August 28, 2023/United Capital

Global Markets: Mixed Sentiments Prevail

Last week, major U.S. indices closed with mixed results on varied signals. Benchmark returns differed as investors seemed to react to mixed signals on the economy and the course of monetary policy. Growth stocks handily outperformed value shares, helped by another substantial earnings and revenue beat by artificial intelligence chipmaker NVIDIA. Financial sector pulled back early in the week after S&P Global downgraded its credit ratings of five (5) regional banks, citing, in part, stresses in the commercial real estate lending market. It was a generally good week for the mega-cap names and a relatively lackluster week for the broader market. There wasn’t a lot of consistency in the trading actions, existing home sales were slightly weaker than expected, impeded yet again by limited supply and affordability pressures from high mortgage rates. New home sales were slightly stronger than expected, driven by sales of more moderately priced homes as higher building costs crimped the supply of lower-priced homes while higher mortgage rates contributed to affordability pressures across the spectrum. Lastly, the Fed Chair, Powell stuck by the Fed’s 2.0% inflation target; reiterated that the process of getting inflation back down to 2.0% still has a long way to go; and he acknowledged that the Fed will raise rates again if it is appropriate. Powell has apparently indicated Fed’s stance prior to this time.   However, he did not previously indicate  that the Fed is thinking about cutting rates, yet that omission was not a surprise either. That said, all major U.S. indices closed mixed. The NASDAQ (+2.3% w/w),  S&P 500 (+0.8%) closed on a positive note whilst DJIA (-0.4% w/w) closed lower.

In another jurisdiction, the European stocks trended higher, despite the release of weak economic data. In local currency terms, the pan-European STOXX Europe 600 Index ended 0.7% w/w higher as European natural gas prices dropped and expectations grew that interest rates may soon peak. Major stock indexes advanced. For instance, Italy’s FTSE MIB tacked on 1.6% w/w, France’s CAC 40 Index gained 0.9% w/w, and Germany’s DAX added 0.4% w/w. Lastly, the UK’s FTSE 100 Index rallied 1.05% w/w. At the same time, the Eurozone’s Purchasing Managers’ Index (PMI) for manufacturing came in at 43.7—a slight improvement from July’s print of 42.7, but still well below the 50-point mark. This level indicates a contraction in manufacturing activity. Meanwhile, the PMI reading for the services sector dipped below 50 to print at 48.3, 5.1% lower when compared to 50.9 in July-2023. UK business activity recorded its weakest month in August since January 2021, according to S&P Global/CIPS. The UK PMI Composite Output Index (flash report) fell to 47.9 from 50.8 in July, the first contraction since January.

Asian stocks closed the week mixed. Chinese stocks fell as investors grew more pessimistic about the country’s economic outlook. The blue-chip CSI 300 Index (-2.0% w/w) and Shanghai Composite Index (-2.2% w/w) both recorded weekly declines and added to their year-to-date losses. The CSI 300 Index is trading at its lowest level since November 2022, while the Shanghai Composite Index is at its lowest level since last December. In Hong Kong, the Hang Seng Index, which entered a bear market the previous Friday, rose slightly for the week, though the Hang Seng Index is also at its lowest level since November 2022. Disappointing data, signs of deflation, high youth unemployment, and continued liquidity problems in the debt-laden property sector have contributed to an erosion of confidence in China’s economy. Signs of deteriorating growth and a sense that China’s government has relatively few good options to arrest the downturn have raised the prospect of accelerated capital outflows. Overseas funds sold the equivalent of $10.7bn from the mainland market over the thirteen (13) trading days through Wednesday, according to Bloomberg, the longest stretch since it began tracking the data in 2016. On the other side, Japanese equities rallied following the previous week’s declines, posting four consecutive positive sessions, before giving up much of the gains in a disappointing Friday close. Nevertheless, the benchmark Nikkei 225 finished the week 0.6% higher.

Similarly, commodity markets ended the week mixed. In energy markets, Brent futures closed lower by 0.4% w/w to print at $84.5/bbl, owing to the mixed sentiments surrounding China’s economic recovery, which essentially dampens the outlook of global demand of oil. Similarly, the WTI crude futures tapered by 1.7% w/w to close the week at $79.8/bbl.

This week, In the U.S., the important economic data expected includes the July Personal Consumption Expenditure (PCE) inflation report and the August unemployment rate report. In UK, we await the BoE’s Consumer Credit report. Overall, we anticipate global equities to continue on mixed sentiments from investors.

Macroeconomic Highlights

On Friday 25-Aug-2023, the Nigerian Bureau of Statistics (NBS) released its Gross Domestic Product (GDP) report for Q2-2023. According to the report, Q2-2023 GDP grew by 0.20% q/q to 2.51% (from 2.31% in Q1-2023). However, this growth rate was lower than the 3.54% recorded in Q2-2022.

By the same token, the NBS also published its first unemployment report since Q4-2022. Excerpt from the report shows that Nigeria’s unemployment rate declined from 5.3% recorded in Q4-2022 to 4.1% in Q1-2023. The figures are a result of the implementation of a new methodology which involves surveying 35,520 households and reportedly aligns with International Labour Organisation (ILO) standards.

The Federal Government plans to re-introduce the national tax amnesty scheme. In a statement, the Director of Press and Public Relations of the Ministry of Finance, Stephen Kilebi noted that the tax amnesty scheme offers a time-limited opportunity for taxpayers to regularise their tax status relating to previous tax periods and pay the taxes due with certain benefits.

The Central Bank of Nigeria (CBN) said the recent estimate of the bank’s financial accounts by JP Morgan was “out of context” and assured that there was no cause for panic. The CBN clarified that fluctuations and liabilities encumbrances to the reserves were only natural and normal, adding that the CBN built the reserves to defend the Naira in terms of its value to other currencies.

According to figures on money market indicators from the CBN, the gap between the maximum lending rate and savings deposit rate in the banking sector stands at 22.14ppts in Jul-2023. In the month, the savings deposit rate rose from 5.18% reported in June-2023 to 5.24% from 5.18% . Nonetheless, the maximum lending rate fell from 28.94% recorded in June-2023 to 27.38% in Jul-2023.

Also, the CBN has directed financial institutions under its regulation to stop granting secured Naira overdrafts. This is in its efforts to guard against foreign currency risk and to preserve the scarce liquidity in the foreign exchange market.

Finally, the aggregate Manufacturers CEO’s Confidence Index (MCCI) of the Manufacturers Association of Nigeria (MAN) showed that all major performance indicators (MPIs) of the sector recorded unfavorable changes, including Employment Condition (Rate of Employment), which declined from 51.3 points in Q1-2023 to 50.7 points in Q4-2023. Also, the confidence of local manufacturers further dipped to 54.1 points Q1-2023, compared with 55.0 points recorded in Q4-2023.

This week, we expect the National Bureau of Statistics to release its Federation Account Allocation Committee (FAAC) Jul-2023 disbursement report at the start of the week, its Pension Asset and Membership data for Q2-2023, and its Company Income Tax report for Q2-2023.

Domestic Equities: Equities Market Rebound…ASI up 1.26% w/w.

Last week, the local equities market bounced back from its bearish state of the prior week. Thus, buy-interest in BUAFOODS (+17.94% w/w), DANGSUGA (+35.71% w/w) and TRANSCORP (+39.42% w/w) drove the local bourse northwards. As a result, the benchmark All Share Index (NGX-ASI) climbed by 126bps w/w to print at 65,558.91 points. Hence, YTD return strengthened to 27.92%, while market capitalisation prints at N35.88tn. Investors’ sentiments strengthened from 0.5x to 0.7x, as 32 tickers appreciated while 46 depreciated.

Across sectors, overall w/w performance was mainly bearish as only two (2) sectors under our coverage closed higher. The Consumer Goods index (+11.58% w/w) and the Insurance index (+1.22% w/w) gained following buy-interests in BUAFOODS (+17.94% w/w). DANGSUGA (+35.71% w/w), CORNERST (+9.23% w/w) and MANSARD (+5.75% w/w). On the flip side, the Banking index (-3.57% w/w) and the Oil and Gas index (-2.40% w/w) declined due to sell-offs in ZENITHBA (-3.68% w/w), ETI (-6.19% w/w), ACCESSCO (-2.65% w/w), CONOIL (-10.00% w/w) and ETERNA (-8.68% w/w). Lastly, the Industrial goods sector lost 0.01% w/w, on account of price depreciations in WAPCO (-0.37% w/w) and CUTIX (-4.00% w/w).

This week, we project mixed sentiments toward listed equities, with some investors’ continuing their cherry-picking activities around fundamentally sound stocks with strong potentials in terms of recently disclosed corporate actions. Other investors will continue to tilt more toward the money market to take advantage of the elevation of yields (particularly risk averse investors), which we term to be temporal pending the expected inflow.

Money Market Review: Stop Rates Climb at PMA

The financial system opened liquid with a balance of N53.9bn last week. Despite coupon payments to the tune of N66.8bn hitting the system, we observed increased activity in the CBN’s Standing Lending facility. The financial system closed the week lower, with a deficit balance of N280.6bn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) climbed by 8.5ppts w/w and 9.0ppts w/w to close the week at 25.2% and 24.3%, respectively.

Last week, the CBN conducted August’s final NTB Primary Market Auction (PMA) with N303.2bn on offer across all tenors. Investors’ demand was strong, with a bid-to-cover of 5.1x, as total subscriptions were N1.5tn.  However, CBN decided to allot the exact amount on offer. Stop rates settled higher as investors were more aggressive with bids. The 91-day paper closed at 5.19 (+0.19 ppt), while the 181-day and 364-day NT-bills closed at 8.0% (+2.1 ppt) and 13.97% (+4.17 ppt).

In the secondary NT-bills market, we observed buy pressures as investors turned to the auxiliary market to fill unmet bids at the PMA. As a result, the average yield on NT-bills declined significantly by 20bps w/w to close at 8.19%.  

This week, our expectations are in two parts. Firstly, we expect the prevalent system illiquidity to keep rates at the short end of the curve elevated (at current levels, at least for the first two days of the week), pending the expected FAAC inflow. On the other side of the coin, we anticipate FAAC payments to the tune of N966.0bn to be shared between the FG, States and LGs. This inflow is expected to provide a breather to the illiquidity situation of the financial system. It will in turn serve as an anchor, weighing down funding rates between banks, as well as money market and FTD rates. Overall, we expect funding rates to decline at the close of the week, straying back to the single-digit terrain (ceteris paribus). A downside to this expectation will be magnitude of the portion of FAAC payments to hit the system, and if there is a delay in the expected inflow.

Bond Market: Investors Bullish on Nigeria Eurobonds

The secondary bonds market was dominated by bearish investors’ sentiments as the average bond yield rose by 27bps to close at 14.10%. In tandem, corporate bonds traded on a bearish note, as the average yield on corporate bonds increased by 16bps w/w to 14.45%.

In the Nigerian secondary Eurobonds market, sentiments were bullish as investors reinvested $88.74mn worth of coupon payments. The average yields in the market plunged by 28bps w/w to settle at 10.99%.

For the Bonds market, we expect yields to hover around current levels this week. However, on the back of the expected liquidity, we envisage that the potential bond price rally might not be as significant given the weak correlation that currently exists between system liquidity and the bonds yield curve. For the Eurobonds market, we expect mixed sentiments, with yields remaining around current levels, reserving the potential to nudge slightly higher.

Currency Market: Naira Resumes its Slide.

Last week, the Naira gained w/w at the Investors & Exporters (I&E) window to close at N778.42/$, from its previous close of N740.6/$1. At the parallel market, we find offer quotes in the N915.0/$1- N925.0/$1 range from N870.0/$1 at the start of the week. Activities in the I&E window worsened, with average FX turnover falling by 32.6% w/w from $124.0mn to $83.6mn. Lastly, Nigeria’s external reserves settled at $33.7bn.

This week, we expect sustained pressure on the Naira as the outlook for the Naira remains grim given the inadequate inflows of the US Dollar into the official and parallel markets and that the backlog of unmet US Dollar demand, even as the US Dollar strengthens across the globe.