It was a brutal week for equity investors as the Nigerian stock market recorded losses in all four trading sessions of the week. Notably, the All-Share index dipped by 1.4% w/w to 66,382.14 points, following profit-taking activities in BUACEMENT (-11.9%) and MTNN (-1.9%) stocks.
September 29, 2023/Cordros Report
Global Economy
According to the United States Department of Labor, the initial jobless claims in the US increased slightly by 2,000 to 204,000 in the week ending 23 September (vs. the week ending 15 September: 202,000) – significantly below market expectation of 215,000. The preceding suggests that the labour market remains tight, more so that the jobless claims remain near the lowest unemployment claims since the beginning of the year (194,000 in the week ending 20 January. Meanwhile, the 4-week moving average was 211,000, a decrease of 6,250 from the previous week’s revised average (217,250). Although we anticipate the labour market will remain solid in the near term, we think the full effect of tight financial conditions will likely pose key downside risks to the labour market further on in the year, especially as signs of a looser labour market are emerging. Nonetheless, the resilient economy and still tight labour market reinforce the view that the US Fed may likely raise the key policy rate at its November meeting. However, the financial markets are currently pricing that the Fed is done with rate hikes for 2023.
Preliminary estimates released by the Eurostat showed that consumer prices in the Euro Area maintained their downward trend for the sixth consecutive month in September. Specifically, the headline inflation moderated by 90bps to 4.3% y/y (August: 5.2% y/y) – its lowest print since October 2021 (4.1% y/y). Parsing through the breakdown provided, we note that energy costs (-4.7% y/y vs. August: -3.3% y/y) declined faster while the core inflation (4.5% y/y vs August: 5.3% y/y) cooled to its lowest since August 2022. We expect consumer prices to maintain their downward path over the rest of the year, primarily due to the favourable statistical base effects in the corresponding periods of the prior year when the headline inflation peaked, rising to record highs. That said, we highlight that the recent surge in crude oil prices poses a downside risk to our expectations. Overall, we expect the inflation print to bolster the European Central Bank’s (ECB) chances of pausing its interest rate hiking cycle at its next meeting in October, more so that the ECB’s September meeting tone suggests that it may have reached the end of its interest rate hiking cycle.
Global Market
Global equities markets remained subdued this week, prompted by (1) hawkish central bank signals, (2) surging bond yields, (3) rising oil prices and (4) China Evergrande’s trading halt. In line with this, US equities (DJIA: -0.9%; S&P 500: -0.5%) faced selling pressure due to rising Treasury yields and uncertainty about future interest rates. Likewise, European equities (STOXX Europe: -1.1%; FTSE 100: -1.1%) were headed for another weekly loss amid concerns over rising rates. Asian markets (Nikkei 225: -2.0%; SSE: -0.7%) followed suit, as investors traded with bearish sentiments amid the escalating debt crisis at China Evergrande, which raised concerns about broader financial risks in China’s property sector. Lastly, the Emerging (MSCI EM: -2.1%) and Frontier (MSCI FM: -1.7%) market indices echoed the negative sentiments across the global equities markets following selloffs in China (-0.7%) and Vietnam (-3.0%), respectively.
Nigeria
Domestic Economy
According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions in the domestic equities market dropped to a five-month low, declining by 62.7% m/m to NGN262.56 billion in August (July: NGN702.99 billion). This time, the local investors led the decline, as domestic transactions (85.8% of gross transactions) declined by 66.0% m/m to NGN225.40 billion (July: NGN662.45 billion). At the same time, foreign transactions (14.2% of gross transactions) recorded their second consecutive month of decline, falling by 8.3% m/m to NGN37.16 billion in August (July: NGN40.54 billion) as the government’s reform-induced momentum slowed, dampening foreign sentiments. We expect domestic investors to continue to dominate the domestic equities market over the short-to-medium term, even as higher fixed income yields may constrain buying activities. Simultaneously, while foreign investors will likely continue to adopt a wait-and-see approach in the near term, we expect to see improvement in foreign participation over the medium term. Our medium-term expectation is hinged on the expectations of positive policy pronouncements and reforms by the current administration.
According to the news flows, the African Export-Import (AFREXIM) Bank is actively engaging some oil traders, gauging their interests in providing the necessary funding for the USD3.00 billion emergency cash-for-crude oil repayment loan to the Nigerian National Petroleum Company Limited (NNPCL). Recall that on 16 August, the NNPCL announced that it had secured a USD3.00 billion emergency crude oil repayment loan from the AFREXIM bank, expecting to receive an upfront cash loan against proceeds from a limited amount of future crude oil production. While the deal is still in progress, we think that once completed, the loan may serve as a favourable short-term fix in providing near-term FX supply to support the FX market and stabilise the local currency. Nonetheless, we acknowledge that the amount is not enough to significantly support the local currency, more so that the funds will come in tranches. Thus, if not adequately managed with other suggested near-term measures (such as increased crude oil production, higher interest rates and additional funding support from third parties or multilateral institutions) FX pressures may likely build up again, leading to another round of local currency depreciation.
Capital markets
Equities
It was a brutal week for equity investors as the Nigerian stock market recorded losses in all four trading sessions of the week. Notably, the All-Share index dipped by 1.4% w/w to 66,382.14 points, following profit-taking activities in BUACEMENT (-11.9%) and MTNN (-1.9%) stocks. Consequently, the Month-to-Date and Year-to-Date returns settled at -0.3% and +29.5%, respectively. Trading activity remained sluggish, with a 65.7% w/w decline in total trading volume and a 40.8% w/w drop in trading value. Elsewhere, sectoral performance was mixed, with gains in the Insurance (+2.8%) and Consumer Goods (+1.6%) indices while the Banking (-4.2%), Industrial Goods (-3.0%) and Oil and Gas (-1.2%) indices declined.
In the short term, we anticipate cautious trading in the local stock market due to the absence of significant positive catalysts to boost sentiments. Overall, we advise investors to take positions in only fundamentally justified stocks as the unimpressive macro story remains a significant headwind for corporate earnings.
Money market and fixed income
Money market
The overnight (OVN) rate expanded by 10bps w/w to 3.4% despite the FGN bond coupon payments (NGN202.34 billion) inflows at the end of the week. However, we highlight that the average system liquidity closed slightly higher this week at a net long position of NGN137.20 billion (vs. a net long position of NGN109.42 billion in the previous week).
Barring any significant inflows to support the financial system next week, we believe the system liquidity will likely come under pressure, and the OVN rate will trend upwards.
Treasury bills
Activities in the T-bills secondary market turned bullish this week as market participants moved to the secondary market to compensate for their lost bids at the week’s NTB PMA. Thus, the average yield across all instruments contracted by 55bps to 8.1%. Across the market segments, the average yield at the NTB segment declined by 51bps to 7.9% and decreased by 126bps to 12.1% in the OMO segment. At this week’s NTB auction, the CBN offered instruments worth NGN177.12 billion – NGN1.75 billion for the 91-day, NGN1.56 million for the 182-day and NGN173.81 billion for the 364-day – to market participants. Demand at the auction was higher than the previous PMA, as the total subscription level settled at NGN786.79 billion (previous auction: NGN643.88 billion). Eventually, the CBN allotted precisely what was offered at respective stop rates of 4.99% (previously: 6.50%), 6.55% (previously: 7.00%), and 11.37% (previously: 12.98%).
Next week, we anticipate yield in the Treasury bills secondary market will likely increase as the possible slim liquidity position will drive down demand for bills.
Bonds
Proceedings in the FGN bonds secondary market traded the week mainly on a calm note but turned bullish at the end of the week as the average yield contracted by 3bps w/w to 14.4%. Across the benchmark curve, the average yield contracted at the short (-19bps) and long (-2bps) ends following buying interest in the MAR-2024 (-86bps) and APR-2037 (-9bps) bonds, respectively. Conversely, the average yield expanded at the mid (+7bps) segment as market participants took profits off the APR-2032 (+8bps) bond.
Over the medium term, we expect yields in the FGN bond secondary market to remain elevated, driven by the sustained imbalance in the demand and supply dynamics. However, we highlight that deliberate actions by the DMO to keep borrowing costs moderate remain a downside factor.
Foreign Exchange
Nigeria’s FX reserves declined for the nineteenth consecutive week, decreasing by USD34.25 million w/w to USD33.24 billion (28 September) – the lowest level since July 2021. Likewise, the naira depreciated by 1.0% to NGN755.27/USD at the I&E window (IEW), with total turnover at the window (as of 28 September) decreasing by 46.4% WTD to USD344.67 million as trades were consummated within the NGN590.00 – NGN851.00/USD band. In the Forwards market, the naira recorded depreciation on the 1-month (-1.2% to NGN791.13/USD), 3-month (-1.0% to NGN803.09/USD), 6-month (-0.7% to NGN820.86/USD) and 1-year (-1.0% to NGN876.74/USD) contracts.
The narratives in the FX market have remained the same in recent weeks, as FX reform momentum has slowed down. Hence, barring any significant positive developments, we expect (1) the lingering low crude oil production and (2) a sustained dip in foreign investors’ net flows to weigh on FX supply in the short term. Consequently, we expect FX liquidity constraints to linger in the near term, ensuring the local currency pressures remain intact.
