January 15, 2024/United Capital
Global Markets: Renewed Investors’ Sentiments Drove the Market
Last week, the global equities market closed the week on a positive note, following a mix of earnings reports, better-than-expected data releases and declining rates in the Treasury market. In the US, the Consumer Price Index (CPI) report for December 2023 was slightly hotter than the market’s expectations as headline inflation printed at 3.4% y/y in Dec-2023 from a five-month low of 3.1% y/y in Nov-2023. On a monthly basis, consumer prices climbed by 0.3% m/m in Dec-2023, the most in three months and above forecasts of 0.2%. Meanwhile, the Producer Price Index (PPI) was cooler than expected. The US PPI unexpectedly declined by 0.1% m/m in Dec-2023, compared to forecasts of a 0.1% rise. Core PPI, which exclude food and energy costs rose by 1.8% y/y in Dec-2023, slowing from a 2.0% advance recorded in the prior month. The key takeaway from the report is that inflation at the wholesale level has been brought under control, with deflation appearing in several components, and is expected to translate into friendlier inflation readings for the Personal Consumption Expenditure (PCE) price index (i.e. the Fed’s preferred inflation gauge). Consequently, market participants recalibrated rate cut expectations despite the generally mixed economic data, suggesting the market doesn’t believe inflation is likely to reaccelerate. The Fed funds futures market now sees a 79.4% probability of a 25bps rate cut at the March FOMC meeting versus a 68.1% probability one week ago. This recalibration was reflective in the Treasury market as the yield on the 2-YR note, which is most sensitive to changes in the Fed funds rate, declined by 24bps w/w to 4.15%. Similarly, the yield on the 10-YR note fell 9bps w/w to 3.95%. As a result, the US indices closed on a positive note as the DIJA (+0.3% w/w), NASDAQ (+3.1% w/w) and S&P 500 (+1.8% w/w) closed the week higher.
In tandem, the European markets recorded w/w gains supported by expectations of expansionary monetary policy and dovish remarks from the European Central Bank (ECB). ECB President, Christine Lagarde noted in an interview that interest rates in the Eurozone are likely to have peaked barring any supply shocks and pointing to some confidence in the central bank’s outlook on inflation. On the economic data front, the seasonally adjusted jobless rate in the Euro Area hit 6.4% in November 2023, aligning with June’s historic low, as the number of unemployed individuals declined by 99,000 to 10.97 million. Consequently, the France’s CAC (+0.6% w/w), Germany’s DAX (+0.7% w/w) and Europe’s STOXX (+0.1% w/w) climbed last week. Elsewhere in Europe, the UK’s 10-YR Gilt yield eased back to 3.8% after touching its highest level in a month as investors processed a slew of economic data and considered the potential impact on the global monetary policy outlook. Data released revealed that the UK’s economy grew by 0.3% m/m in Nov-2023, led by the services sector. However, the three-month (Sep-Nov) average revealed a 0.2% contraction in output, sparking concerns about a potential recession. Thus, the UK’s FTSE declined by 0.8% w/w.
The Asian market recorded mixed sentiments as investors reacted to mixed economic data releases. Data showed that China’s economy remained deflationary in December 2023, with consumer and producer prices falling by 0.3% and 2.7%, respectively. Meanwhile, the country posted a larger-than-expected trade surplus last month amid robust exports. Still, markets remain hopeful that China’s deflationary environment and faltering economic recovery will drive authorities to lower key lending rates and reduce the reserve requirement ratio again this year. As a result, the capitalisation-weighted Shanghai Composite Index fell by 1.6% w/w, as the lack of aggressive policy measures to support growth in China continued to weigh on investors’ sentiments. Elsewhere, Japanese shares gained significantly as a weak Yen, a dovish outlook on Bank of Japan (BoJ) monetary policy tone and strong corporate results lifted the market. That said, the Japanese NIKKEI (+6.6% w/w) and Indian SENSEX (+0.8% w/w) recorded weekly gains.
In the oil market, crude oil prices plummeted as Saudi Arabia, the world’s largest exporter of crude oil, lowered its official selling prices across all regions. This move indicates a response to global crude market weaknesses and was sufficient enough to offset supply concerns generated by escalating geopolitical tension in the Middle East. As a result, oil prices closed lower, with Brent Crude falling by 60bps w/w to print at $78.29/bbl. (previously, $78.76/bbl.).
This week, the US market will be closed on Monday in observance of Martin Luther King Day. Nevertheless, the main focus will be on the US retail sales, Michigan consumer confidence, and export/import prices for the month of Dec-2023. In addition, the market will anticipate speeches by the Fed officials, along with earnings reports from major players. In the Euro Area, investors will monitor ECB President Lagarde’s speeches, balance of trade and industrial production data. Lastly, in China, all eyes will be on the Q4-2023 GDP growth, retail sales, industrial production and unemployment data. The outcome of these data releases will shape the direction of the global equities market for the week.
Macro Highlight and Outlook
The World Bank has projected Nigeria’s economy to grow at 3.3% this year, about 0.4 percentage points higher than the 2.9% it is expected to have closed last year. The World Bank has also projected that Nigeria’s per capita income will return to its pre-pandemic level by 2025.
Dangote Petroleum Refinery has announced its readiness to commence production of refined petroleum products as it received the 6th batch of one million barrels of crude oil required by the plant for its initial operations. The fresh one million Agbami barrels of crude via MT ALMI SUN was the last cargo to complete the initial scheduled six million barrels consignment to be delivered to Dangote Refinery for the commencement of operations.
The United Nations (UN) projects that Nigeria’s rising public debt, increasing inflation rate and its impact on the welfare of the citizens, puts the Nigeria at risk of declining economic growth in 2024. Nevertheless, the UN estimates an increase in Nigeria’s growth rate, from 2.9% in 2023 to 3.1% in 2024.
The Nigerian Electricity Regulatory Commission (NERC) has announced the dissolution of the Board of Directors of Kaduna Electricity Distribution Company (KEDC) over the KEDC’s inability to pay N110.0bn debt owed to the Nigeria Electricity Supply Industry (NESI). The Commission stated that the Board of the firm has been dissolved, as it also commenced moves to sell KEDC.
International rating company, Moody’s has projected that the use of central bank digital currencies such as eNaira can boost asset tokenisation in 2024. The rating company highlighted that lack of reliable digital cash options was one of the four challenges facing digital finance and the adoption of distributed ledger technology.
The bustling Lagos Free Trade Zone (LFTZ) has scored a major coup, attracting a multi-million-dollar gas distribution project that promises to fuel industrial growth and unlock new economic opportunities for the region. This infrastructure, initiated by Optimera Energy, aims to provide 25 million standard cubic feet per day (mmscuf/d) of natural gas to companies within the zone. The project, set for completion and inauguration by the last quarter of 2024, seeks to address the energy access challenge and high operating costs in the LFZ.
Foreign investments in Nigerian startups fell by 65.83% y/y to $410.0mn in 2023 from $1.2bn in 2022. The fall in investments caused the country to lose its top spot in terms of total startup investments on the continent to Kenya.
This week, we expect the National Bureau of Statistics (NBS) to release Nigeria’s Consumer Price Index (CPI) report for the month of Dec-2023. We expect Nigeria’s headline inflation to tick higher on the back of lingering Foreign Exchange (FX) pressures and higher energy costs.
Domestic Equities: Bullish Run Sustained…ASI up 4.2% w/w
The Nigerian Exchange Limited continued on its bullish course which began at the start of the year, with BUAFOODS (+15.5% w/w) and DANGCEM (+7.7% w/w) being the major index movers last week. The benchmark All Share Index (NGX-ASI) climbed by 424bps w/w to print at 83,042.96 points. Hence, YTD return printed at 11.1%, while market capitalisation closed at N45.4tn. Activity level improved, as the total value and volume of stocks traded climbed by 112.7% w/w and 72.3% w/w to settle at N88.8bn and 5.7bn units, respectively. However, investors sentiment as measured by the market’s breadth weakened to 2.6x from 5.2x, as 97 tickers appreciated while 37 depreciated.
Across sectors, overall w/w performance was broadly bullish as four (4) of the five (5) sectors under our coverage closed in the green zone. The Consumer Goods sector (+9.6% w/w) led the gainers due to buy-interest in BUAFOODS (+15.5% w/w). Trailing behind was the Insurance sector (+7.6% w/w) following bargain-hunting activities in LINKASSU (+27.8% w/w) and AIICO (+8.7% w/w). The Banking sector (+5.1% w/w) and Industrial Goods (+4.8% w/w) climbed on the back of price appreciations in UBA (+7.1% w/w), ACCESSCO (+5.5% w/w), DANGCEM (+7.7% w/w) and WAPCO (+15.4% w/w). On the flip side, the Oil sector (-1.6% w/w) due to price depreciation in TOTAL (-10.0% w/w).
Looking ahead, we expect positive sentiment to drive the market, as bargain hunting continues. We expect the local bourse to record a positive performance this week. Investors are expected to continue to cherry-pick stocks with strong fundamentals, (value or growth) for dividend scouting investors, ahead of FY-2023 earnings season. At different intervals, we expect profit booking and mild sell-offs.
Money Market Review: Stop Rates at NT-Bills Auction Tapered
Last week, the financial system opened very liquid with a balance of N578.0bn, following the inflow from FAAC- payments. During the week, primary market auctions and other financial transactions weighed down overall system liquidity. Wrapping up the week, the financial system posted reasonable liquidity balance to the tune of N186.4bn. Funding rates between banks were volatile, straying into the single digit terrain in the first two trading days of the week. However, the weekly average of funding rates between banks remained in the double-digit region, with the average Open Repo Rate (OPR) and Overnight Rate (OVN) declining by 184bps w/w and 104bps w/w to close at 12.85% and 14.26% respectively.
At the primary market, the Central Bank of Nigeria (CBN) conducted an NT-bills auction. The CBN offered a total of N56.6bn worth of bills across the 91-day, 182-day and 364-day bills. The auction was met with strong investors’ demand, with total subscriptions printing at N1.1tn, indicating a bid-to-cover ratio of 20.2x. Notably, the Apex Bank sold the exact amount on offer. Given the supply and demand fundamentals at the auction, with demand coming in significantly strong, stop rates at the auction tapered significantly, way into the single-digit terrain. The stop rates across the 91-day, 182-day and 364-day bills declined by 456bps, 578bps and 384bps to close at 2.44%, 4.22% and 8.40%, respectively (previously, 7.00%, 10.00% and 12.24%).
The CBN also expressed its commitment toward orthodox methods by conducting its first OMO auction for the year 2024. On offer was OMO bills to the tune of N300.0bn, spanning across the 97-day, 181-day, and 363-day OMO bills. Accordingly, the auction was oversubscribed, with the banks contributing to the bulk of the total subscription (N414.2bn). Interestingly, the CBN oversold the auction, selling OMO bills to the tune of N357.2bn. The stop rates across the 97-day, 181-day and 363-day bills closed at 10.50%, 14.00% and 17.75%.
In the secondary market, we saw the bullish sentiments from the PMA trickle down. Investors’ buy interest was reflective in the 267bps w/w decline observed in the average yield of NT bills in the secondary market, from 5.95% in prior week to 3.28%.
In the week ahead, we expect supply and demand fundamentals to be the key driver of money market rates. System liquidity will continue its background role, stimulating buy interest at the short end of the curve, while activities at the CBN’s Standing Deposit Facility (SDF) and Standing Lending Facility (SLF) windows will also underpin system liquidity or illiquidity. That said, we expect money market rates to remain around current levels, albeit volatile, with the strong likelihood of closing lower towards the tail-end of the month.
Bond Market: Bullish Sentiments Prevailed
At the secondary market for bonds, investors maintained bullish strides, which dragged on market rates. System liquidity underpinned activities at the secondary market levels. That said, yields on sovereign bonds declined by 45bps to print at 13.28%, (previously, 13.73%). Similarly, yields in the secondary market for Eurobonds decreased by a significant 55bps w/w to print at 9.90% at the close of the week (previously 10.45%).
This week, we expect the mixed sentiments in the bonds market, as the market continues to anticipate Q1-2024 bond auction calendar. Most market participants will look to trade cautiously, while some will opt toward a standoffish stance. We expect coupon payments to the tune of N65.4bn to instigate background buy interests, as investors seek to reinvest their funds. For Nigerian Eurobonds we expect the bullish run to persist as yields adjust lower in advanced economies, making SSA Eurobonds more attractive to investors.
Currency Market: Naira Depreciated at the I&E Window
Last week, the Naira depreciated by 2.4% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N890.54/$, from its previous close of N869.39/$. At the parallel market, the Naira depreciated by 2.3% w/w to close the week at N1265.0/$ (previously, N1237.0/$). Activities in the I&E window improved, as average FX turnover rose by 48.1% w/w to settle at $130.9mn. Lastly, Nigeria’s external reserves fell by 5bps to settle at $33.1bn.
This week, we expect continued pressure on the Naira across all market segments, given that Dollar earnings remain weak, and demand for Dollar outweighs supply.
