August 14, 2023/United Capital
Global Markets Closed Mixed
Last week, the US stock market closed mixed, driven by rising treasury yields, mixed H1-2023 earnings results, and a slew of varying economic data. At the start of the week, the trade balance report showed June’s trade balance was -$65.5bn compared to -$68.3bn recorded the prior month, showing a continued lack of growth in exports and imports which points to less demand both home (in the US) and abroad. Consumer Price Index (CPI) and core CPI were both in line with consensus estimates. Headline CPI was up 0.2% m/m in July, whilst core CPI, which excludes food and energy, advanced by 0.2% m/m. On a year-on-year basis, total CPI increased to 3.2% as against 3.0% recorded in Jun-2023. Similarly, core CPI rose from 4.8% recorded in June to 4.7% in July. More so, the Producer Price Index (PPI) for July was better than expected as it printed at 0.3% m/m compared to its prior print of 0.0%. Meanwhile, initial jobless claims continue to run well below recession levels, printing at 248,000. In addition, last week, Moody’s downgraded the credit ratings for ten smaller US banks and put some bigger banks on watch for downgrade, contributing to the consolidation mindset. The downgraded banks by Moody’s include M&T Bank (MTB.N), Pinnacle Financial Partners (PNFP.O), Prosperity Bank and BOK Financial Corp (BOKF.O) and major lenders Bank of New York Mellon, U.S. Bancorp, State Street, Trust Financial, Cullen/Frost Bankers and Northern Trust are now under review for a potential downgrade. Consequently, major indices such as the Nasdaq Composite (-1.9% w/w), S&P 500 (-0.3% w/w), and Russell 2000(-1.7% w/w) posted weekly losses. Conversely, Dow Jones Industrial Average (+0.6% w/w) gained.
In tandem, the European markets recorded mixed outings w/w. In local currency terms the pan-European STOXX Europe 600 Index closed flat. The Italian government’s decision to seek a windfall tax on bank profits and increasing concerns about a potential economic slowdown in China weighed on sentiment. Major stock indexes were mixed. Hence, Germany’s DAX fell 0.75% w/w, Italy’s FTSE MIB tumbled 1.09% w/w, and the UK’s FTSE 100 Index lost 0.53% w/w. France’s CAC 40 Index, on the other hand, gained 0.34%w/w. Meanwhile, European government bond yields rebounded from intraweek lows as investors weighed the possibility that inflationary pressures might remain elevated. The yield on the benchmark 10-year German government bond climbed above 2.50%. Swiss and French bond yield spreads moved in tight ranges. The benchmark 10-year government bond yield in the UK ticked higher as robust economic growth data raised expectations that the Bank of England would continue to tighten monetary policy. Furthermore, UK’s gross domestic product (GDP) grew by 0.5% in June due to substantial increases in manufacturing and construction. While the Q2-2023 GDP surprised market participants, growing by 0.2% as against the previous three months’ 0.1% reading due to better-than-expected private consumption.
Similarly, the Asian market closed mixed. Chinese stocks posted weekly losses despite mounting evidence that the country’s recovery may have peaked weighed on sentiment. The Shanghai Stock Exchange Index declined 3.0% w/w, while the blue-chip CSI 300 lost 3.4% w/w. In Hong Kong, the benchmark Hang Seng Index lost 2.38% w/w. Conversely, Japan’s stock markets rose over a holiday-shortened week, with the Nikkei 225 Index gaining around 0.9% w/w and the broader TOPIX Index up about 1.3% w/w. Optimistic earnings forecasts from some significant Japanese companies provided a favourable coulisse.
In the oil market, crude oil prices rose. Brent crude rose marginally as it settled at $86.81% per barrels, up 41 cents (+0.7% w/w). The weekly gain for Brent was the smallest since the oil rally, which began seven weeks ago. But in a similar trend to its US counterpart, the global crude benchmark touched a new milestone on Thursday, reaching a seven-month high of $88.10. In under two months, Brent is up 18.0%. Friday’s higher close came after the Paris-based International Energy Agency estimated that global oil demand hit a record 103 million barrels per day in June and could scale another peak in August.
This week, the spotlight will be on the EU and the UK inflation numbers. Furthermore, within the week, investors would focus on the release of Japan’s Q2-GDP numbers and the release of FOMC Meeting Minutes. Finally, investors will closely watch companies’ performances as the Q2-2023 earnings season continues. These data releases will determine the market’s direction and investors’ sentiments.
Macro Highlight and Outlook
Foreign Exchange (FX) inflows through the Investors and Exporters (I&E) window rose by 23.0% m/m to $1.4bn in June 2023 from $1.1bn in May 2023. The Apex Bank reported that the total inflows into the I&E window rose to $2.6bn in the months of May and June following the unification of exchange rates by the Central Bank of Nigeria (CBN).
According to the Central Bank of Nigeria (CBN), banks Non-Performing Loans (NPLs) hit N1.3tn as of the end of Apr-2023. This figure represented 4.3% of the total credit in the banking sector, which stood at N30.6tn. Loans in the sector have maintained a steady increase, following the 65% Loan-to-Deposit Ratio (LDR) directive of the CBN that mandated banks to increase their loans to the public.
Businesses operating in Nigeria increased losses in the second quarter of the year, following foreign exchange reforms. Already, nine firms lost N960.18bn to the new forex policy in Q2-2023. According to the half-year financial reports of the firms, the steep devaluation of the Naira, following the CBN’s attempt to close the gap between the official and parallel rates of the Naira, negatively impacted their businesses. These firms include MTN Nigeria Communications Plc, Airtel Africa Plc, Dangote Cement Plc, Dangote Sugar Refinery Plc, Nestle Nigeria Plc, MRS Oil Nigeria Plc, Guinness Nigeria Plc, Nigerian Breweries Plc, and Seplat Energy Plc.
According to the World of Statistics (the Statistics), Nigeria tops the list of countries with the highest rate of unemployment. According to the Statistics, Nigeria led with 33.3%, followed by South Africa with 32.9% and Iran with 15.55%. Nigeria’s labour market growth remains underwhelming due to the lack of jobs to match the growing number of workers in the country.
The Nigerian-Nigerien trade worth about $226.34m is at risk of breaking down following a border closure between the two countries. The recent border closure by Nigeria with Niger following a military takeover that overthrew President Mohammed Bazoum’s democratically elected administration, is negatively affecting trade between both countries.
According to the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Nigeria’s crude oil production in the month of July 2023 fell by 12.6% m/m to 1.29mbpd compared to 1.48mbpd recorded in June 2023. This also represents a 1.5% y/y drop from its production print of 1.31mbpd in July 2022. The decline can be attributed to the temporary shutting of the Forcados terminal last month.
This week, we expect the Nigerian Bureau of Statistics (NBS) to publish the country’s Consumer Price Index (CPI) report for Jul-2023. We expect headline inflation to continue its upward trend in July, further reflecting the impact of the petrol subsidy removal and the devaluation of the Naira.
Domestic Equities: The Market Closed Bullish… ASI up 0.20%
Last week, the local equities market closed on a positive note as the bulls maintained their dominance in the market. Notably, price appreciations in large-cap stock, MTNN (+1.05% w/w) and some banking stocks, GTCO (+4.12% w/w) and FBNH (6.73% w/w), were the primary All-share index movers. As a result, the benchmark All Share Index (NGX-ASI) appreciated by 20bps w/w to print at 65,325.37 points. Hence, YTD return strengthened to 27.5%, while market capitalisation grew by N92.69bn to N35.6tn. Equity turnover worsened as the average value and volume traded fell by 15.3% w/w and 32.4% w/w to N5.02bn and 348.21mn units, respectively. Investors’ sentiment improved to 1.1x (previously 0.8x), as 67 tickers appreciated while 62 depreciated.
Across sectors, overall w/w performance was bearish as three (3) of five (5) sectors under our coverage closed lower. The Banking Index (+1.26% w/w) led the gainers, following gains in ZENITHBA (+2.64% w/w), ACCESSCO (+1.46% w/w) and UBA (+1.41%). It was followed by the Insurance index (+0.73% w/w) driven by buy interests in CORNERST (+21.65% w/w), SUNUASSU (+23.66% w/w), CHIPLC (+6.38% w/w) and AIICO (+1.47% w/w). Conversely, the Consumer Goods index (-0.92% w/w) declined following share price depreciations in DANGSUGA (-12.00% w/w). The Industrial Goods index (-0.39% w/w) and the Oil and Gas index (-0.32% w/w) closed bearish on account of losses in DANGCEM (-0.60% w/w), WAPCO (-0.39% w/w) and ETERNA (-6.64% w/w).
This week, we expect mixed investors’ sentiments towards the Nigerian equities market. Given that the majority of companies on the NGX-ASI have released their Q2-2023 financials, we expect any buy-interest in the market to be driven by the excess system liquidity and investors’ demand for higher returns (risk-on sentiments). However, we expect tempered interests in equities in the week.
Money Market Review: Stop Rates Tapered at Primary Market Auction (PMA)
Last week, the financial system was mostly liquid, with liquidity determining the rate affairs in the money market. System liquidity opened with a balance of N246.9bn and wrapped the week with significant liquidity to the tune of N215.7bn, despite investors’ oversubscription of government securities at the primary market. Volatility was experienced in the funding rates between banks, however, all money market rates remained suppressed around support/resistance levels. For FTD rates, we continued to find rates hover around 8.0% – 11.0% levels. The weekly average of funding rates between banks as measured by the OBB and OVN rates settled higher last week, reflecting the volatile rate environment. The weekly average of OPR and OVN rose by 100bps and 127bps, to print at 3.2% and 4.0%, respectively (previously 2.2% and 2.8%).
At the primary market, the Central Bank of Nigeria (CBN) conducted its first (1st) NT bills auction for the month of August, rolling over maturing bills to the tune of N153.99bn. At the auction, investors’ demand was strong. This was measured using investors’ subscription strength at the auction, which printed at N836.3bn, implying a bid-to-cover ratio of 5.4x. Investors’ demand was mostly skewed toward the 364-day bill (N807.7bn vs N148.2bn on offer), as it was oversubscribed by 5.5x. However, in a bid to preserve the liquidity of the financial system, the auction was not oversold. The Apex Bank allotted the exact amount that was being rolled over. Owing to the prevailing liquidity in the financial system at the time of the auction, stop rates across all the bills offered tapered. Stop-rates on the 91-day, 182-day, and 364-day bills declined by 100bps, 210bps, and 235bps, to print at 5.0%, 5.9%, and 9.8%.
The CBN also conducted an OMO auction at the primary market, to mop-up liquidity to the tune of N150.0bn. The OMO bills on offer were the 96-day, 187-day, and 362-day bills. Investors’ demand came in strong, with total subscriptions printing at N307.9bn, implying a bid-to-cover ratio of 2.1x. Stop rates across the bills offered printed at 10.0%, 12.98% and 14.49%.
The secondary NT Bills market was mostly bearish, in tandem with the broad sentiments among the banks, relative to the peculiar 65.0% LDR directive. Also, the contagion effect from the negative sentiments after the CBN released its consolidated financial statements for a period of eight years – 2015 to 2022, fueled the bearish sentiments, with risk-on investors displaying standoffish postures toward the NT-bills market. That said, the average yield on NT bills climbed by 37bps w/w to close at 7.3% (previously 7.0%).
This week, we expect the volatile yield environment to persist. We see funding rates between banks (which has proven to have a strong correlation with system liquidity) experiencing a sharp upward nudge in the aftermath of the DMO’s bond auction, as system liquidity is expected to shrink during this period, forcing higher funding rates to materialise, pending August’s FAAC inflow. For FTD and money market rates, we envisage a 25bps – 75bps climb, with banks’ hesitance to accept deposits serving as an anchor, restraining the degree of responsiveness of these rates to the brief illiquidity expected. Lastly, we do not see the contagion effect in the aftermath of the CBN’s financial releases lingering for long. We are of the opinion that system liquidity will remain KING, acting as the key driver of yields in the money market.
Bond Market: Bearish Sentiments Prevailed
The secondary bonds market was bearish, as investors began rallying for liquidity in anticipation of the upcoming DMO auction slated for 14 August 2023. That said, the average yield on bonds climbed by 21bps to close at 13.5% (previously 13.3%). Similarly, corporate bonds traded on a bearish note, as the average yield on corporate bonds climbed by 26bps w/w to 13.8% (previously 13.5%).
At the Nigerian secondary Eurobonds market, sentiments were bearish. The bearish sentiments surfaced after the CBN’s financial releases, which revealed the Apex Bank’s liability to JP Morgan, Goldman Sachs, and FX Forwards, summing to the tune of $13.8bn. Comparing to the country’s FX reserves of $33.2bn, as of 07 August 2023, this implies that Nigeria’s actual reserves stood at $19.4bn as of 07 August 2023. The average yields in the Nigerian Eurobonds market rose by 42bps w/w to settle at 10.8% (previously 10.4%).
Looking forward, we expect system liquidity to remain a key market mover, determining the direction of yields in the fixed-income market. At the primary market, we expect the Debt Management Office (DMO) to approach the local debt market to raise funds to the tune of N360.0bn. At the auction, we expect investors’ demand to come in strong. However, we expect marginal rates to nudge higher, sponsored by the relatively liquid financial system. We also expect the auction to be oversold. At the secondary market for bonds, we expect rates to nudge higher in tandem with our overall bearish expectation. For the Eurobonds market, we expect bearish sentiments to persist, owing to a combination of factors. The recent CBN release that revealed the liabilities of the Apex Bank will continue to plague the minds of investors with uncertainties, with most foreign investors closing out their Nigerian Eurobond positions. Another latent bearish driver will be any potential downgrade from International Rating Agencies.
Currency Market: Naira Appreciated at the I&E Window
Last week, the Naira appreciated by 33bps w/w at the Investors & Exporters (I&E) window to close at N740.6/$, from its previous close of N743.1/$. At the parallel market, Naira depreciated further, as we saw offer quotes in the N885.0/$- N940.0/$ range. Activities in the I&E window weakened, as average FX turnover fell by 14.2% w/w to settle at $78.1mn. Lastly, Nigeria’s external reserves fell by 14bps to settle at $33.1bn.
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 for Dollar outweighs supply.
