April 15, 2024/United Capital Report
Global Markets: Dampened Expectations of a Possible US Rate Cut in June
Last week, the global equities market closed on a negative note. The downside bias was driven by weaker-than-expected economic data releases, a recalibration of rate cut expectations, and increased geopolitical tensions. Reports that Israel is bracing for imminent strikes from Iran deepened concern of escalated warfare in the Middle East. This led to a surge in demand for safe-haven assets such as the Dollar and US Treasuries. Meanwhile, in the US, the equities market did not react favorably to the Mar-2024 Consumer Price Index (CPI) data release. Headline inflation accelerated for a second consecutive month to 3.5% y/y in Mar-2024, marking the highest level since Sep-2023, compared to 3.2% y/y print in Feb-2024. The increase was driven by an upsurge in energy and transportation costs during the period. Additionally, producer’s prices increased to 2.1% y/y in Mar-2024, indicating the highest level since Apr-2023, following a 1.6% y/y rise in Feb-2024. These reports fueled worries about ongoing hawkishness from the Federal Open Market Committee (FOMC) and drove participants to rethink rate cut expectations. Thus, the probability of a rate cut at the June FOMC meeting declined to 27.7% from 69.3% possibility a month ago. Previously, market’s expectations at the start of the year were for six rate cuts by the end of 2024, but the sudden change this week leaves the market with only two expected rate cuts (starting Sep-2024, instead of June). Furthermore, the minutes of the FOMC’s meeting in Mar-2024 further supported the decline in rate cut expectation. This is as the policymakers noted that it will not be appropriate to reduce the Fed fund rate until there are clearer indications that inflation is moving sustainably toward the 2.0% target. On corporates, the negative sentiments in the market were influenced by earnings reports from major banks as the Q1-2024 earnings season commences. Notably, banking shares took a hit after JPMorgan Chase, Wells Fargo, and Citigroup disclosed that high interest rates had negatively impacted their net interest income. As a result, the US indices closed on a negative note as the NASDAQ (-0.5% w/w), DIJA (-2.4% w/w), S&P 500 (-1.6% w/w) and RUSSELL 2000 (-2.9% w/w) closed the week lower.
In tandem, the European markets recorded w/w losses as pessimistic economic data from China weighed on key sectors of European equity indices, while geopolitical risks and expectations of a hawkish Fed continued to dampen investors’ risk sentiment. The European Central Bank (ECB) left its interest rates unchanged at 4.5% in its Apr-2024 meeting and signaled a possible rate cut in Jun-2024. However, President Lagarde emphasised that the ECB is not committing to a specific rate trajectory and that future decisions will be dependent on economic data. Consequently, the Germany’s DAX (-1.4% w/w), France’s CAC (-0.6% w/w) and Europe’s STOXX (-0.3% w/w) declined. Elsewhere in the UK, the equities market climbed predominantly fueled by gains in mining and oil stocks. On the data front, the latest Gross Domestic Product (GDP) data signaled a potential end to the UK recession. The British economy expanded by 0.1% m/m in Feb-2024, following a 0.3% rise in Jan-2024, with the largest contribution coming from production. Manufacturing production in the UK rose by 1.2% m/m in Feb-2024, recovering from January’s contraction of 0.2%. Thus, the UK’s FTSE climbed by 1.1% w/w.
In the same vein, the Asian market closed on a negative note due to apprehensions about interest rate, which weighed on market sentiment. Exports from China dropped 7.5% y/y to $279.7bn in Mar 2024, reversing sharply from a 5.6% y/y growth recorded in the previous month. As a result, China’s trade surplus declined by 25.3% y/y to $58.6bn in Mar-2024 from $78.4bn in the corresponding period of 2023, as exports dropped more than imports. This signals an uneven recovery in the country and puts concerns on the possibility of global demand driving growth in the nation. In other news, Fitch Ratings revised China’s sovereign credit outlook from stable to negative while affirming its A+ rating, amidst mounting concerns regarding the nation’s public finance outlook, particularly as it navigates uncertain economic terrain. That said, the Shanghai Composite declined by 1.6% w/w. In the oil market, crude oil prices fell due to reports of Israel preparing for a potential attack from Iran. This has kept geopolitical tensions high and focused attention on the potential supply disruptions. In addition, sticky inflation in the US, which dampened expectations for an imminent rate cut by the Fed, weighed on oil prices. As a result, oil prices closed lower, with Brent Crude declining by 79bps w/w to print at $90.45/bbl. (previously, $91.17/bbl.).
This week, the focal point in the United States will revolve around the retail sales figures and speeches by Federal Reserve officials. Additionally, given the start of the Q1-2024 earnings season, the market will be anticipating major companies like Goldman Sachs, Bank of America, J&J, Morgan Stanley, UnitedHealth Group, Blackstone, Taiwan Semiconductor Manufacturing, Netflix, American Express, and P&G to report their financial results. In the UK, the markets will follow closely the release of headline inflation rate, unemployment rate, and retail sales data. Elsewhere, the spotlight will shine on China, as the country is set to release its Q3-2023 GDP growth rate, industrial production, and retail sales figures. The outcome of these data releases will shape the direction of the global equities market for the week.
Macroeconomic Highlights
Nigeria is set to receive a $1.05bn syndicated loan backed by oil from the African Export-Import Bank next month (May). The loan is part of a larger $3.3bn prepayment facility arranged by Afreximbank, with repayment terms tied to crude cargoes from the Nigerian National Petroleum Company Ltd. According to Bloomberg, Afreximbank’s Senior Executive Vice President for Finance, Administration, and Banking, Denys Denya, confirmed the verification of crude availability, paving the way for the final release of the balance within the next month.
The Association of Bureaux De Change Operators of Nigeria (ABCON) has appealed to the Central Bank of Nigeria (CBN) to adjust and lower its applicable exchange rate below the N1,251/$ it pegged for its members. This was stated by the ABCON National President, Aminu Gwadabe. The appeal comes when the parallel market rate of 1,235/$ is lower than the BDCs’ applicable buying exchange rate of 1,251/$ (plus a 1.5% margin) set by the CBN in its latest tranche of interventions. He further added that the Naira’s speedy recovery made CBN’s selling rate to BDCs very expensive and difficult to offload to retail end buyers, who were going to the undocumented forex operators for cheaper rates.
The Minister of Power, Adebayo Adelabu, on Sunday, announced that testing has commenced on the 700 megawatts Zungeru Hydroelectric Power Plant ahead of the evaluation of electricity from the facility to the national grid. He also stated that the $1.3bn project, located in Niger State, had been connected to the national grid, in contrast to claims in some quarters that the plant was not connected to the grid.
The Special Adviser to the President on Information and Strategy, Bayo Onanuga, stated that the move by government to withdraw electricity subsidy from 15.0% of power consumers in Nigeria would save the government about N1.1tn annually. He also stated that about 2.5mn meters would be installed this year in a bid to bridge the metering gap across the country and ensure consumers pay the right amount for electricity.
The Federal Government’s total debt stock may experience a significant increase from N87.3tn (as of December 2023) to N111.4tn, following fresh borrowings in the first quarter of 2024. The Federal Government borrowed over N7.0tn via fixed income instruments as well as the first tranche of $2.25bn from a $3.3bn Afreximbank loan in the first quarter of the year, Last month, in its updated ‘Total Public Debt Portfolio,’ the Debt Management Office said Nigeria’s total debt had increased to N97.3tn. This figure, however, included local and external debts owed by all 36 states and the Federal Capital Territory.
The Minister of Finance and the Coordinating Minister of Economy, Wale Edun, has disclosed that the revenues of government-owned enterprises, ministries, departments, and agencies increased to N835.70bn in February. This figure indicates a growth of N681.45bn or 441.78% from N154.25bn MDAs remitted in the same period of 2022. He further added that the government had automated a two-time daily sweep of 50.0% of MDAs and GOEs internally generated revenue since 02 January 2024, leading to more remitted earnings.
This week, we expect the National Bureau of Statistics to release Consumer Price Index Report March 2024, National household kerosene Price watch March 2024, Premium motor spirit (PETROL) Price watch March 2024, Automative Gas oil (DIESEL) price watch March 2024 and Liquefied Petroleum Gas (Cooking Gas) Price Watch March 2024
Domestic Equities: Bearish Sentiments Prevailed Yet Again…ASI Down by 1.1%
Last week was a holiday shortened week as the market only opened for two trading days. Nonetheless, the local equities market closed in the red zone as negative investors’ sentiments dominated the market yet again. Investors remained biased towards risky assets given the high rates and yield offerings in the money market and bonds market respectively. Notably, share price depreciations in banking stocks, GTCO (-15.5% w/w), FBNH (-15.31%) and ZENITHBA (-7.41% w/w) dragged the local bourse southwards. As a result, the benchmark All Share Index (NGX-ASI) declined by 109bps w/w to print at 102,314.56 points. Hence, YTD return weakened to 36.83%, while market capitalisation fell to N57.9tn.
On a sectorial level, performance was bearish as all five (5) sectors under our coverage closed in the red zone. The Banking sector (-7.2% w/w) led the laggards following sell offs in ZENITHBA (-7.4% w/w) and ACCESSCO (-8.8% w/w). Trailing behind were the Insurance (-2.5% w/w) sector and Consumer Goods (-1.3% w/w) due to share price depreciations in CORNERST (-5.0% w/w), MBENEFIT (-10.9% w/w) and DANGSUGA (-5.2% w/w). The Oil and Gas sector (-0.3% w/w) and Industrial Goods sector (-0.4% w/w) declined on the back of losses in WAPCO (-7.5% w/w) and ETERNA (-7.9% w/w).
This week, we expect bearish sentiments amongst investors to persist in the local equities market given the attractive returns offered in the fixed-income market. The impact of the high yields in the fixed-income market will continue to drive sell-offs as investors switch their asset classes to less risky assets.
Money Market Review: Stop-Rates Tapered at PMA
Last week, the financial markets recorded two trading sessions owing to a three-day holiday declared for the celebration of the Eid-al-Fitr. Bagging a balance of N48.4bn on the first trading session, the system wrapped up the second/last trading session of the week under review with a surplus balance of N67.4bn. The positive position of the system at the close of the week came despite the primary market activity of the CBN, which was oversubscribed and over-allotted. That said, funding rates between banks surged on the back of the outcome of the primary market auction, which was significantly over-allotted (further tightening the liquidity in the banks). The weekly average of funding rates of the Open Repo Rate (OPR) and Overnight Rate (OVN) climbed by 4.1ppts w/w and 3.7ppts w/w to settle at 27.8% and 28.2%, respectively.
In the primary market, the Central Bank of Nigeria (CBN) conducted an NT-bills auction, in a bid to roll-over maturing bills across the 91-day, 182-day and 365-day bills, amounting to N149.6bn. The auction was heavily subscribed with total demand amounting to N1.8trn, indicating an oversubscription rate of 12.4x. The CBN opted to over-allot the auction, allotting open bids to the tune of N951.8bn, an over-allotment rate of 6.4x (compared to the total worth of maturing bills). Interestingly, despite the significant overallotment rate (a strong hawkish driver of stop rates), the massive demand at the auction supported stop rates on the 364-day NT-bill to decline by 42bps to print at 20.7% (previously 21.12%). Stop rates on the other maturing bills (91-day and 182-day) remained unchanged at 16.24% and 17.00%, respectively.
In the secondary NT-bills market, we observed bullish sentiments spurred by a class of investors who embraced the paradigm that short term rates may have peaked. Since the auction was held on Friday and there was insufficient time to witness the real pass-through into the secondary markets, which is marked by a class of investors seeking to fulfil unmet bids at the primary market auction. Ultimately, the bullish sentiment was moderate given the fact that the week had been shortened by the three-day holiday. That said, the average yield on NT-bills declined by 5bps w/w to close at 18.86% (previously 18.91%).
This week, we anticipate the financial system’s liquidity condition to continue to be mild. We foresee primary market settlements driving the financial system into the deficit terrain. Maturities from Open Market Operation (OMO) totaling N37.5 billion will support the liquidity situation. However, the effort will be vain, as the expected maturity is not sufficient to alleviate the prevailing liquidity concerns. In the end, we anticipate system liquidity to settle mostly in the deficit region. The volatile financial system will keep FTD and money market rates high relative to its current levels. On the other hand, following the most recent NT-bill auction, positive demand is anticipated in the secondary market for NT-bills, supported by the assumption that short-term rates have peaked.
Bond Market: Mild Bullish Sentiment in the Secondary Market
The previous week was a mildly bullish one for the secondary bond market, driven by investors who were hoping to capitalize on the historically high bond yields. For context, the average yield across the bond yields curve declined by 4bps to close at 19.27% (previously 19.31%). At the corporate bonds segment, we observed a relatively quiet market (stemming from the holiday shortened week) indicated by a 1bp w/w decline in the average yield across the corporate bonds yield curve, from 21.26% to 21.25%.
On the other hand, we observed sell-pressure in the Nigerian secondary Eurobonds in the absence of any coupon payments, and amidst lingering debt sustainability concerns. Thus, the average yields in the market rose by 16bps w/w to settle at 9.74% (previously 9.58%).
Looking forward, we expect the nation’s fiscal health and the efficacy of its monetary policy to continue to provide extra buffer for bond yields to trend higher. However, considering the elevated cost of debt servicing, we anticipate that bond yields will trend higher at a very restricted pace. Meanwhile, the DMO will be conducting its April 2024 auction. At the auction, we expect marginal rates to climb higher, albeit at a very restricted pace. Elsewhere in the Nigerian Eurobonds market, we expect the bearish sentiments to overshadow the broad-based bullish sentiment toward SSA Eurobonds.
Currency Market: Naira Appreciated at the I&E Window
Last week, the Naira appreciated by 8.6% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,142.38/$, from its previous close of N1,251.05/$. Meanwhile, activities in the NAFEM window decreased, as average FX turnover fell by 2.9% w/w to settle at $236mn. Lastly, Nigeria’s external reserves fell by 40bps to settle at $33.4bn. At the parallel market, the Naira appreciated by 8.4% w/w to close the week at N1140.0/$ (previously, N1245.0/$).
This week, we expect the Naira to trade at current levels with a possibility of slight improvement as the CBN’s policies crystalize and as the interventions in the FX market continue to yield positive result.
