August 7, 2023/United Capital
Global Markets: Bearish Investors’ Sentiments Dominate the Market
Last week, the global equities market closed in the red on the back of weak corporate earnings results and economic data releases. In the US, the major indices declined w/w due to a big jump in long-term yields on the US Treasury. This provided the rationale for market participants to take some money off equities, given that the market is currently in the overbought region. The factors that drove the increase in rates include resilient labour market growth (unemployment rate fell to 3.5% from 3.6%) and the view that the Fed may retain its hawkish stance at its next meeting. However, yields fell marginally following the announcement by Fitch ratings, downgrading the US credit to AA+ from AAA. The downgrade reflected the expected fiscal deterioration over the next three years, rising government debts, and erosion of governance relative to peers. Nevertheless, yields rebounded higher, with the 10-YR and 30-YR climbing by 9bps w/w and 18bps w/w, respectively. On the data front, the US ISM Services PMI fell marginally by 0.2pts from 53.9pts to 52.7pts in Jul-2023. This indicates a slowdown in services growth due to smaller increases in business activities. On the other hand, the ISM Manufacturing PMI for Jul-2023 edged slightly higher by 0.4pts from 46.0pts recorded in prior month to 46.4pts in Jul-2023.. Despite the increase, the ISM Manufacturing PMI still points to a ninth consecutive month of contraction in the factory sector. As a result, the US indices closed in the red zone as the DIJA (-1.1% w/w), S&P 500 (-2.3% w/w) and NASDAQ Composite (-2.8% w/w) closed the week lower.
In tandem, the European markets recorded w/w losses as investors reacted to mixed economic data releases and the Central Bank’s interest rate decision. The Eurozone economy grew sluggishly by 0.3% y/y in Q2-2023, following a flat growth recorded in Q1-2023. The headline inflation rate in the Euro Area slowed marginally by 0.2% for a third consecutive month from 5.5% recorded in Jun-2023 to 5.3% y/y. This is due to a drop in energy prices and a slowdown in the cost of food. However, the market did not react positively to the growth estimates as declining business activity in Jul-2023 weighed on investors’ sentiments. Meanwhile, the Hamburg Commercial Bank (HCOB), Eurozone Composite PMI was revised lower from 49.9pts to 48.6pts in Jul- 2023.This was the biggest contraction in private sector activity since Nov-2022. The manufacturing sector weighed on the Eurozone’s economic performance, with production volumes declining faster. In the U.K., the Bank of England (BoE) raised its policy interest rate by 25bps from 5.00% to 5.25% during its Aug-2023 meeting, marking a 14th consecutive increase, and bringing borrowing costs to new 2008-high. During the meeting, two members opted for a sharper 50bps hike, while one preferred a hold. This suggests that the combination of soaring inflation, plunging demand for mortgages and risks of economic contraction resulted in dividing opinions on the best course of policy action. That said, the U.K. FTSE 100 declined by 1.7% w/w. In the same vein, the France’s CAC (-2.2%), Germany’s DAX (-3.1% w/w) and Europe’s STOXX (-2.4% w/w) declined for the week.
On the other hand, the Asian market closed mixed. In China, the capitalisation-weighted Shanghai Composite Index climbed by 0.4% w/w, lifted by growing optimism that Chinese authorities would offer more pro-growth policy measures to support the economy. Investors also reacted positively to the data release that showed that the Chinese services sector grew unexpectedly in Jul-2023, as the PMI numbers rose to 54.1pts (vs. 53.4pts in Jun-2023). Elsewhere in Asia, the au Jibun Bank Japan Services PMI settled at 53.8pts in Jul-2023, compared with the 54.0pts in Jun-2023. This is the lowest reading since Jan-2023, as new orders grew at a slower pace while employment fell after rising in the prior five months. Meanwhile, the Manufacturing PMI printed at 49.6pts in Jul-2023 from the 49.8pts in Jun-2023. This points to the sixth contraction in factory activity so far this year, amid sustained modest reductions in output growth. In India, the equities market declined, tracking a general risk-off sentiment as traders continue to assess the economic outlook and corporate results. That said, Indian SENSEX (-0.7% w/w) and Japanese NIKKEI (-1.7% w/w) closed lower.
In the oil market, crude oil prices appreciated, supported by signs of US growth optimism, as well as tightening global supply and rising demand through the rest of this year. During the week, Saudi Arabia, the world’s biggest crude oil exporter, announced that it would extend its voluntary output cut of 1.0mbpd to Sep-2023. Similarly, Russia noted that it would lower its September output and export levels by 300,000bpd. As a result, oil prices closed higher on a weekly basis, with Brent Crude gaining 1.5% w/w to print at $86.24/bbl.
This week, the spotlight will be on the impact of several economic data releases on the market. In the US, attention will be focused on the Consumer Price Index (CPI) and Producer Price Index (PPI) reports. In addition, the inflation numbers and trade data releases for China will be another key focus. These data releases will determine the market’s direction and investors’ sentiments.
Macroeconomic Highlights
S&P Global Ratings has upgraded Nigeria’s credit outlook from negative to stable. The International Rating Agency raised Nigeria’s national scale ratings to ‘ngBBB+/ngA-2’ from ‘ngBBB-/ngA-3’. At the same time, S&P affirmed Nigeria’s ‘B-/B’ long- and short-term foreign and local currency sovereign credit ratings. It is expedient to note that despite the improved rating, Nigeria’s rating was maintained at B-, six notches into junk. According to the Rating Agency, Nigeria’s upgrade was buoyed by the improving reforms which include removal of petrol subsidy, exchange rates unification and other laudable economic policies of the new administration.
Currency outside banks rose to N2.3tn at the end of June 2023, according to the latest figures from the Central Bank of Nigeria (CBN). The CBN’s data revealed that currency outside banks rose by N792.2bn from N1.5tn reported in Jan-2023 to 2.3tn in Jun-2023, indicating a 185.7% upsurge in currency outside banks. Also, currency in circulation in the country rose by 87.1% (N1.2tn) from N1.4tn in January 2023 to N2.6tn in June 2023.
Meanwhile, the country’s external reserves lost $167.2m in July, as the Naira fell further to the Dollar. Figures obtained from the Central Bank of Nigeria on movement of external reserves showed that the reserves which ended June 30, 2023, at $34.12bn, fell to $33.95bn as of July 28, 2023.
In another update, the Chief Executive Officer of the Nigerian Export Promotion Council (NEPC), Dr Ezra Yakusak, disclosed that limited access to banks’ financial services by exporters is one of the significant challenges stifling the smooth growth of non-oil export in the country. In line with the CBN’s financial inclusion policy, banks and other financial institutions have to bolster clients’ access to financial services in Nigeria.
Other updates revealed that Nigeria’s average electricity generation rose by 8.6% y/y to 3,970.33 megawatts, MW in July 2023, from 3,655.64MW recorded in the corresponding period of 2022. This communicates the efficacy of the recent electricity reforms, as signed into law by President Bola Ahmed Tinubu (GCFR).
The Nigerian National Petroleum Company Limited (NNPCL), on Thursday, announced its partnership with Nipco Gas Limited for the development and deployment of Compressed Natural Gas (CNG) stations across the country. This will set the tone for increased demand and supply of CNG in the local economy, as a close substitute to petrol.
Speaking at the headquarters of the NNPCL in Abuja, the Group Chief Executive Officer of NNPCL, Mele Kyari, disclosed that President, Bola Tinubu directed the NNPCL to source for alternative forms of fuel to cushion the effect of PMS subsidy removal.
In a similar news, the National Controller Operations of the Independent Petroleum Marketers Association of Nigeria, Mike Osatuyi, disclosed that N9.0tn was the initial fund required before the Compressed Natural Gas can be made available to consumers. This amount will be earmarked for investment into setting up of conversion kits in each of its members filling station across the country.
Further to the above, the Niger Delta Development Commission (NDDC) and the Nigeria Liquefied Natural Gas Company (NLNG) have perfected plans to sign a Memorandum of Understanding (MoU) as part of efforts to drive sustainable development in the Niger Delta region.
This week, we do not expect any macroeconomic report from the National Bureau of Statistics. In the absence of any policy announcements from the new administration, we expect the macroeconomic front to be relatively quiet.
Domestic Equities: The Bulls Prevailed in the Market…ASI up 0.2%
Last week, the local equities market remained on its upward trajectory. The market closed positive, posting weekly gains majorly due to buy-interests in MTNN (+1.8% w/w), DANGSUGA (+25.0% w/w), NB (+16.4% w/w) and WAPCO (+4.1% w/w). As a result, the benchmark All Share Index (NGX-ASI) climbed by 22bps w/w to print at 65,198.08 points. Hence, YTD return strengthened to 27.2%, while market capitalisation gained N77.0bn to print at N35.5tn. Activity level declined, as average value and volume traded fell by 21.3% w/w and 9.8% w/w to N5.9bn and 514.9mn units, respectively. Investors’ sentiments strengthened to 0.8x from 0.7x, as 42 tickers appreciated while 52 depreciated.
Across sectors, overall w/w performance was mainly bullish as only three (3) out of the five (5) sectors under our coverage closed green. The Consumer Goods Index (+2.3% w/w) led the gainers due to strong buy interest in DANGSUGA (+25.0% w/w), NB (+16.4% w/w) and NASCON (+13.9% w/w). The Industrial Index (+0.2% w/w) gained due to price appreciations in WAPCO (+4.1% w/w). At the other end of the bourse leading the laggards was the Banking index (-2.1% w/w) which posted losses due to sells in ETI (-7.9% w/w), FIDELITY (-6.5% w/w) and ACCESSCO (-2.3% w/w). The Oil and Gas Index was down by 0.7% w/w due to depreciations in ETERNA (-26.74% w/w)
On corporate actions, Presco Plc, whose securities were suspended on NGX’s trading platform on 11-Jul-2023 for refusal to file its 2022 audited financials, has now filed its outstanding financial accounts with the NGX (the Exchange). Given the Company’s submission of the outstanding financial statements, and pursuant to Rule 3.3 of the Default Filing Rules of NGX, trading license holders and the investing public were notified by the Exchange that the suspension placed on trading on the shares of Presco Plc was lifted on 03 August 2023.
Dangote Sugar Refinery PLC (the Company) disclosed to the investing public that the Board of Directors of the Company, at its meeting held on 28-Jul-2023, resolved to recommend the proposed merger between the Company, NASCON Allied Industries Plc (NASCON) and Dangote Rice Limited (DRL) to the shareholders of the Company for consideration and approval, subject to parties agreeing on terms and conditions. The Company, NASCON & DRL, referred to as the “Merging Entities”, are all subsidiaries of Dangote Industries Limited (the Group). It is intended that the proposed merger will be an internal restructuring executed through a scheme of Merger under Section 711 of the Companies & Allied Matters Act, 2020 (as amended) and other applicable rules and regulations.
This week, we expect the bullish sentiments in the equities market to persist on the back of the market’s attractiveness over the depressed rates in the fixed-income market. Also, we believe the positive sentiments around the new policy direction will continue to drive the rally in the market. Lastly, the recent S&P upgrading of Nigeria’s outlook from “negative” to “stable” would further drive positive sentiments.
Money Market Review: The Treasury Bills Market Closed Bullish
The financial system had an opening balance of N737.2bn. During the week, banks that failed to comply with the Central Bank’s (CBN) 65.0% Loan Deposit Ratio requirement were hit with a CRR debit. At the close of the week, the system had a N355.7bn balance. Consequently, the OPR and OVN rose by 4.93ppts and 5.43ppts, to print at 5.8% and 6.8%, respectively (previously 0.9% and 1.4%).
The secondary NT Bills market ended the week bullish. This was because, investors looked to take advantage of the relatively elevated yields, following the last PMA auction. As a result, the average yield on NT bills fell by 16bps w/w to close at 7.0% (previously 7.12%).
This week, we envisage that liquidity will remain pivotal in the direction of FTD and money market rates, among other fundamentals. Also, we expect the CBN to conduct an NT bills auction, rolling over a total of N148.2bn maturing bills across the 91-day, 182-day and 364-day bills. At the auction, we expect rates to taper on the back of demand factors outweighing the supply of bills. In the secondary market for NT bills, we expect the buy interest to persist, as investors take advantage of the relatively elevated rates. The demand for money from the banks will most likely remain conservative because they need to comply with the 65.0% LDR. As a result, we expect the low demand from the banks to provide a form of buffer for rates to inch slightly higher, staying elevated at the upper region of the single-digit terrain (1.0% – 9.9%). Overall, we expect more volatility in yields at the NT bills market segment.
Bond Market: Investors’ Sentiment was Bearish
The secondary bonds market was mostly bearish despite the observed liquidity in the financial system. This is because financial system liquidity has a relatively strong correlation with rates from the mid-long end of the curve. However, the sell-offs were driven by the banks, as they continue to close out active positions to meet financial obligations related to the 65.0% LDR. Thus, the average yield on bonds climbed by 20bps to close at 13.3% (previously 13.1%). In the same vein, the corporate bonds segment traded on a bearish note, with the average yield on corporate bonds climbing by 30bps w/w to 13.5% (previously 13.2%).
In the Nigerian secondary Eurobonds market, sentiments were bearish, driven by the low FX supply in the local economy. The average yields in the Nigerian Eurobonds market rose by 34bps w/w to settle at 10.4% (previously 10.1%).
Looking forward, we expect the liquid financial system to remain a key market mover, determining the direction of yields in the fixed-income market. We envisage investors will lean more toward standoffish sentiments with mild activities around high yield In the secondary market for bonds, we expect yields to taper slightly, with investors losing bias for fixed-income instruments. At the Eurobonds market, we expect mixed sentiments. On one end, we expect the recent revision of Nigeria’s Outlook to STABLE by the S&P Global ratings agency to trigger some buy-interest in the Nigerian Eurobonds market. The downside to this expectation will be the magnitude of inflow compared to the amount required to negate the existing FX-deficit to cause a brief rally. On the other end, we continue to see the FX-deficit situation as strong driver of bearish sentiments.
Currency Market: Naira Steadied at the I&E Window
Last week, the Naira gained 4.2% w/w at the Investors & Exporters (I&E) window to close at N743.07/$, from its previous close of N776.76/$1. Activities in the I&E window improved w/w with average FX turnover improving by 11.2% from $81.6mn to $90.8mn. At the parallel market, we find offer quotes in the N830.0/$1- N855.0/$1 range. Lastly, Nigeria’s external reserves settled at $33.96bn as at 2-August.
This week, we expect foreign exchange rate in the I&E window to be determined by the market forces.
