December 4, 2023/United Capital

Global Markets: Broad-Based Positive Momentum
Last week In the US, equities closed green, buoyed by optimistic economic data suggesting the possibility of a soft landing for the economy. This favourable outlook fueled bullish sentiment among investors. Key economic indicators, including job growth and inflation, pointed towards a steadying economy, raising hopes that the Federal Reserve may be able to tame inflation without triggering a recession. This prospect of a soft landing, where the economy cools down without crashing, boosted investor confidence and drove gains in the stock market. Prominent developments comprised a November Consumer Confidence Index surpassing expectation, a positive adjustment to the Q3-2023 real GDP, increasing from 4.9% to 5.2%, a slowdown in income and spending, disinflation observed in the PCE Price Indexes in October, an exceptionally robust Chicago PMI for November, and a relatively modest count of initial jobless claims. In addition, yields on US treasuries declined further. The 2-yr note yield, which is most sensitive to changes in the Fed funds rate, plunged 39 bps this week to 4.56%. The 10-yr note yield declined 24 basis points to 4.23%. Moreover, the CME FedWatch Tool indicates a substantially increased likelihood of a rate cut by May-2024 in the Fed funds futures market, rising to 89.0% from 47.8% just one week ago. Consequently, the S&P (+0.8% w/w), The Nasdaq (+0.4% w/w), DIJA (+2.4% w/w) and the Russell 2000 (+5.8% w/w) all posted weekly gains.

In tandem, European equities rallied in local currency terms, and the pan-European STOXX Europe 600 Index week-on-week ended 1.35% higher, as a steep decline in inflation and falling bond yields lifted investor sentiment. Major stock indexes rose as well. Germany’s DAX climbed 2.3% w/w, Italy’s FTSE MIB tacked on 1.7% w/w, and France’s CAC 40 Index added 0.7% w/w. The UK’s FTSE 100 Index gained 0.6% w/w. The bullish investor sentiments were driven by economic data releases. Firstly, the Eurozone experienced a more pronounced deceleration in annual consumer price growth for November than anticipated, registering at 2.4%, a decline from October’s 2.9% and falling below the economists’ consensus of 2.7% in a FactSet poll. Underlying price pressures also eased. Core inflation, which excludes food and energy costs, dropped to 3.6% from 4.2%. Separately, the jobless rate held steady at a record low of 6.5%. In Germany, retail sales grew more than expected in October, increasing 1.1% sequentially, as falling inflation boosted consumer confidence.

The Asian market closed on a bearish note with Chinese equities experiencing sell-offs due to concerns about the nation’s delicate economic recovery. The Shanghai Composite Index experienced a 0.3% w/w loss, while the blue-chip CSI 300 lost 1.6% w/w. In Hong Kong, the benchmark Hang Seng Index fell by 4.2% w/w. Economic data for October provided a mixed snapshot of China’s economy. The official manufacturing Purchasing Managers’ Index (PMI) fell to a below-consensus 49.4 in November from 49.5 in October, marking the second consecutive monthly contraction. The non-manufacturing PMI slipped to a lower-than-expected 50.2 from 50.6 in October. Japan’s stock markets fell over the week, with the Nikkei 225 Index declining 0.6% w/w and the broader TOPIX Index down 0.4% w/w. Japanese stocks faced profit-taking following a November rally driven by expectations that U.S. interest rates had reached their peak.

In the oil market, crude oil prices fell as OPEC+ producers reached an agreement on voluntary oil output cuts for Q1-2024, which fell below market expectations. Saudi Arabia, Russia and other members of OPEC+, who pump more than 40.0% of the world’s oil, agreed to voluntary output cuts totalling c.2.0mbpd. However, at least 1.3mbpd of those cuts were an extension of voluntary curbs that Saudi Arabia and Russia already had in place. Market expectations were that the additional cuts under discussion would be as much as 2.0mbpd. As a result, oil prices closed lower, with Brent Crude declining by 1.2% w/w to print at $78.88/bbl.

This week, Australia and Canada will decide on their benchmark rates. In the US, Nov-2023 PMI numbers would be released, as well as employment data. The JOLTs Jop Openings, Nonfarm Payrolls and Unemployment reports will be released during the week, serving as a gauge of economic activity for investors. In addition, Germany’s Inflation numbers for Nov-2023 and Japan’s Q3-2023 GDP data will be released.

Macro Highlight and Outlook
The Organisation of Petroleum Exporting Countries (OPEC+) oil producers reached a consensus on implementing voluntary output cuts amounting to approximately 2.2mb/d for the early months of next year. This initiative was spearheaded by Saudi Arabia, which opted to extend its existing voluntary production cut. Meanwhile, Nigeria and Angola have opposed a reduction in their crude oil production quotas.

The Presidency has expressed support for the banking sector consolidation initiative of the Central Bank of Nigeria, saying it would help the country to grow the economy to a new height. According to the Presidency, it has become important to consider the capital adequacy of Nigerian banks in light of the projected $1.0tn economy in 8 years.

President Bola Tinubu has called upon the Senate to deliberate and grant approval for his request to secure a loan amounting to $8,699,168,559 and €100 million. This forms part of the 2022 – 2024 external borrowing plan envisioned by the federal government.

Also, the President has appointed a new Board and Management team for the Nigerian National Petroleum Company (NNPC) Limited, made up of nine members. The President retained Mele Kyari as the Group Chief Executive Officer
of the state-owned oil company.

Norway’s Equinor has concluded the sale of its 20.21% stake in Chevron’s operated Agbami oil field. Equinor stated that it had agreed to sell its shares in the Agbami oil field to Nigerian-owned Chappal Energies for an undisclosed amount. The assets to be sold also included Equinor Nigeria Energy Company’s 53.85% ownership in Oil Mining License 128. Equinor’s presence in Nigeria dates back to 1992.

According to the National Salaries, Incomes and Wages Commission, pensioners in the federal civil service may get a raise in their pension stipends next year. It was gathered that the raise would be for FG pensioners under the new pension scheme as well as for those in the previous scheme.

This week, we anticipate the release of Nigeria’s Capital Importation Data for Q3-2023 by the National Bureau of Statistics (NBS). Other than that, we expect the macroeconomic environment to be quiet in the absence of any data release.

Domestic Equities: Bullish Sentiments Prevailed…ASI up 0.27%
Last week, the local equities market closed positive following price appreciations in large-cap stocks, SEPLAT (+10.0% w/w), NESTLE (+9.5% w/w) and FBNH (+10.8% w/w) spurred the rally in the market. As a result, the benchmark All Share Index (NGX-ASI) climbed by 27bps w/w to print at 71,419.87 points. Hence, YTD return strengthened to 39.4%, while market capitalisation rose to N39.1tn. However, Investor sentiment weakened to 0.9x from 2.8x, as 61 tickers appreciated while 67 depreciated.

Across sectors, overall w/w performance was mainly bearish as three (3) sectors under our coverage closed bearishly. The two gainers were the Oil index (+6.0% w/w) and the Banking index (+1.9% w/w) following gains in SEPLAT (+10.0% w/w), ACCESSCO (+4.0% w/w), ETI (+6.9% w/w) and UBA (+2.2% w/w). Inversely, The Insurance index (-2.0% w/w) led the laggers due to sell-offs in WAPIC (-12.2% w/w) and AIICO (-6.4% w/w). Similarly, the Industrial goods index (-1.2% w/w) and the Consumer Goods index (-0.5% w/w) declined due to share price depreciations in DANGCEM (-2.4% w/w), BUAFOODS (-1.9% w/w) and DANGSUGA (-3.8% w/w).

Looking into this week, we maintain our expectations for mixed sentiments toward the equities market, given that the RSI is currently trending above the overbought region, with some investors projected to continue booking some profit; albeit mild. However, as witnessed last week, we still see sustained buy interest toward the Banks and other fundamentally sound stocks with strong Q3-2023 performances.

Money Market Review: Buoyant Financial System Drives Rates Lower
Last week, the financial system opened with a balance of N106.9bn. During the week, FAAC inflows and coupon payments totalling N5.6bn bolstered liquidity. Thus, the financial system closed in a surplus, with a balance of N404.1bn. Consequently, the weekly average Open Repo Rate (OPR) and the Overnight Rate (OVN) declined significantly by 7.66ppts and 7.80ppts to 16.19% and 17.00%, respectively.

In the secondary NT-bills market, we observed muted activity as the average yield on NT-bills remained unchanged at 10.5%.

This week, the CBN will roll over N104.4bn worth of NT-bills.  Post-auction, we expect to see increased buy interest in the NT-bills secondary market as investors try to fill the demand of unmet bids from the primary market.

Bond Market: Bullish Sentiments in Eurobonds Market
Bullish investor sentiments dominated the secondary bonds market as the average bond yield fell by 22bps w/w to close at 15.69%. Similarly, corporate bonds traded bullish, as the average yield on corporate bonds declined by 85bps to close at 16.15%.

In the Nigerian secondary Eurobonds market, we observed continued buy interest amongst investors as yields continue to decline in advanced economies. Further driving bullish sentiment was the $105.9mn coupon payments that hit the market. Thus, the average yields in the market fell by 20bps w/w to settle at 10.63%.

This week, we expect the bonds market to be muted as investors focus on the NT-bills primary market.

Currency Market: Naira Depreciated at the I&E Window
Last week, the Naira depreciated by 16.6% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N927.19/$, from its previous close of N794.89/$. At the parallel market, the Naira depreciated by 0.9% w/w to close the week at N1165.0/$ (previously, N1155.0/$). Activities in the I&E window weakened, as average FX turnover fell by 13.0% w/w to settle at $119.5mn. Lastly, Nigeria’s external reserves fell by 51bps to settle at $33.0bn.

This week, we expect continued pressure on the Naira across all market segments, given that FX pressures will persist as Dollar earnings remain weak, and demand outweighs supply.