February 12, 2024/United Capital Research

Global Markets: Broad-Based Bullish Sentiments

Last week, the global equities market closed with mixed sentiments on the back of uncertainties regarding the probability of a rate cut amongst global central banks, despite positive economic data releases. In the US, the equities recorded weekly gains following strong earnings season (particularly in chip makers), easing inflation and a resilient economy. Although the stock market is reportedly overbought and due for a pullback, increases in mega-cap stocks supported the rise in major indices. The absence of selling pressure amid growing expectations among some participants acted as an upside catalyst. Still, upside moves were relatively modest for most of the market. On economic data front, the usual benchmark revisions from the Bureau of Labour Statistics (BLS) showed the Consumer Price Index (CPI) increased by 0.2% m/m in Dec-2023, slightly less than the 0.3% m/m uptick initially reported. Additionally, the S&P Global US services Purchasing Managers’ Index (PMI) rose from 51.4pts in Dec-2023 to 52.5pts in Jan-2023 following an uptick in new orders, employment, and prices. Lastly, trade data showed that trade deficit narrowed to $773.4bn in 2023, down 19.0% y/y from a record of $91.2bn in 2022. This was buoyed by the 1.2% y/y exports amounting to $258.2bn. As a result, the US indices closed on a positive note as the NASDAQ (+2.3% w/w), S&P 500 (+1.4% w/w) and RUSSELL 2000 (+2.4%) closed the week higher.

In tandem, the European markets recorded w/w gains as investors continued to assess the economic and corporate outlook in the region, as well as latest corporates earnings and actions. The Swiss banking giant, UBS, outperformed its Q4-2023 earnings estimates and unveiled plans to resume its share buybacks of up to $1.0bn in the latter half of the year. On data front, producer prices in the Euro Area plummeted by 10.6% y/y in Dec-2023, marking the largest decline in three months, due to fall in energy prices. On a monthly basis, producer prices declined by 0.8%, marking the largest fall since last May. Additionally, the German inflation rate was confirmed at 2.9% in Jan-2024, its lowest level in over two years. Consequently, the France’s CAC (+0.7% w/w), Germany’s DAX (+0.1% w/w) and Europe’s STOXX (+1.3% w/w) climbed this week. Elsewhere, the UK equities market closed lower, as investors tempered their expectations of early interest rate cut in the UK following cautious remarks from officials. The Bank of England (BoE) Deputy Governor, Sarah Breeden, indicated a shift in focus towards considering the duration of interest rates at their current level rather than contemplating further increases. This signals that the central bank is not rushing to implement rate cuts. Furthermore, Chief Economist, Huw Pill, suggested that the first cut “is still some way off,” emphasizing that monetary easing is a matter of timing rather than inevitability. Thus, the UK’s FTSE declined by 0.6% w/w.

In the same vein, the Asian market closed bullish as Beijing appointed a new securities regulation head amid efforts to stabilise the Chinese equity markets. Chinese authorities also moved to curb short-selling and directed state funds to step up ETF purchases. Moreover, latest data pointed to persistent deflationary pressures in China, supporting bets on further monetary easing. Data showed that consumer prices for Jan-2024 dropped by 0.8% y/y, the most in more than 14 years, while producer prices declined for the 16th consecutive month by 2.5% y/y. As a result, the capitalisation-weighted Shanghai Composite Index (5.0% w/w) and Japanese NIKKEI (+2.0% w/w) climbed.

In the oil market, crude oil prices rose as Israel rejected Hamas proposed ceasefire, reigniting fears of a widening of the conflict in the Middle East. Also, the market rallied on the back of reports of retaliatory airstrikes by the US against Iran-backed militias in Iraq, Syria, and Yemen, in response to the deadly drone strike carried about by Iran-allied militants. As a result, oil prices closed higher, with Brent Crude climbing by 628bps w/w to print at $82.19/bbl. (previously, $77.33/bbl.).

This week, investors’ main focus will be on the US inflation report, alongside retail trade figures, producer inflation data, and the Michigan consumer confidence index. Additionally, speeches by several Federal Reserve officials will be closely watched. Elsewhere, the main highlights include the UK’s Q4 GDP, inflation, and unemployment data. The outcome of these data releases will shape the direction of the global equities market for the week.

Macroeconomic Highlights

The Nigerian Federal Government has set its sights on a significant revenue boost from the oil sector in 2024, aiming for a 214.0% increase in Petroleum Profit Tax (PPT) collections. This target is outlined in data from the Federal Inland Revenue Service (FIRS), which indicates plans to rake in N9.96tn from PPT. The proposed figure marks a substantial leap of 214.0% from the N3.17tn generated in 2023 and represents an 89.0% hike over the initial projection of N5.26tn for the same year.

Bank Directors Association of Nigeria says it is supportive of a directive by the Central Bank of Nigeria asking commercial banks to stop “hoarding’’ foreign currencies. The CBN had last week expressed concerns over the escalating foreign currency exposure of banks through their Net Open Positions.

The Governor of the Central Bank of Nigeria, Olayemi Cardoso highlighted that Foreign Portfolio Investors (FPIs) want the country to carry out policy reforms to enable them to bring in their funds. Cardoso said this on Monday during an interview on Arise TV, where he addressed concerns about the recent volatility in the currency market.

The Vice President of Nigeria, Kashim Shettima has inaugurated a committee that will develop the country’s Carbon Market Activation Plan. The committee is expected to guide the development of a National Carbon Market Activation Plan that will accelerate green growth and facilitate energy transition.

Indications have emerged that lingering regulatory approvals have stalled Dangote Petrochemical Refinery’s plan to release aviation fuel (Jet A1) and diesel for sale in the Nigerian market in January. The Nigerian Midstream and Downstream Petroleum Regulatory Authority are still assessing the products being produced by the plant before the agency would issue regulatory approvals for the products’ release into the market.

The Governor of the Central Bank of Nigeria (CBN), Olayemi Cardoso, has said that the Apex Bank will no longer give Ways and Means to the President until the previous loans are repaid. He further added that is one of the measures taken by the Apex Bank to curtail the economic downturn currently plaguing the country. He also stated that on their side at the CBN, they have responded with significant monetary policy tightening to rein in inflationary pressure.

This week, we expect the National Bureau of Statistics to release the Selected Petroleum Statistics: Oil and Gas Production Report (Half Year 2023), the Road Transport Data (Q4, 2023), Nigeria Capital Importation (Q4 2023), Selected Banking Sector Data: Sectorial Breakdown of Credit, ePayment Channels and Staff Strength (2022-Q3 2023), CPI and Inflation Report January 2024, and also the Premium Motor Spirit (PETROL) Price Watch.

Domestic Equities: Bearish Sentiments Drive Selloffs…ASI Down 2.5% W/W

The Nigerian Exchange Limited closed the week on a negative note driven by overwhelming bearish sentiments across board despite the raft of FY-2023 corporate earnings results. Noteworthily, selloffs in BUACEMEN (-10.0% w/w) and MTNN (-5.2% w/w) were the primary index movers. The benchmark All Share Index (NGX-ASI) fell by 245bps w/w to print at 101,858.37 points. Hence, YTD return weakened to 36.2%, while market capitalisation closed at N55.7tn. Activity level decreased, as the total value and volume of stocks traded declined by 87.0% w/w and 93.9% w/w to settle at N2.5bn and 47.9bn units, respectively. Also, investors sentiment as measured by the market’s breadth weakened to 0.3x from 0.4x, as 18 tickers appreciated while 66 depreciated.

Across sectors, overall w/w performance was bearish as all the five (5) sectors under our coverage closed lower. The Banking Sector (-6.9% w/w) and Industrial Goods Sector (-4.2%) led the losers due to selloffs in UBA (-9.1% w/w), ZENITHBA (-6.7% w/w), ACCESSCO (-8.3% w/w), BUACEMEN (-10.0% w/w) and WAPCO (-9.6% w/w). These was followed by loses in the Insurance Sector (-1.5% w/w), the Oil and Gas Sector (-0.4% w/w), and the Consumer Goods Sector (-0.1% w/w) following selloffs in MANSARD (-4.9% w/w), MBENEFIT (-17.6% w/w), AIICO (-4.8% w/w), ETERNA (-18.8% w/w), DANGSUGA (-10.0% w/w) and PZ (-15.1% w/w).

On corporate actions, PZ Cussons Nigeria Plc released its Q2-2023/24 unaudited interim financial statements for the quarter ended 30-Nov-2023. In the period, the company grew its revenue by 19.0% y/y to N68.1bn. However, due to a -N77.0bn operation loss, the company declared a PBT of -N73.8bn and a PAT of -N74.1bn.

This week, we expect the technical adjustment of the All-share index to continue. Also, given the market’s anticipation of a hawkish stance by the Monetary Policy Committee at its next meeting, we expect investor focus to shift towards the fixed-income markets. Nonetheless, crucial corporate disclosures such as dividend declarations are set to move the market.

Money Market Review: Stop Rates Surged at PMA.

Last week, the financial system had a surplus opening balance of N96.95bn at the start of the week. The large N1.0trn NT-bills auction (as opposed to the N412.5bn maturing, which was expected to be rolled over) also sent a negative (bearish) shockwave through the primary market, indicating the FG’s aim to boost returns at the short end of the curve in order to further tickle the attention of foreign investors. There was CRR refund of N579.0bn by the CBN during the week, to boost demand at the PMA. Operations at the CBN’s Standing Lending Facility (SLF) window also improved on the back of the PMA, recording a highest of N275.8bn on Monday, 5 Feb-2024. Despite the enormous PMA, the financial system closed in a surplus position of N117.3bn. Given the broadly illiquid position of the financial system, in the aftermath of the PMA, we observed that funding rates between banks were mostly volatile. On a weekly average, the Open Repo Rate (OPR) and the Overnight Rate (OVN) rose by 203bps and 176bps w/w, to settle at 19.4% and 20.5% respectively. 

On details of the primary market auction, the CBN conducted NT-bills auction with a total offer of N1.0trn, across the 91-day (N200.0bn), 182-day (N200.0bn), and 364-day bills (N600.0bn). In terms of demand, investors’ demand came in strong, with total subscription printing at 1.98trn, implying an oversubscription rate of about 2.0x. Total demand was largely skewed toward the 364-day bills, with total subscription of N1.86trn (93.9% of total auction subscription). That said, given the volume of offer at the auction, stop rates surged significantly across all tenors. Stop rates across the 91-day, 182-day, and 364-day bills climbed 12.2ppts, 10.8ppts and 7.5ppts to print at 1724%, 18.00%, and 19.00%, respectively.

In the secondary NT-bills market, we observed bearish sentiments across the curve, as investors sought to push short-term rates northward, in tandem with outcome in PMA. Yield on the 363-day bill closed at 20.6% on Friday 9-Feb-2024. That said, the average yield on NT-bills rose by 569bps w/w to close at 15.35% (previously 9.66%). Similarly, the average yield on OMO bills rose by 829bps to settle at 17.92% (previously 9.63%).

This week, we expect short-term rates (money market and FTD rates) to continue to trend at current levels, with likelihood of trending higher in the absence of any significant liquidity inflow. Yields on NT-bills at secondary market levels will most likely remain around current levels, with a strong likelihood of nudging slightly higher. Overall, we expect supply and demand fundamentals to remain as key driver for short-term rates.

Bond Market: Bearish Sentiments Prevail in the Bonds Market.

The secondary bonds market was met with similar bearish sentiments as witnessed at the short-end of the yield curve, albeit milder. The average bond yield rose by 72bps to close at 15.49% (previously 14.77%). Similarly, corporate bonds traded on a bearish note, as the average yield on corporate bonds increased by 87bps w/w to 16.99% (previously 16.12%).

In the Nigerian secondary Eurobonds market, we observed buy-interest amongst investors as they sought to take advantage of the high yields offered by Nigerian Eurobonds in tandem with sentiments across SSA Eurobonds. Therefore, the average yields in the market fell by 11bps w/w to settle at 9.78% (previously 9.89%).

Looking into the week, we expect mixed sentiments in bond markets, with bearish sentiments to possibly outweigh, underpinned by legitimate concerns about the country’s fiscal health and the efficacy of its monetary policy. Overall, we expect bond yields to remain at current levels. For the Eurobonds market, we foresee positive sentiment to continue into the new week.

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 N1469.97/$, from its previous close of N1,435.53/$. At the parallel market, the Naira depreciated by 4.5% w/w to close the week at N1500.0/$ (previously, N1435.0/$). Activities in the I&E window improved, as average FX turnover rose by 86.1% w/w to settle at $487mn. Lastly, Nigeria’s external reserves fell by 89bps to settle at $33.1bn.

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.