November 6, 2023/United Capital Research

Global Markets Surged Amid Optimism That Interest Rates Might Have Reached Their Peak
Last week, the US equities market was met with a strong positive performance, recording its best week of gains since November 2022, particularly owing to falling treasury and bond yields. The S&P 500 Index recorded its strongest weekly gain in nearly a year, as signs of a slowing economy and a policy statement from the Federal Reserve that was generally perceived as dovish led to a sharp decrease in long-term bond yields. Growth stocks and the technology-heavy Nasdaq Composite Index outperformed somewhat, but the gains were broad-based and led by the small-cap Russell 2000 Index, which scored its best weekly gain since October 2022. A primary driver of sentiment appeared to be the Fed’s policy meeting that was concluded on Wednesday. The Fed left rates steady, as was widely expected, but investors appeared encouraged by the post-meeting statement, which signaled that the recent runup in long-term Treasury yields had achieved some of policymakers’ intended tightening in financial conditions. Fed officials also seemed comfortable with the recent upside surprises in economic data, merely tweaking their description of the pace of economic growth from “solid” to “strong.” That said, NASDAQ Composite (+6.6% w/w), S&P 500 (+5.9% w/w) and DIJA (+5.1% w/w) were all met with strong w/w gains.

By the same token, the European equities markets recorded weekly gains, with the pan-European STOXX Europe 600 Index rebounding from the previous week’s loss and ending 3.41% higher week-on-week. Major stock indexes also rallied, buoyed by expectations that interest rates may have peaked. Italy’s FTSE MIB surged 5.1% w/w, France’s CAC 40 Index jumped 3.7% w/w, and Germany’s DAX climbed 3.4% w/w. The UK’s FTSE 100 Index added 1.7% w/w. The Bank of England (BoE) held interest rates at a 15-year high at 5.25% for the second consecutive meeting but warned that rates would have to stay at a restrictive level for “an extended period.

In Asia, we witnessed similar sentiments, with financial markets in China recording gains as speculation that US interest rates might have peaked offset broader concerns about the country’s slowing growth. Thus, the Shanghai Composite Index rose 0.4% w/w, while the blue-chip CSI 300 advanced 0.6% w/w. Japan’s stock markets gained over the week, with both the Nikkei 225 Index and the broader TOPIX Index returning around 3.0% w/w.

In the oil market, oil prices fell on Friday, racking up a second-straight weekly loss as easing concerns about Middle East supply disruptions took center stage offsetting the boost from a swing lower in the Dollar following a weaker monthly jobs report. Hence, Brent Crude prices declined 6.2% w/w to print at $84.89/bbl.

This week, we expect the bullish sentiments across the global markets to remain unabated, as central banks in advanced economies maintain a bias for a HOLD in monetary policy tightening.

Macro Highlight and Outlook
The Federal Government, through the Central Bank of Nigeria, has commenced payment of outstanding matured Foreign Exchange (FX) forwards owed to various creditors. The amount of overdue forward payments is estimated at $6.7bn, according to the Minister of Finance, Wale Edun. The CBN has delivered over 75.0% – 80.0% of outstanding matured FX forwards in banks. According to sources, only international banks have been settled, which include Citi Bank, Standard Chartered and Stanbic IBTC.

Oct-2023 Purchasing Managers’ Index (PMI) report shows that, business activity in Nigeria contracted for the first time in seven months to 49.1pts from 51.1pts in the previous month. This signals a deterioration in business conditions in the private sector due to a sharp rise in overall input prices and operating expenses for the period under review. Notably, the last time the country’s business activity shrank was in Mar-2023 following the fallout of the severe cash shortages caused by the Naira redesign policy of the CBN.

Morgan Stanley Capital International (MSCI), a provider of benchmark indexes and multi-portfolio analysis tools, has reclassified MSCI Nigeria indexes from Frontier Markets to Standalone Market status. This means MSCI will delete each Nigerian security from the MSCI Frontier Markets Indexes at a price that is effectively zero. This comes after FTSE Russell reclassified Nigeria’s equity country classification to unclassified from frontier markets in Sep-2023.

According to the Central Bank of Nigeria’s Monthly Economic Report, the Federal Government’s oil revenue for May 2023 dropped to N223.0bn compared to the projected N804.0bn for the month. This represents about a 72.0% reduction in federal earnings for the period under review. The decline in oil earnings was driven mainly by lower receipts from Petroleum Profit Tax and Royalties.

The Nigerian National Petroleum Company Limited said it was set to provide six million barrels of crude oil to the Dangote Refinery in December 2023. This development came as plans have since been firmed up for the signing of a sales and purchase Agreement between the national oil company and the refinery. Notably, the country’s crude oil shortage has delayed the take-off of the Dangote refinery.

The Federal Government (FG) has approved a N2.2tn supplementary budget for the 2023 fiscal year to fund urgent issues, including national defence and security. The supplementary funding is also targeted at providing welfare packages for workers and Nigerians at large.

This week, we expect the macroeconomic environment to be quiet in the absence of any data release.

Domestic Equities Market Closed Bullishly… ASI up 4.56%
Last week, the local equities market closed higher. Notably, AIRTELAF (+5.66% w/w) was the primary equity index mover, even as losses in BUACEMEN (-4.29% w/w) and MTNN (-2.50% w/w) weighed on the index. As a result, the benchmark All Share Index (NGX-ASI) appreciated 456bps w/w to print at 70,196.93 points. Hence, YTD return strengthened to 36.97%, while market capitalisation closed at N38.14tn. Equity turnover improved as the average value and volume traded rose by 59.6% w/w and 69.5% w/w to N8.11bn and 490.24mn units, respectively.

Across sectors, overall w/w performance was bullish as four (4) of five (5) indexes under our coverage closed higher. The Insurance index (+8.0% w/w) led the gainers due to MANSARD (+9.5% w/w) and AIICO (+11.9% w/w). It was followed by the Banking index (+2.7% w/w) due to buy-interests in UBA (+7.6% w/w) and ZENITHBA (+2.1% w/w). The Industrial goods index (+0.7% w/w) and the Consumer Goods index (0.5% w/w) closed higher due to gains in DANGCEM (+5.8% w/w), FLOURMILL (+12.1% w/w), NB (+3.3% w/w), INTBREW (+8.3% w/w) and CADBURY (+25.0% w/w). Lastly, the Oil and Gas index closed flat.

This week, investors’ sentiments towards the Nigerian equities market would be mixed. We expect buy-interest to be driven by stocks with good performance in the Q3-2023 earnings season. However, we anticipate pockets of profit-booking activity in the week. Also, as monetary authorities shift towards orthodox methods of monetary policy, the expected rise in the yield environment will likely draw investors to the safer fixed-income instruments.

Money Market Review: Stop Rates Trend Higher at OMO Auction
Last week, the financial system opened very liquid with a balance of N795.7bn. We observed a lot of activities in the Standing Deposit Facility (SDF) with a record high of N888.7bn on Monday 30 October 2023. The CBN conducted two Open Market Operations (OMO) auctions during the week under review, further cementing its return to traditional monetary policy. Rounding up the week, the financial system remained elevated, closing the week with an excess balance of N354.4bn. Funding rates began trending above the 15.75% rate (MPR, 18.75% minus 300bps) offered at the SDR window, in the aftermath of the removal of the restrictions at the SDF window. That said, the weekly average of the Open Repo Rate (OPR) and Overnight Rate (OVN), two (2) measures of funding rates between banks surged significantly by 969bps w/w and 988bps w/w to print at 16.61% and 17.36%, respectively.

Riding on the prevailing liquidity in the financial system, particularly after the restrictions in the CBN’s Standing Deposit Facility (SDF) was removed, the apex bank went on to conduct two (2) OMO auctions with a total of N650.0bn on offer across the 99-day, 183-day, 267-day, and 365-day OMO bills. As expected by the Central Bank, the auction was oversubscribed 1.6x, with total demand reaching N760.8 billion. That said, we witnessed a surge in rates at the OMO auction, with stop rates across all the bills offered printing at 13.98%, 14.48%, 14.99%, and 17.98%, respectively (as of the second OMO auction).

In the secondary NT-bills market, we observed intense sell-interest as investors sought to push yields higher, aligning them with OMO yields. As a result, the average yield on NT-bills surged by 714bps w/w to close at 14.29% (previously 7.15%).

This week, we anticipate the current status quo to be unabated. System liquidity would play background roles. The CBN would approach the market to roll-over NT-bills to the tune of N310.1bn. At the auction, we expect stop rates to trend higher. In terms of FTD and money market rates, we expect these rates to trend higher at 75bps or a maximum of 150bps. 

Bond Market: Bond Yields Trend Higher at Secondary Market
In the bonds market, we saw a similar bearish trend, with investors seeking to drive bond yields higher. Based on the foregoing at the primary market, particularly with regards to the CBN’s OMO auctions, market participants desire for higher rates trickled into the bonds space, with the FG’s proposed N26.0trn budget forming a pedestal. That said, the weekly average bond yield climbed by a significant 73bps to close at 15.61% (previously 14.88%).

In the Nigerian secondary Eurobonds market, bullish sentiments prevailed in tandem with SSA Eurobonds. The bullish appetite was driven by overall positive sentiments- in the aftermath of the Fed’s decision to HOLD its monetary policy rate steady. Other major central banks followed suit, exhuming the possibility that policy rates across advanced economies may have peaked. That said, the average yields in the market closed lower by 97bps w/w to settle at 11.01% (previously 11.98%).

This week, we expect mixed sentiments in the secondary market for bonds. This is because, pending the next MPC meeting, investors will tilt more toward standoffish and bearish stances. The FG’s proposed N26.0trn budget for 2024 will continue to underpin a broad-based bearish atmosphere. On the other side, some investors will look to take advantage of the prevailing bond yields, which is at a record high. In the Eurobonds market, we expect the bullish sentiments to linger. Also, we anticipate that the current reform process in Nigerian Foreign Exchange Market (NAFEM) will positively translate into the stability of the segment, thus further improving investors buy sentiments for Nigerian Eurobonds.

Currency Market: Naira Appreciated at Both Official and Parallel Market
Last week, the Naira appreciated by 1.7% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) window to close at N776.14/$, from its previous close of N789.94/$. At the parallel market, Naira appreciated, as we saw offer quotes in the N1000.0/$ – N1050.0/$ range compared to previous highs of N1300.0/$. This is due to the commencement of clearing of FX backlogs by the CBN. Nevertheless, activities in the NAFEM window weakened, as average FX turnover fell by 12.97% w/w to settle at $108.4mn. Lastly, Nigeria’s external reserves settled at $32.6bn.

This week, we see improvement in the Naira/Dollar position as the Federal Government persists in its efforts to enhance liquidity and market conditions.