Preliminary estimates from S&P Global show that the United States (US) Composite PMI, signalled a stronger performance at the close of 2023, increasing marginally to 51.0 points in December (November: 50.7 points). We highlight that the improved reading indicates a sustained upturn in the services sector despite further deterioration in factory activities. Analyzing the breakdown, the Services PMI (51.3 points vs November: 50.8 points) reached a 5-month high due to a significant increase in new orders that spurred output growth. Meanwhile, factory activities, as measured by the Manufacturing PMI, slowed to 47.9 points (November: 49.4 points), reflecting weakened operating conditions attributed to softer domestic and external demand. We expect the overall private business activity in the US to remain in expansionary territory over the short term, mainly driven by the services sector,  supported by improvement in broader economic activities just as the FOMC switches to an accommodative monetary policy stance. However, we acknowledge that the subdued operational environment in factory activities presents a potential downside risk to short-term growth.

According to the recently released data from Eurostat, the Euro Area’s consumer prices increased to 2.9% y/y in December (November: +2.4% y/y) after seven consecutive months of slowdown. We attribute the upturn in inflationary pressure to the increase in energy prices stemming from the removal of energy subsidies by the German and French governments, which had previously kept prices lower. As a result, there was a weaker contraction in energy costs (-6.7% y/y vs November: -11.5% y/y) amid a slowdown in prices for food, alcohol & tobacco (+6.1% y/y vs November: +6.9% y/y) and non-energy industrial goods (+2.5% y/y vs November: +2.9% y/y). On a month-on-month basis, consumer prices rose by 0.2% in December (November: -0.6% m/m). We expect the inflation rate in the Euro Area to remain above the European Central Bank’s (ECB) 2.0% target, primarily influenced by the recent surge in energy prices. Notably, this data aligns with our view that the ECB will refrain from contemplating interest rate cuts in the short term, and instead prioritize monitoring potential pressures arising from wage increases and geopolitical tensions. Accordingly, the financial market now anticipates the ECB will embark on its first rate cut in mid-2024.

Global Equities

After a sluggish start to the holiday-shortened week, global stocks are poised for a weekly loss as investors assessed various economic reports – including initial jobless claims and non-farm payrolls – which indicated lingering resilience in the labor market that may impact how policymakers approach potential interest rate reductions this year. Correspondingly, US equities (DJIA: -0.4%; S&P 500: -0.2%) started the year with a lackluster performance, grappling with concerns over potential rate cuts by the Federal Reserve. At the same time, European equities (STOXX Europe: -0.3%; FTSE 100: -0.1%) were poised for their first weekly loss, as investors reacted negatively to a hotter-than-expected euro-zone inflation data amid rising bond yields. Equally, Asian markets (Nikkei 225: -0.3%; SSE: -1.7%) finished lower in response to mixed manufacturing reports from China and longer-than-expected policy tightening in the US. Lastly, the Emerging (MSCI EM: -1.9%) market declined, undermined by selloffs in China (-1.6%), while the Frontier (MSCI FM: +0.7%) market closed higher, supported by Vietnam’s (+1.9%) bullish performance.

Nigeria

Domestic Economy

Based on data from the National Bureau of Statistics (NBS), capital importation into Nigeria fell to a record low in Q3-23, declining by 43.6% y/y to USD654.65 million (Q2-22: USD1.54 billion). We believe the persistent slowdown in capital importation reflects foreign investors’ lacklustre interest in the country given the (1) lingering FX liquidity constraints, (2) uncompetitive domestic interest rates and (3) the uninspiring macro narrative. Parsing through the breakdown provided, we highlight broad-based declines across foreign portfolio investments (-80.3% y/y to USD87.11 million), foreign direct investments (-26.9% y/y to USD59.77 million), and other investments (-20.2% y/y to USD507.77 million). Similarly, capital importation declined by 36.5% on a quarter-on-quarter basis. We anticipate foreign inflows to remain subdued compared to pre-COVID levels due to foreign investors adopting a cautious “wait-and-see” approach. We believe they will await signals from the CBN regarding further initiatives to enhance FX supply and provide short-term support to the market, particularly amidst elevated global interest rates. Consequently, if there is a notable improvement in local FX liquidity, leading to higher market rates and simplified capital repatriation for investors, we expect an increase in foreign capital inflows over the medium term.

According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions in the local bourse rose to a 4-month high, after increasing by 34.1% m/m to NGN300.67 billion in November (October: NGN220.94 billion). The breakdown shows that the domestic investors were the primary drivers of the increase, as domestic transactions (76.3% of total transactions) increased by 22.2% m/m to NGN229.30 billion (October: 187.58 billion). On the other hand, foreign transactions (23.7% of gross transactions) increased by 113.9% m/m to NGN71.37 billion (October: NGN33.36 billion) – its highest level since March 2020 (NGN110.22 billion), likely due to investors’ optimism about reforms from the government. 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 (1) expected FX inflows as guided by the authorities, (2) CBN’s recent actions in clearing its FX backlogs, and (3) firm direction of short-term interest rates.

Capital Markets

Equities

The local stock market celebrated a bullish start to the first trading week of 2024, with gains recorded on all trading sessions this week. Accordingly, the benchmark index surged, and broke through the 79,000 points mark to record a substantial 6.5% w/w gain to closing at 79,664.66 points. Notably, bargain hunting in blue-chip telecommunication stocks – MTNN (+8.0%) and AIRTELAFRI (+6.0%) – underpinned the market’s performance. Activity levels mirrored the market’s broad gauge, as the total traded volume increased significantly by 139.2% w/w while the total traded value registered a 15.9% w/w increase. Sectoral performance was positive as gains in the Insurance (+14.1%), Banking (+10.3%), Consumer Goods (+4.4%), Industrial Goods (+3.6%), and Oil and Gas (+3.0%) indices reflected the overall market performance.

In the near term, we believe positioning for 2023FY earnings releases and accompanying dividends declarations will continue to support buying activities on the local bourse even as institutional investors continue to search for clues on the direction of yields in the FI market. However, we advise investors to seek trading opportunities in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate contracted by 57bps w/w to 14.9%, as the surplus liquidity from the prior week supported the financial system. We highlight that the average system liquidity closed at a net long position of NGN159.30 billion (vs a net long position of NGN305.62 billion in the previous week).

Barring any significant inflows into the system next week, we believe a possible net NTB issuance at the Wednesday auction would pressure the liquidity in the system. Thus, we anticipate the OVN rate will likely head northwards.

Treasury bills

Bullish sentiments persisted in the Nigerian Treasury bills secondary market this week, as the healthy system liquidity supported demand. As a result, the average yield across the segmented market contracted by 35bps to 6.4%. Across the market segments, the average yield declined by 34bps to 6.0% in the NTB secondary market and contracted by 47bps to 10.9% in the OMO segment.

Next week, we envisage yields in the T-bills secondary market will trend higher, given our expectation of a possible liquidity squeeze in the financial system. Also, we expect market focus to be shifted to the NTB PMA holding on Wednesday (10 January), where the CBN is scheduled to roll over NGN56.56 billion worth of maturities.

Bonds

Similarly, the Treasury bonds secondary market traded with bullish sentiments as market players cherry-picked attractive instruments across the curve. Accordingly, the average yield dipped by 41bps to 13.8%. Across the benchmark curve, the average yield contracted at the short (-23bps), mid (-32bps) and long (-42bps) segments driven by buying interest in the APR-2029 (-95bps), JUL-2030 (-62bps) and JUL-2034 (-54bps) bonds, respectively.

Given our analysis of the factors expected to influence market direction in 2024E – such as (1) monetary policy stance globally and domestically and (2) sustained imbalance in the demand and supply dynamics – we expect yields in the FGN bonds secondary market to trend upwards in the medium term.

Foreign Exchange

Nigeria’s FX reserves started the year with an accretion as the gross reserve level increased by USD129.82 million w/w to USD33.04 billion (03 January). Accordingly, the naira appreciated by 3.0% to NGN869.39/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), with total turnover in the market (as of 04 January 2024) declining by 56.0% WTD to USD169.64 million, with trades consummated within the NGN700.00 – NGN1,268.00/USD band. In the Forwards market, the naira appreciated across the 1-month (+7.5% to NGN907.02/USD), 3-month (+7.0% to NGN929.47/USD), 6-month (+6.1% to NGN964.05/USD) and 1-year (+4.7% to NGN1,038.50/USD) contracts.

Looking ahead, we expect FX liquidity conditions to remain tight, pending receipt of expected FX inflows. Thus, we expect the pressure on the local currency to persist in the near term. Nonetheless, we expect foreign investors to keenly watch the development in the FX space with regards to the (1) expected FX inflows as guided by the authorities, (2) CBN’s recent actions in clearing its FX backlogs, and (3) firm direction of short-term interest rates.