March 18, 2024/United Capital
Global Markets: Mixed Investors’ Sentiment Prevailed
In the US, equities were mostly lower for the week, as investors weighed upside surprises in inflation data and signs of moderating consumer spending. The Dow Jones Industrial Average held up best among the major indexes and reached a record high on Wednesday before falling back to end the week. Energy shares outperformed on the back of higher oil prices, while technology shares lagged due to weakness in NVIDIA and other chipmakers. In terms of economic data, the US producer price index (PPI) rose 0.6% in February, roughly double consensus estimates and the most in six months. While core producer prices rose only 0.3%, this was also slightly more than expected. On a year-over-year basis, headline producer prices were up 1.6%, well above expectations and at the highest level since September. The data appeared to weigh on hopes that low inflation or even deflation in producer prices would eventually flow down to prices paid by consumers. That said, major US equity indices, S&P 500 (-0.1% w/w) and NASDAQ (-0.7% w/w) closed the week lower. However, Dow Jones Industrial Average (DJIA) closed flat.
In Europe, investor sentiment was broadly positive with increased expectation that the European Central Bank (ECB) would begin to cut rates in June 2024. In the UK, despite unemployment rate rising from 3.8% to 3.9% in the three months through January 2024, positive GDP report for the UK economy which revealed signs of recovery from a recession spurred investors sentiments positively. For context, the UK economy expanded 0.2% in January 2024, bolstered by expansion of retailing and wholesaling. This improvement follows a -0.1% contraction in Q4-2023. As a result, UK equities recorded gains, with the UK FTSE advancing by +0.9% w/w. On other ECB related news, Bloomberg reported that, in an interview Wednesday, Latvian central banker Martins Kazaks suggested that rate cuts were coming soon and stated that “the dragon of inflation is pinned to the ground; a little more and it will be defeated.”. On a broader scale, the pan-European STOXX Europe 600 Index added +0.3% w/w, notching an eighth consecutive weekly gain. Finally, the France’s CAC 40 Index rose +1.7% w/w, Italy’s FTSE MIB gained +1.6% w/w, and Germany’s DAX added +0.7% w/w.
The Asian stock markets witnessed mixed investors sentiments. Japan’s stock markets recorded a negative return over the week, with the Nikkei 225 Index losing 2.5% and the broader TOPIX Index down 2.1%. The likelihood of the Bank of Japan (BoJ) ending its negative interest rate policy in the near term rose with the announcement of the highest average wage rises for members of Japan’s labor unions since the early 1990s. The BoJ is committed to the view that monetary policy tweaks will hinge on the meeting of its 2% inflation target, driven by inflation accompanied by wage growth. Economists’ consensus expectations are now converging around a March or an April interest rate hike. Meanwhile, in China, equities trended higher as the government’s recent market stabilization measures boosted investor confidence despite a weak economic outlook. The Shanghai Composite Index gained +0.3% w/w, while the blue-chip CSI 300 added +0.7% w/w. In Hong Kong, the benchmark Hang Seng Index rallied +2.3% w/w
On oil related updates, oil prices notched a weekly gain Friday despite settling lower amid pressure from a rising dollar as a hotter-than-expected U.S. inflation data stoked fears of a more hawkish Federal Reserve at the central bank’s meeting this week. On a week-on-week basis, Brent Crude gained by 4.0% w/w to close at $85.34/bbl. (previously, 82.08/bbl.)
In the commodity markets, OPEC+ extended its production cuts, originally announced in Nov-2023, through Q2-2024 as expected, even as hopes for a ceasefire in Gaza continue to fade. However, concerns of slowing demand outweighed supply constraints. Thus, although ICE Brent tested recent highs of $84.0 multiple times this week, it ended down by 1.8% w/w at $81.90.
This week, FOMC will hold its second meeting for the year 2024, to decide on the direction of interest rate in the US. We expect a HOLD decision with the US Fed Fund Target Rate range expected to remain at 5.25-5.50%. Overall, we expect factors like economic growth considerations and possible sticky inflation in the US to influence the decision of the Fed this week.
Macroeconomic Highlights
According to the Feb-2024 Consumer Price Index (CPI) report released by the National Bureau of Statistics (NBS), Nigeria’s headline inflation soared to its highest level since 1996 printing at 31.70% y/y compared to its 29.9% y/y print in Jan-2024. This indicates a 180bps rise in the general prices of goods and services in the economy. On a monthly basis, headline inflation surged by 48bps to settle at 3.12% m/m in Feb-2024 compared to the 2.64% m/m in January 2024. The major contributors to the surge in inflation were increases in the cost of Food & Non-Alcoholic Beverages, Housing, Water, Electricity. Gas & Other Fuel, Clothing & Footwear, and Transport.
Data from the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) showed that crude oil earnings by the Federal Government increased by about N449.93bn in the months of December 2023 and January 2024. This indicates that Nigeria’s oil output maintained an upward trajectory in the months of December 2023 and January 2024. The country’s oil production (excluding condensates) increased by 3.88 million bpd in December 2023, when compared to November 2023, and 2.81 million bpd of crude oil in January. A summation of the increased earnings in December 2023 (N244.79bn) and January 2024 (N205.14bn) showed that the Federal Government earned additional N449.93bn during the two-month period.
The Chairman of the House of Representatives Committee on Finance, James Faleke, at a meeting between the House Committee on Finance and the management of the Nigeria National Petroleum Company Limited (NNPCL) on the cost of crude oil production in the country and its impact on government revenue described Nigeria’s $48 per barrel crude oil production cost as the highest in the world. This is as he put the cost of production of crude oil per barrel at $9 in Saudi Arabia, $21 in Norway and $24 for the United States of America, adding that despite the increase in production cost, the volume of production has continued to dwindle. He further added that, with crude oil selling at about $80/barrel at the international market, only $32 is available to the government to be shared with oil companies.
The Group Managing Director of the Nigerian National Petroleum Company Limited (NNPCL), Mele Kyari has announced that the Port Harcourt refinery will commence operations in about two weeks-time i.e. (March 29th, 2024). According to him, mechanical works have been completed on the Port Harcourt, Warri, and Kaduna refineries, stressing that the Kaduna refinery will commence operations in December. He further added that, over 450,000 barrels of crude oil have been stocked into the Port Harcourt refinery.
The Central Bank of Nigeria (CBN), in a circular signed by the acting Director, the Banking Supervision Department, Adetona Adedeji, reiterated that banks operating in the country cannot use their foreign exchange revaluation gains to pay dividends or meet their operational expenses. This is expected to effect the attractiveness of the FY-2023 dividend performance of some banks.
This week, we expect the macroeconomic environment to be quiet in the absence of any major economic releases.
Domestic Equities: Bullish Sentiments Persisted…ASI up 3.7% w/w
Last week, the local equities market closed on a positive note as investors sentiments towards the market remained bullish. Notably, share price appreciation in large-cap stock, MTNN (+21.0% w/w), drove the local bourse northwards. As a result, the benchmark All Share Index (NGX-ASI) climbed by 371bps w/w to print at 105,085.25 points. Hence, YTD return strengthened to 40.5%, while market capitalisation rose by N2.1tn w/w to print at N59.4tn. Activity level declined, as the average value and volume of stocks traded fell by 51.4% w/w and 17.8% w/w to settle at N10.6bn and 354.6mn units.
On a sectorial level, performance was mainly bullish as four (4) out of the five (5) sectors under our coverage closed in the green. The Banking sector (+12.8% w/w) led the gainers following bargain-hunting activities in ZENITHBA (+16.8% w/w), ACCESSCO (+14.4% w/w) and UBA (+11.0% w/w). Trailing behind were the Insurance (+2.5%) and Consumer goods (+1.4% w/w) sectors due to buy-interests in NEM (+20.9% w/w), CORNERST (+10.0% w/w) and DANGSUGA (+10.1% w/w). The Industrial goods sector (+0.2% w/w) climbed due to share price depreciation in WAPCO (+5.3% w/w). On the flip side, the Oil & Gas sector (-0.1% w/w) was the sole loser on account of losses in ETERNA (-3.2% w/w).
On corporate action, Ecobank Transnational Incorporated (ETI), has signed a $250.0mn senior unsecured bridge-to-bond loan facility with the African Export-Import Bank (Afreximbank) and Africa Finance Corporation (AFC) acting as Global Coordinators and Initial Mandated Lead Arrangers to support trade finance and the general corporate purposes of the group.
This week, we expect mixed sentiments towards the equities market, with bearish sentiment persisting at the background, given the elevated interest rate regime. However, we expect solid corporate actions and fundamentals to continue to spur pockets of bargain hunting activities among investors.
Money Market Review: System Liquidity remains depressed
Last week, the financial system opened with a deficit balance of N2.3tn. The system was bolstered by N51.1bn worth of coupon payments, N161.49bn in maturing NT-Bills, and a bond maturity to the tune of N729.0bn. However, these inflows did not significantly boost system liquidity. Due to NT-bills primary market activity, the financial system became further deflated as illiquidity persisted. Consequently, the Open Repo Rate (OPR) and Overnight Rate (OVN) climbed by 47bps and 7bps w/w to settle at 30.29% and 31.07%, respectively.
In the primary market, the Central Bank of Nigeria (CBN) conducted a NT-bills auction, rolling over a total of N161.49bn worth of maturing bills across the 91-day, 182-day and 365-day bills. At the auction, investors’ demand was strong, as total subscription printed at N1.5tn. The bulk of the bids were skewed towards the longer-tenured instrument which recorded a total subscription of N1.4tn. Notably, the CBN sold the exact amount on offer. The stop rates across the 91-day, 182-day and 365-day bills fell by 100bps, 100bps and 37bps to settle at 16.24%, 17.00% and 21.12%, respectively.
In the secondary NT-bills market, we observed bullish sentiments across the curve. As a result, the average yield on NT bills fell by 19bps w/w to close at 18.61% (previously 18.80%).
This week, we expect the N57.42bn worth of coupon payments to hit the financial system. However, given the size of deficit that already exists, we expect the financial system to remain tight as intended by the monetary authorities. There still exists the possibility that the CBN will conduct an OMO auction to absorb any inflows. Therefore, the elevated short-term rates interest rates (FTD and money market rates) will be sustained at current levels.
Bond Market: Bearish Sentiments Dominate the Secondary Market
The secondary bonds market was dominated by bearish investor sentiments as average bond yield rose by 39bps to close at 18.40% (previously 18.01%). However, corporate bonds traded on a bullish note, as the average yield on corporate bonds fell by 3bps w/w to 19.98% (previously 20.01%).
On the other hand, we observed sell-pressures in the Nigerian secondary Eurobonds market in the absence of any coupon inflows. Thus, the average yields in the market rose by 37bps w/w to settle at 10.08% (previously 9.71%).
This week, we expect the bonds market to perform bearishly amid the tight system liquidity. The uncertainty of the MPC’s next decision at its 26th-27th March meeting will likely contribute to the bearish sentiment. During the week, the DMO released an offer circular for the bond auction to be held today, 18-Mar-2024. On offer are the new FGN MAR 2027 bond, and the re-opened FGN FEB 2031 bond and FGN FEB 2034 bond. The total offer size prints at N450.0bn (N150.0bn a piece). We expect marginal rates to inch higher at the auction. Lastly, we expect bearish sentiment to persist in the Eurobond market.
Currency Market: Naira Appreciated at the NAFEM Window
Last week, the Naira appreciated by 1.5% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,602.75/$, from its previous close of N1,627.40/$. At the parallel market, the Naira appreciated by 0.6% w/w to close the week at N1605.0/$ (previously, N1615.0/$). Meanwhile, activities in the NAFEM window declined, as average FX turnover fell by 27.0% w/w to settle at $185mn from $254.0mn. Lastly, Nigeria’s external reserves rose by $209.9mn to settle at $34.4bn from $34.2bn.
This week, the Naira is expected to sustain its current trend against the dollar, given that the CBN has achieve exchange rate convergence thereby discouraging speculative activities. Barring any unforeseen events, we do not expect any wild movements in the currency this week.
