enhance cooperation with security agencies, with the aim of facilitating the seamless supply and distribution of petroleum products.

This week, we expect the Nigerian Bureau of Statistics (NBS) to publish reports on the country’s Energy and Environmental Statistics (FY-2022). This report will provide updated data on key statistics in the Energy Sector. Also, the NBS is scheduled to release the country’s CPI Inflation Report for June 2023 on Saturday 15 July 2023. We expect inflation to continue its upward trend in June, reflecting the impact of the petrol subsidy removal.

Domestic Equities: Bullish Sentiments Persists in the Market…ASI up 3.4%

Last week, the local equities market continued its upward trajectory as the market closed in the green zone. The bulls maintained their dominance in the market as positive sentiments amongst investors  continued to drive the rally in the market amid the depressed fixed-income environment. Notably, share price appreciations in large-cap stocks such as DANGCEM (+5.3% w/w), STANBIC (+17.9% w/w) and FBNH (+19.06% w/w), drove the local bourse northwards. As a result, the benchmark All Share Index (NGX-ASI) climbed by 3.4% w/w to print at 63,040.4 points. Hence, YTD return strengthened to 23.0%, while market capitalisation gained N1.1tn to print at N34.3tn. Activity level improved as average value and volume traded climbed by 110.0% w/w and 154.8% w/w to N29.1bn and 1.97bn units, respectively. Investors’ sentiment improved to 3.1x from 1.3x, as 78 tickers appreciated while 25 depreciated.

Across sectors, overall w/w performance was mainly bullish as four (4) out of the five (5) sectors under our coverage closed in the green zone. The Banking (+9.8% w/w) sector led the gainers, following buy-interests in ACCESSCO (+13.0% w/w), UBA (+15.9% w/w) FIDELITY (+27.60% w/w). Followed closely by the Oil & Gas (+7.2% w/w) sector, buoyed by gains in CONOIL (+23.5% w/w), ETERNA (+34.3% w/w) and MRSOIL (+26.0% w/w). The Insurance (+4.9% w/w) and Industrial goods (+2.2% w/w) sectors rallied due to bargain-hunting activities in CHIPLC (+9.3% w/w), CORNEST (+5.9% w/w), DANGCEM (+5.3% w/w) and WAPCO (+2.2% w/w). Lastly, the Consumer goods sector lost 0.2% w/w, on account of price depreciations in NESTLE (-4.0% w/w) and NB (+2.9% w/w).

This week, we expect the bullish sentiments in the equities market to persist on the back of the attractiveness of the market over the depressed rates in the fixed-income market. Also, we believe the positive sentiments around the new policies to continue to drive the rally in the market. Lastly, we expect investors to begin to take positions ahead of the upcoming Q2-2023 earnings season.

Money Market Review: Inter-bank Rates Declined Further

Last week, the financial system had an opening balance of N872.3bn. Despite the absence of any maturity, the financial system closed the week with a balance of N818.0bn. Funding rates between banks declined further. The Open Repo Rate (OPR) and Overnight Rate (OVN), two measures of funding rates between banks, tapered by an average of 62bps w/w and 90bps w/w, to close the week at 0.98% and 1.4%, respectively. 

The secondary NT-Bills market was bullish, with investors looking to exploit the current rates in the secondary market amid the liquid financial system and the expectation of further rate declines. Thus, the average yield on NT-Bills tapered by 6bps to settle at 6.29% (previously 6.35%).

This week, we expect the liquidity in the financial system to incentivise further buy interest. Although the overall demand for higher rates has kept the money market and FTD rates elevated in the upper region of the single digit, we expect the prevailing system liquidity to determine the direction of rates in the fixed-income market. Supply and demand fundamentals will continue to prevail at the short end of the curve.

Bond Market: System Liquidity Drove Rates Lower

The secondary FGN Bond market closed the week relatively bullish. Most investors expressed standoffish sentiments towards fixed-income instruments, streaming in higher bids across all tenors, but their thirst for higher rates remains unsatisfied. The average yield across all sovereign bond tenors tapered by 3bps w/w to close the week at 12.95% (previously 12.98%). The demand for higher rates was more evident at the corporate bonds market, with investors opting toward bearish stance, to drive rates higher. However, the average yield on corporate bonds rose by 31bps w/w to close at 12.81% (previously 12.50%).

Conversely, sentiments were bearish at the secondary market for Nigerian Eurobonds, largely due to the yield of the 12-Jul-23 Eurobond which rose from 37.55% in the previous week to 298.55%. Thus, the average yield across the curve climbed by 20.47ppts w/w to settle at 33.33%. (Previously 12.83%).

This week, we expect the bullish sentiments in the secondary market to continue. Liquidity will remain KING, keeping rates suppressed. For the Eurobonds market, we expect  buy-interest as Nigeria redeems its 12-Jul-23 $500.0mn Eurobond.

Currency Market: Naira Depreciated at the I&E Window
Last week, the Naira depreciated by 99bps w/w at the Investors & Exporters (I&E) window to close at N776.9/$, from its previous close of N769.25/$. Average daily market activity at the I&E window declined by 61.8% w/w to $88.1mn from the previous week’s average of $230.8mn. At the parallel market, we saw quotes in the N750/$- N765.0/$ range.  Lastly, the most recent CBN data shows Nigeria’s external reserves at $34.06bn (as of Thursday, 6 June 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.