August 21, 2023/Aetoswire

Global Markets: Bearish Sentiments Prevail Across the Board.

Last week, major U.S. indices fell for the third consecutive week, extending the bearish run. The losses from the previous week were broadened, with the S&P 500(-2.1% w/w), the Russell 2000(-3.3% w/w) and the NYSE FANG+ (-3.0% w/w) off over 2.0%.  The fundamental concerns were long-dated Treasury yields and China apprehension. Minutes from the U.S. Fed’s July-2023 monetary policy meeting showed that Policy Makers were divided over the need for more rate hikes. Investors grappled with the prospect of longer-lasting high interest rates and the uncertain cumulative impact that would result. These factors caused the long-dated Treasury yields to move higher, with the 10yr yield rising by 9bps w/w to 4.16% and the 30yr yield rising by 11bps w/w to 4.26%. This put pressure on some stock valuations, (particularly tech and growth stocks) which resulted to accelerated loses on Wall Street. Similarly, cyclical sectors were also under pressure. Notably, S&P 500 Financials closed 2.8% w/w. The sector began moving downwards as the FDIC President Gruenberg discussed the possibility of requiring banks with >$100.0bn in assets to issue long-term debt to cover capital losses in the event of a failure. This was followed by a Fitch warning that it could downgrade multiple banks. Thus, the regional bank ETF was down 6.0% w/w.

European stocks traded down largely in line with most global markets due to greater concern about the outlook of the Chinese economy and the prospect of a prolonged period of higher European interest rates. Hence, the STOXX Europe 600 (-2.3% w/w), German Dax (-1.6% w/w), the UK FTSE 100 (-3.5% w/w) closed lower.

In Asia, data released on Tuesday by the Chinese National Bureau of Statistics (NBS) showed retail sales and industrial output growing at underwhelming rates. Industrial output grew 3.7% y/y in July-23, slower than 4.4% y/y in Jun-23. Similarly, retail sales, a measure of consumption, grew 2.5% y/y in Jul-23, down from 3.1% y/y in Jun-23. Also, China’s property woes re-emerged with multiple property developers missing debt payments and Evergrande filing for Chapter 15 bankruptcy. These saw investors withdraw funds from Chinese stocks due to growing concerns about the country’s economic prospects. The SSE Composite Index was down 1.8% w/w. China concerns weighed on all of Asia. In Japan, the Nikkei 225 was down 3.1% w/w.

Commodity markets ended the week mixed. In energy markets, ICE Brent broke its 6-week winning streak, falling 2.3% w/w. Similarly, RBOB Gasoline fell 4.8% w/w. Although U.S. Natural Gas futures fell 7.1%, Dutch Natural Gas held recent gains pending a resolution to the Australia labour dispute as it rose 6.8% w/w. Metals closed the week mixed, with Gold falling 1.4% w/w, Silver went up 0.3% w/w, and Copper remained unchanged. Finally, agricultural commodities got a boost last week following reports that India is looking to purchase wheat from Russia at a discount. Wheat was up 2.1% w/w.

This week, in the U.S., we expect to receive late cycle earnings from retail and tech companies. The other big catalyst of the week is Chairman, Jerome Powell’s speech on Friday at the Jackson Hole Economic Symposium. Elsewhere, the BRICS summit will hold from August 22 – 24. Also, the S&P Global Composite Flash PMI, as well as PMI from Australia, Japan, and the E.U. will be closely watched. Markets will be paying close attention to Japan’s CPI report to be released on Friday, given the Yen’s weakness. Although the weak Yen helped boost GDP figures beyond expectations, it raises more concerns of the Bank of Japan’s policy changes.

Macro Highlight and Outlook

According to a Bloomberg report, the Federal Government (FG) may sell stakes in about 20 state-run companies to raise funds and improve governance in the entities. According to the chief executive officer at the Ministry of Finance Incorporated (MOFI), Dr Armstrong Takang, the NNPC is among the firms the FG may sell a stake in.

Also, Dr Armstrong Takang stated that the MOFI plans to utilise the Nigerian Exchange Limited platform to raise funds to meet its target of having N100.0tn Assets Under Management (AUM) in 10 years. This comes after officials have alluded to the possibility of listing the NNPC in the future. 

The Consumer Price Index (CPI) report for July 2023 shows that Nigeria’s headline inflation surged by 129bps to print at 24.08% y/y in Jul-2023 from 22.79% y/y in Jun-2023. This indicates the highest reading since August 2005. On a month-on-month basis, headline inflation accelerated by 76bps to print at 2.89% in Jul-2023 from 2.13% in Jun-2023.

 The acting Governor of the Central Bank of Nigeria (CBN), Folashodun Shonubi, has revealed that the official foreign exchange market, otherwise known as the Investors and Exporters (I&E) window, will be renamed the Nigerian Foreign Exchange Market (NFEM).

The Federal Government (FG) has noted that about $20.0bn annual investments would be needed to achieve the desired gas expansion projects in Nigeria and deepen the use of gas across the country. For the gas utilisation policy of the FG to work, investments in specific connectivity across upstream facilities to processing, power plants, and other end users are required.

 Oil marketers noted that the foreign exchange crisis in Nigeria and the recent implementation of a 7.5% Value Added Tax (VAT) on Automotive Gas Oil (AGO), popularly called diesel, had pushed up the cost of the commodity to between N900 and N950/litre in many states. This development has raised concerns for local manufacturers who believe that the situation may lead to the closure of some factories and job losses.

 The Nigerian National Petroleum Company Limited, on Wednesday last week, announced that it had secured a $3bn emergency crude oil repayment loan from the African Export-Import Bank. It said the oil company would use the loan to support the Federal Government in stabilising Nigeria’s exchange rate. It was also gathered that the facility would help reduce the pump price of Premium Motor Spirit, popularly called petrol.

 Nigeria has resumed the export of about 220,000 barrels of crude oil per day at the Forcados terminal. The terminal was shut for maintenance on July 12, 2023 after workers saw ‘fumes’ near a single buoy mooring where oil was loaded onto a vessel.

 According to the Central Bank of Nigeria (CBN), the total amount of currency-in-circulation in the country dropped by 29bps from N2.6tn as of the end of June 2023 to N2.59tn as of the end of July 2023. This is the first time the figure has dropped since February 2023. Currency-in-circulation is defined as currency outside the vaults of the Central Bank; that is, all legal tender currency in the hands of the public and in the vaults of the Deposit Money Banks (DMBs).

Additionally, the Central Bank of Nigeria has introduced a foreign exchange Price Verification System (PVS) designed for importers to have access to forex. The Apex Bank said that a price verification report from the portal is now mandatory for all Form M requests. This is expected to take effect from August 31, 2023.

 Nigeria Liquefied Natural Gas Limited (NLNG) has said gas production from its plant in Bonny Island, River State, is still active. It debunked reports which earlier alleged that the continued shutdown of operations by NLNG was a looming danger to the country’s annual production of 22 million tonnes of gas.

 Nigeria has expressed the readiness of the country to join the second phase of the Guided Trade Initiative by the African Continental Free Trade Area (AfCFTA). The initiative by AfCFTA is a solution-oriented approach that aims to facilitate trade between interested state parties by connecting businesses and products for export and import.

This week, we expect the Nigerian Bureau of Statistics (NBS) to publish the country’s Q2-2023 Capital Importation report and the Q2-2023 Selected Banking Sector Data report.

Domestic Equities: The Market Closed Bearish… ASI down 89bps

Last week, the local equities closed lower as the bears prevailed over the bulls. Notably, share price depreciation in large-cap stock, AIRTELAFRI (-5.3% w/w) influenced the magnitude of decline that was experienced. As a result, the benchmark All Share Index (NGX-ASI) dipped by 89bps w/w to print at 64,743.96 points. Hence, YTD return weakened to 27.3%, with market capitalisation settling at N35.4tn. Activity levels were mixed as the average value traded improved by 17.1% w/w to print at N5.9bn from N5.0bn. Conversely, the average volume traded fell by 3.0% w/w to 337.8mn units. Investors’ sentiment weakened to 0.7x (previously 1.1x), as 29 tickers appreciated while 41 depreciated.

Across sectors, overall w/w performance was mostly bearish as three (3) of five (5) sectors under our coverage closed lower. The Insurance Index (-2.2% w/w) led the losers, following losses in NEM (-10.0% w/w), SUNUASSU (-28.7% w/w), MANSARD (-5.2% w/w), and CHIPLC (-8.0% w/w). It was followed by the Banking (-2.1% w/w) and Oil & Gas (-0.4% w/w) Indices, which were driven by share price depreciation across ZENITHBA (-2.9% w/w), UBA (-3.5% w/w), ACCESSCO (-2.0% w/w), and ETERNA (-9.4% w/w). Conversely, the Consumer Goods index (+2.4% w/w) led the gainers, on the back of gains across BUAFOODS (+4.4% w/w), and DANGSUGA (+6.1% w/w). Lastly, the Industrial Goods index (+0.4% w/w) closed higher owing to buy-sentiments in DANGCEM (+2.9% w/w).

This week, we see investors buy-interest strengthen. This will come on the back of FG’s recent intervention in the FX market. We believe that this will propel the return of some of the stray funds back into the Nigerian equities market. That said, we project that investors’ interest toward the NT-bill segment will remain positive in the coming week, pending the injection of the next liquidity (FAAC). This expectation is expected to trickle into the equities market in form of a bear market.

Money Market Review: System Liquidity Dampened.

Last week, the financial system opened liquid with a balance of N298.3bn. In the absence of zero maturities and coupon payments, system liquidity became deflated following the mop-up activity by the Debt Management Office (DMO) via the bond auction. As a result, the financial system closed the week lower, with a balance of N177.5bn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) climbed by 11.4ppts w/w and 11.0ppts w/w to close the week at 14.6% and 15.0%, respectively.

In the secondary NT-bills market, we observed sell pressures amongst investors across the curve due to the relatively depressed liquidity in the financial system. As a result, the average yield on NT-bills climbed significantly by 106bps w/w to close at 8.4% (previously 7.3%). Meanwhile, the average yield on OMO bills settled at 11.2%.

This week, we expect the Central Bank of Nigeria (CBN) to conduct an NT-bills auction, rolling over a total of N303.2bn maturing bills across the 91-day, 182-day and 364-day bills. At the auction, we expect investors’ demand to be mild, given the illiquidity of the financial system. Thus, we believe that stop rates would trend higher as investors demand higher rates for funds. For FTDs and money market rates, we expect the suppressed system liquidity to provide room for a potential increase in rates (25bps-50bps). Although we expect a total of N66.8bn worth of coupon payments to hit the financial system, it is not sufficient to provide a buffer for system liquidity.

Bond Market: Marginal Rate Trend Higher at the Auction

Last week, the Debt Management Office (DMO) conducted the Aug-2023 FGN bond auction with a total offer size of N360.0bn across the 2029s, 2033s, 2038s and 2053s papers. At the auction, investors’ demand was weak as the total subscription printed at N312.6bn, implying a bid-to-cover ratio of 0.9x. Notably, the DMO undersold the auction, allotting a total of N227.8bn. The marginal rates on the 2029s, 2033s, 2038s and 2053s papers climbed by 135bps, 140bps, 110bps and 155bps to settle at 13.85%, 15.00%, 15.20% and 15.85%, respectively.

The secondary bonds market was dominated by bearish sentiments as the average yield on bonds rose by 31bps to close at 13.8% (previously 13.5%). Similarly, corporate bonds traded on a bearish note, as the average yield on corporate bonds increased by 51bps w/w to 14.3% (previously 13.8%).

In the Nigerian secondary Eurobonds market, sentiments were largely bearish as investors remained worried about the Foreign Exchange (FX) situations in the country. Thus, the average yields in the market closed higher by 50bps w/w to settle at 11.3% (previously 10.8%).

Looking forward, we expect the bearish sentiments to persist in the secondary bonds market hinged on the financial system’s illiquidity. On the other hand, we expect buy interests to resume in the Eurobonds market as investors seek to reinvest maturing funds. Notably, we expect a total of N92.7bn worth of Eurobonds coupon payments to hit the system.

Currency Market: Naira Appreciated at the I&E Window

Last week, the Naira appreciated by 14bps w/w at the Investors & Exporters (I&E) window to close at N739.52/$, from its previous close of N740.6/$. At the parallel market, Naira appreciated further, as we saw offer quotes in the N840.0/$- N900.0/$ range. Activities in the I&E window strengthened, as average FX turnover rose by 56.2% w/w to settle at $124.0mn. Lastly, Nigeria’s external reserves fell by 35bps w/w to settle at $33.8bn.

This week, we expect continued pressure on the Naira across all market segments, given that FX pressures will persist as Dollar earnings remain weak. However, we expect to see the appreciation of the Naira continue as the CBN continues to implement its recent FX policies.