Global economy
 
The Monetary Policy Committee (MPC) of the Bank of England (BoE) increased its key policy rate for the fourteenth consecutive time, with members voting by a majority of 6 – 3, to hike the bank rate by 25bps to 5.25% – the highest level since March 2008 (5.25%). In its assessment, the Committee noted that recent data outturns had been mixed. Nonetheless, some key indicators, notably wage growth, suggest that some of the risks stemming from more persistent inflationary pressures may be starting to materialise. Accordingly, the BoE guided that the monetary policy rate will remain restrictive for a sufficiently long period to return inflation to the 2.0% target. Looking ahead, we align with the Committee that further rate hikes would be needed in the short term if the evidence continues to show more persistent price pressures. Simultaneously, the markets now expect at least an additional 25bps increase at the September meeting.
 
According to S&P Global, the United States (US) Composite PMI remained above the 50-point threshold for the sixth consecutive month, although the PMI moderated to 52.3 points in July (June: 54.4 points). Analysing the breakdown, we highlight that factory activity, as measured by the Manufacturing PMI (July: 49.0 points vs June: 46.3 points) remained depressed, driven by softer new orders on the back of a slowdown in domestic and external demand. Similarly, the Services PMI (July: 52.3 points vs June: 54.4 points) weakened to the lowest level in five months, as tight financial conditions forced a decline in consumer spending in the period. We expect overall private sector activity to slow further in the near term, as we anticipate continued moderation in factory and business activities. Our prognosis is hinged on the lingering impact of tighter monetary conditions and the weak business environment stemming from the slow growth outlook for the economy.
 
Global Markets
 
This week, global stock markets posted broadly negative performances due to concerns over the potential economic effects of a credit rating downgrade for the US. Accordingly, US equities (DJIA: -0.7%; S&P 500: -1.8%) were on track for a weekly loss, as of the time of this report, as rising Treasury yields, triggered by Fitch Ratings’ downgrade of the US credit grade (from AAA to AA+), added to risk-off sentiments. Likewise, negative sentiments dominated European equities (STOXX Europe: -2.7%; FTSE 100: -2.1%) after the Bank of England hiked its key interest rate (+25bps to 5.25%) for the fourteenth consecutive time. Meanwhile, Asian markets posted mixed performances, as Japanese equities (Nikkei 225: -1.9%) closed lower while Chinese equities (SSE: +0.8%) consolidated on the prior week’s gain. We note that the sentiments on Wall Street triggered the selloffs in Japan; however, the impact on the Chinese market was neutered by China’s central bank’s pledges to provide additional support for the private sector. Elsewhere, the Emerging (MSCI EM: -2.6%) and Frontier (MSCI FM: -0.4%) market indices declined following bearish sentiments in Bahrain (-0.5%) and Taiwan (-2.6%), respectively.
 
Nigeria
 
Domestic Economy

According to the data obtained from FMDQ, total inflows into the Investors & Exporters Window (IEW) declined by 65.7% m/m to USD608.00 million in July (June: USD1.77 billion) – the lowest level since April 2021 (USD564.20 million). Analysing the breakdown provided, we highlight that the decline was on the back of broad-based contraction across both the local (92.3% of total transaction value) and foreign (92.3% of total transaction value) investors. Precisely, inflows from local investors dipped by 60.6% m/m to USD561.00 million in July (June: USD1.42 billion), given the slowdown across the local segments – CBN (-70.0% m/m), Individuals (-51.2% m/m), Non-bank corporates- (-65.6% m/m) and Exporters (-63.9% m/m). In the same vein, inflows from foreign sources remained underwhelming, decelerating by 86.5% m/m to USD47.00 million (June: USD: 347.30 million) as foreign investors remained cautious about returning in their droves despite the FX market liberalisation, as FX backlogs remain uncleared. Looking ahead, we expect FX liquidity conditions to remain frail in the near term, amid the lingering reforms in the FX market. We also anticipate weak foreign inflows in the short term, as foreign investors will likely adopt a wait-and-see approach in the near term as they await the CBN’s actions in clearing its FX backlogs and the direction of short-term interest rates amid high inflation.
 
According to the Central Bank of Nigeria (CBN), Credit to the Private Sector (CPS) increased by 34.6% y/y to NGN52.81 trillion in June (June 2022: NGN39.23 trillion). We believe the continuous increase in CPS reflects the impact of (1) improved domestic macroeconomic conditions relative to the previous year, and (2) CBN-led interventions in the real sector. On a month-on-month basis, the CPS increased by 17.9% in June (May: +2.6% m/m to NGN44.79 trillion). Meanwhile, the currency in circulation declined by 20.0% y/y to NGN2.60 trillion (June 2022: NGN3.26 trillion) primarily due to a temporary reduction in the amount of money in circulation in line with the Naira redesigned policy. Over the short to medium term, we expect that the improvement of domestic economic activities and the re-enforcement of the CBN’s limit on the loans-to-deposits (LDR) macro-prudential ratio for deposit money banks (DMBs) will drive the willingness of commercial banks to create risky assets in the short term. We also anticipate that the CBN will maintain its intervention programs at a steady pace as the economy expands. Conclusively, we project that the Credit to Private Sector (CPS) will maintain a double-digit expansion in 2023FY.
 
Capital Markets

Equities
 
The Nigerian equities market edged higher this week as investors’ interest in MTNN (+1.8%) drove the All-Share Index higher by 0.2% w/w to 65,198.08 points. Consequently, the Month-to-Date and Year-to-Date returns printed +1.6% and +27.2%, respectively. Elsewhere, activity levels remained weak as the trading volume and value declined by 9.8% w/w and 21.3% w/w, respectively. Meanwhile, sectoral performance was mixed, as the Insurance (+5.9%), Consumer Goods (+2.3%), and Industrial Goods (+0.2%) indices recorded gains, while the Banking (-2.1%) and Oil and Gas (-0.7%) indices declined.

We believe earnings from the Tier-1 banks in the coming week(s) will support positive sentiments on the bourse, especially given the anticipation of interim dividends. In the medium term, we expect investors’ sentiments to be influenced by developments in the macroeconomic landscape and the movement of yields in the fixed-income market. Overall, we reiterate the need for positioning in only fundamentally sound stocks as the weak macro environment remains a significant headwind for corporate earnings.
 
Money market and fixed income
 
Money market
 
This week, the overnight (OVN) rate expanded by 543bps w/w to 6.8% as CRR debits induced by CBN’s re-enforcement of the LDR compliance across the banks pressured the financial system. Nonetheless, we highlight that the OVN rate remained in single-digit as system liquidity remained elevated – average system liquidity settled at a net long position of NGN723.80 billion (vs. a net long position of NGN363.38 billion in the previous week).

We expect the OVN rate to remain at current levels in the coming week, in the absence of any significant inflows into the financial system.
 
Treasury bills
 
The buoyant liquidity in the system triggered bullish sentiments in the Treasury bills secondary market as players looked to invest excess funds in short and long-dated bills. As a result, the average yield across all instruments dipped by 15bps to 7.0%. Across the curve, the average yield contracted at the short (-26bps), mid (-1bp), and long (-17bps) segments following buying interest on the 83DTM (-102bps), 174DTM (-1bp), and  237DTM (-193bps) bills, respectively.

Next week, we expect demand for instruments in the T-bills secondary market to weaken, following our expectations of lower inflows into the system. Also, we expect participants’ focus to be shifted to the primary market, where the CBN is scheduled to roll over maturities worth NGN153.99 billion.
 
Bonds
 
The FGN bonds secondary market traded with bearish sentiments this week as investors took profits on their positions across the curve. Consequently, the average yield expanded by 18bps to 13.3%. Across the benchmark curve, the average yield expanded at the short (+21bps), mid (+15bps), and long (+13bps) segments following profit-taking activities on the MAR-2025 (+63bps), APR-2029 (+39bps), and MAR-2035 (+45bps) bonds, respectively.

We expect yields in the FGN bond secondary market to remain elevated in the medium term, specifically driven by our expectation of a sustained imbalance in the demand and supply dynamics. However, we highlight that deliberate actions by the DMO to keep the cost of borrowing moderate remains a downside factor.
 
Foreign Exchange
 
After ten consecutive weeks of decline, Nigeria’s FX reserves increased by USD13.14 million w/w to USD33.97 billion (02 August 2023). Likewise, the naira appreciated by 4.4% to NGN743.07/USD at the I&E window (IEW), with total turnover at the window (as of 03 August 2023) declining by 15.9% WTD to USD334.05 million, as trades were consummated within the NGN651.00 – NGN851.00/USD band. In the Forwards market, naira values across the 1-month (-2.8% to NGN795.98/USD), 3-month (-3.3% to NGN811.52/USD), 6-month (-3.9% to NGN839.89/USD) and 1-year (-1.8% to NGN875.44/USD) contracts were weaker.

We expect currency pressures to remain intact in the near term, given seasonal-induced demand and still frail FX supply despite the CBN’s abolishment of its multiple FX windows. On FX supply, we expect foreign investors to remain on the sidelines in the near term, as they continue to look for signals on market interest rates and solutions to the existing FX backlog and supply issues.