September 11, 2023/United Capital
Global Markets Closed Bearish
Last week, the US stock market posted weekly losses, driven by the released economic data, rising treasury yields, concerns about oil prices, and implications on the broader economy. At the start of the week, data for factory orders showed that factory orders have improved. Thus, total factory orders, excluding the volatile transportation component, rose by 0.8% in July from the 0.3% increase recorded in June. The ISM Services PMI jumped from 52.7% to 54.5%, and the Prices Index rose from 56.8% to 58.9%, a combination that will support the Fed’s argument of the need for rates to stay higher for longer period. Further fueling the market’s expectation for a longer elevated rate environment was the sharp increase in oil prices, which prompted worries about inflation expectations and consumer spending pressures. Despite the end-of-week rally in mega-cap stocks, rising yields had kept pressure on the stock market this week. The 2-yr note yield rose eight basis points to 4.96%, and the 10-yr note yield rose ten basis points to 4.27%. Thus, major indices such as the Nasdaq Composite (-1.9% w/w), S&P 500 (-1.3% w/w), Dow Jones Industrial Average (-0.7% w/w) and Russell 2000 (-3.6% w/w) posted weekly losses.
Similarly, the European markets recorded bearish outings w/w. Economic releases provided more signals that the eurozone economy remains weakened. Gross Domestic Product (GDP) in the bloc grew by 0.1% in Q2-2023, as a drop in exports contributed to Eurostat’s downward revision of its initial estimate of a 0.3% expansion. Retail sales volumes in the eurozone fell by 0.2% sequentially in July, reflecting weaker automotive fuel purchases. Investors’ sentiment in the eurozone fell more than expected at the start of September, with Sentix’s index tumbling to -21.5 from -18.9 in August. The deepening slowdown in Germany was the primary dampener on sentiment. German industrial production in July fell for a third month, running by a greater-than-expected 0.8% sequentially. The decline was driven by a 9.0% drop in auto manufacturing. Among major stock indexes, Germany’s DAX declined by 0.6% w/w, France’s CAC 40 Index lost 0.8% w/w, and Italy’s FTSE MIB slid 1.5% w/w. Conversely, the UK’s FTSE 100 Index advanced by 0.2% w/w as Bank of England (BoE)’s Governor, Andrew Bailey cast doubt on a possible hike in UK interest rates at the upcoming 21-Sep policy meeting.
Similarly, the Asian market closed bearish primarily due to continued concerns about China’s economic slowdown and the impact on global demand. The private Caixin/S&P Global survey of services activity fell to (a below forecast) 51.8 in August from July’s 54.1. Although the gauge remained above the 50-point threshold, indicating expansion for the eighth consecutive month, it was the slowest increase since December as poor demand continued to drag on China’s economy. The Shanghai Stock Exchange Index declined by 0.5% w/w, while the blue-chip CSI 300 lost 1.4% w/w. In Hong Kong, the benchmark Hang Seng Index gave up 1.0% w/w. Japan’s stock markets closed mixed as weak economic data releases suggested that Japan’s economy was not doing as well as previously thought, with a downward revision to second-quarter economic growth weighing on sentiment. Japan’s second-quarter 2023 GDP expanded 4.8% quarter-on-quarter on an annualised basis, weaker than preliminary estimates of 6.0% growth. Capital spending, private consumption, and public investment were softer than anticipated. The Nikkei 225 Index (-0.3%) posted weekly losses while the broader TOPIX Index gained 0.4% w/w. Elsewhere, the Mumbai Sensex (+1.9% w/w) gained.
In the oil market, crude oil prices rose. Brent crude oil futures rose by 2.4% to $90.65/bbl following news that Saudi Arabia and Russia plan to extend their voluntary oil production cuts of one million barrels per day and 300,000 barrels per day, respectively, through the end of 2023.
This week, investors will turn their attention to US inflation numbers for August as both Consumer and Producer Price Indices will be released within the week. At the tail end of the week, the spotlight will be on the EU as the ECB will make its interest rate decision.
Macro Highlight and Outlook
Nigerian foreign exchange earnings grew in the first six months of 2023 as the foreign trade surplus rose to N2.2tn due to the new administration’s effort to improve the country’s foreign exchange earnings. According to the National Bureau of Statistics (NBS), Nigeria’s total import bill stood at N11.29tn, while total exports amounted to N13.50tn, indicating that the country was able to earn N2.22tn worth of foreign exchange in the process.
According to the NBS, government revenue got a boost as taxes from companies and consumers rose by 96.1% to N2.3tn in the second quarter of 2023 from the N1.18tn generated in Q1-2023. The significant rise in taxes generated in Q2-2023 was because of Company Income Tax (CIT), which rose by 226.40% q/q from N469.01bn in Q1-2023 to N1.53tn. Notably, taxes paid by manufacturers increased by 115.0% from N192.0bn in the first quarter to N414.5bn in the second quarter of 2023.
The CBN disclosed in its Q1-2023 Economic Report that the net foreign exchange inflow into the economy rose by 24.7% q/q from $5.78bn reported in Q4-2022 to $7.2bn in Q1-2023. The report further highlighted that the net outflow through the Apex Bank also increased by 30.0% q/q from $1.30bn reported in Q4-2022 to $1.69bn in Q1-2023, reflecting the Bank’s increased intervention efforts in the foreign exchange market segments.
President Bola Tinubu, on Saturday, visited New Delhi, India, to attend the 18th G-20Leaders’ Summit. At the meeting, the President expressed Nigeria’s readiness to play a major role within the G-20 countries, as well as contribute to shaping a more equitable world. Earlier in the week, Nigeria secured significant investment pledges from Indian investors, totalling nearly $14.0bn. Jindal Steel and Power plans to commit $3.0bn to Nigeria’s steel sector, while Indorama Corp plans an $8.0bn expansion of its petrochemical facility in Nigeria. Lastly, Skipperseil Ltd’s Chairman and India’s Bharti Enterprises pledged $1.6bn each over four years for power generation and $700.0mn, respectively.
According to the recent Monetary Policy communique released by the Central Bank, members of the Monetary Policy Committee (MPC or Policymakers) forecasted a continuous decline in the Federal Government’s fiscal deficit in the third quarter and fourth quarter of 2023. The Policymakers’ projection was based on the recent efforts by the government to manage expenditures better and improve oil and non-oil revenues.
The Acting Governor of the Central Bank of Nigeria (CBN or the Apex Bank), Folashodun Shonubi, has said the Apex Bank is making plans to clear the foreign exchange (FX) backlogs in the next one or two weeks. The FX backlog, which is the unmet demand for forex by investors and exporters, is estimated at $10 billion.
In other news, Nigeria’s presidential election tribunal ruled on Wednesday, 06-Sept-2023 that Nigeria’s main opposition parties (People Democratic Party, and Labour Party) failed to prove claims of electoral malpractice against the ruling party, All Progressives Congress (APC) in February’s disputed elections. As a result, the tribunal upheld President Bola Tinubu’s victory in the 2023 Presidential election.
This week, we expect the NBS to publish the country’s Consumer Price Index (CPI) report for Aug-2023. We anticipate headline inflation to continue its upward trend in August, further reflecting the impact of the petrol subsidy removal and the devaluation of the Naira. In addition, we await the release of the country’s domestic and foreign debt report for Q2-2023.
Domestic Equities: The Market Closed Bullishly… ASI up 0.91%
Last week, the local equities market closed higher. Notably, buy-interests in BUAFOODS (+5.41% w/w), ZENITHBA (+7.41% w/w) and DANGSUGA (+6.03% w/w) were the primary All-share index movers, although price depreciation in DANGCEM (-1.30% w/w) weighed on the index. As a result, the benchmark All Share Index (NGX-ASI) appreciated 91bps w/w to print at 67,527.19 points. Hence, YTD return strengthened to 32.96%, while market capitalisation grew by N337.24bn to N37.30tn. Equity turnover improved as the average value and volume traded rose by 52.7% w/w and 13.6% w/w to N9.09bn and 528.75mn units, respectively. Investors’ sentiments worsened to 1.56x (previously 1.96x), as 78 tickers appreciated while 50 depreciated.
Across sectors, overall w/w performance was bearish as three (3) of five (5) sectors under our coverage closed lower. The Banking Index (+5.55% w/w) led the gainers, following buy-interests in ZENITHBA (+7.41% w/w), FIDELITY (+12.90% w/w) and ETI (+6.67%). It was followed by the Consumer Goods index (+2.24% w/w) driven by buy- interests in BUAFOODS (+5.41% w/w) and DANGSUGA (+6.03% w/w). Conversely, the Insurance index (-2.94% w/w) declined following share price depreciations in CORNERST (-11.43% w/w), NEM (-5.84% w/w), CHIPLC (-11.30% w/w) and LINKASSU (-7.78% w/w). The Industrial Goods index (-0.49% w/w) and the Oil & Gas index (-0.12% w/w) closed bearishly due to share price depreciations in DANGCEM (-1.30% w/w) and ETERNA (-3.37% w/w).
Looking ahead, we forsee investors sentiment tilted more toward listed corporates with strong and pending corporate actions. Investors will look to take positions across listed Tier 1 banks that are yet to release their H1-2023 financials. Overall, we expect a group of investors to remain tilted toward the money market, in a bid to take advantage of the elevated interest rate. This will be translated into pockets of bearish sentiments. However, fund managers and risk inclined investors may continue cherry-picking stocks with strong fundamentals and improved dividend yield.
Money Market Review: Stop Rates Closed Lower at PMA
Last week, the financial system opened with a balance of N185.8bn. However, owing to the absence of maturities and any significant inflow, the financial system strayed into the deficit region, particularly owing to increased activities in the Standing Lending Facility (SLF) window (in the aftermath of the CBN’s NT-bill auction). That said, the financial system wrapped up the week under review with a deficit balance of N73.4bn. As a result, (in line with our expectation) funding rates surged, with the Overnight Policy Rate (OPR) and Overnight (OVN) closing the week at 17.8% and 18.75% respectively. However, considering the weekly average of funding rates between banks we observed that both rates (OPR and OVN) still closed 50bps and 43bps lower than the prior week’s average print, recording a weekly average of 5.9% and 6.6% respectively (compared to 6.4% and 7.0% in the prior week). This is because, the surge in funding rates was only recorded on Friday 08 September 2023, after the financial system slid into the deficit terrain.
At the primary market, the CBN conducted the first NT-bill auction for September, rolling over maturing bills to the tune of N214.7bn. Owing to the increased interest at the short end of the curve (particularly in the aftermath of CBN’s strict 65.0% LDR directive to the banks), investors’ demand came in strong, translating into an oversubscription at the auction. Total subscription was recorded at N875.7bn, implying a bid-to-cover ratio of 4.1x. The CBN allotted the same amount that was on offer. Given the liquidity in the financial system at the time of the auction, stop rates across all the bills (91-day, 181-day, and 364-day) tapered by 69bps, 100bps, and 142bps, to record 4.50%, 7.00%, 12.55% (5.19%, 8.00%, and 13.97% respectively).
The secondary NT-bills market was met with increased interest from investors. On 06 September 2023, we observed two (2) new 1-year bills (8-Aug-2024 and 22-Aug-2024) were introduced with yields of 9.5% and 11.7% respectively. Despite the pockets of bullish sentiments (post PMA), as investors sought to fulfill unmet demands at the NT-bill auction, average yields at the short end of the curve remained elevated. This was influenced by the newly observed bills in the market, whose yields nudged higher. For context, The newly introduced 1-year bills closed the week at 13.04% and 13.56% respectively. That said, the average yield across the NT bill yield curve climbed by 66bps w/w to close at 7.93% (previously, 7.27%).
At the close of the week, the average yield climbed by 66bps w/w to close at 7.93% (previously, 7.27%). The newly introduced 1-year bills closed the week at 13.04% and 13.56% respectively.
This week, we expect the CBN to conduct the second NT-bills auction for September, rolling over maturing bills to the tune of N152.2bn. At the auction, we anticipate stop rates to climb, given our expectation of a wider system deficit. Overall, we anticipate the liquidity status of the financial system to continue to influence the direction of FTD and money market rates, spearheaded by funding rates between banks. That said, we foresee funding rates between banks, FTD rates, and money market yields to climb higher this week.
Bond Market: Bearish Sentiments Resumed
The secondary bonds market closed bearish, underpinned by short-selling activities, in anticipation of the upcoming DMO auction. As a result, we observed the average yield across all bond tenors climbed by 10bps w/w to settle at 14.16% (previously, 14.06%).
In the Nigerian Eurobond secondary market, sell pressures remained, in tandem with the overall sentiments in the Sub-Saharan African (SSA) region. That said, the average yield on Nigerian Eurobonds rose by 9bps w/w to settle at 11.20% (previously, 11.11%).
This week, we expect the Debt Management Office (DMO) to approach the market to raise debt to the tune of c.N360.0bn. At the auction, we anticipate marginal rates to climb higher. In the Eurobond market, we expect the bearish sentiment to continue in the market, in tandem with sentiment in the SSA region.
Currency Market: Naira Appreciated at the I&E Window
Last week, the Naira appreciated by 2.4% w/w at the Investors & Exporters (I&E) window to close at N722.39/$, from its previous close of N740.38/$. At the parallel market, Naira depreciated further, as we saw offer quotes in the N910.0/$- N940.0/$ range. Activities in the I&E window weakened, as average FX turnover fell by 44.0% w/w to settle at $89.1mn. Lastly, Nigeria’s external reserves fell by 54bps to settle at $33.4bn.
This week, we expect continued pressure on the Naira across all market segments, as FX pressures persist due to weak Dollar earnings, and demand outweighs supply.
