May 6, 2024/United Capital Research
Global Markets: The Fed Kept its Benchmark Interest Unchanged
Last week, the global equities market closed on a mixed note amid a slate of earnings news and market-moving economic releases. In the US, the performance of the mega cap stocks significantly impacted the overall index performance. This was driven by the stronger-than-expected earnings reports. On the macro front, the Federal Open Market Committee (FOMC) conducted its third meeting of the year to deliberate interest rate direction. As expected, the Federal Reserve (Fed) kept the target range for the federal funds rate unchanged at 5.25% – 5.50% for the sixth consecutive time. This is as ongoing inflationary pressures and a tight labor market indicate a slowdown in progress toward achieving the 2.0% target this year. Policymakers acknowledged that while inflation has moderated over the past year, it remains elevated, and there has been a notable lack of further progress towards achieving the central bank’s target rate in recent months. Still, the Fed Chair, Jerome Powell, calmed some fears during his press conference, where he stated that it was “unlikely that the next policy rate move will be a hike.” This, coupled with the weaker-than-expected April’s job report, spurred investors sentiments in the equities, as market participants anticipate a rate in Sep-2024. Additionally, US treasury yields settled the week lower, acting as support for the equities market. The yield on the 2-YR and 10-YR note declined by 19bps and 17bps to settle at 4.81% and 4.50%, respectively. As a result, the US indices closed on a positive note as the NASDAQ (+1.4% w/w), DIJA (+1.1% w/w), S&P 500 (+0.5% w/w) and RUSSELL 2000 (+1.7% w/w) closed the week higher.
Conversely, the European markets recorded w/w losses as markets assessed weak corporate earnings for Q1-2024 and the Federal Reserve’s interest rate decision. The HCOB Eurozone Manufacturing Purchasing Manager’s Index (PMI) printed at 45.7pts in Apr-2024, compared to March’s final figure of 46.1pts. The latest reading signaled a slightly faster rate of deterioration in Euro Area’s manufacturing business conditions, as the inflow of new orders declined at a steeper pace. Additionally, the Eurozone’s economy expanded by 0.3% y/y in Q1-2024, the fastest growth rate since Q3-2022. The expansion in economic activities resulted in worries that the European Central Bank (ECB) might refrain from immediately cutting rates this year should inflationary pressures prove to be more stubborn than previously expected. Notably, headline inflation rate in the Euro Area remained unchanged at 2.4% in Apr-2024 due to pressure from higher food prices. Consequently, the Germany’s DAX (-0.9% w/w), France’s CAC (+1.6% w/w) and Europe’s STOXX (-0.5% w/w) declined. Elsewhere in the UK, the equities market climbed on the back of positive development in the country. The S&P Global UK PMI Composite Index rose to 54.1pts in Apr-2024, marking the sixth consecutive month of positive performance. This expansion represents the fastest growth in private sector business activity since Apr-2023. The service sector showed a robust and accelerated upturn with a PMI of 55.0pts in Apr-2024 (previously, 53.1pts in Mar-2024), driving the overall output growth. Thus, the UK’s FTSE climbed by 0.9% w/w.
Meanwhile, the Asian market closed on a positive note as investors reacted to the latest purchasing managers index reports. Official data showed that Chinese manufacturing and services sector activities remained expansionary but slowed in April. Meanwhile, a private survey showed that factory growth hit a 14-month high this month. The latest figures provided little clues on whether Chinese authorities would ease policy further to bolster the economy. That said, the Shanghai Composite (+0.5% w/w), the Japanese NIKKEI (+0.8% w/w) and the Indian SENSEX (+0.2% w/w) recorded positive gains.
In the oil market, crude oil prices fell as investors weighed the impact of the weak US jobs data release and the possible timing of a Federal Reserve interest rate cut. In addition, fresh peace talks between Israel and militant group Hamas in Cairo cooled worries of a wider conflict in the Middle East disrupting supplies. As a result, oil prices closed lower, with Brent Crude declining by 745bps w/w to print at $82.83/bbl. (previously, $89.50/bbl.).
This week, economic calendar will be light with investors’ attention pivoting to policymakers’ remarks for insights into the Federal Reserve’s monetary stance. Key indicators such as the preliminary reading of Michigan Consumer Sentiment and weekly jobless claims will also be closely watched. In the UK, the markets will follow closely the release of the preliminary Q1-2024 GDP growth figures, business investment, foreign trade balance, industrial production, and construction output. Elsewhere, the spotlight will shine on China, as the country is set to release its Caixin Services and Composite PMIs, alongside foreign trade, inflation rates, and new loans data. The outcome of these data releases will shape the direction of the global equities market for the week.
Macroeconomic Highlights
On Monday, the Federal Government initiated a due diligence meeting for Shell’s proposed $2.4 billion asset sale to Renaissance Africa Energy. It announced its aim to finalize the divestment by June this year. Gbenga Komolafe, Chief Executive of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), made this announcement. He also disclosed that the government had sanctioned the participation of two globally recognized consultants, S&P Global and BCG Group, to collaborate with the NUPRC in completing the process.
On Tuesday, the Federal Government revealed its plans to grant a fully valid operating license to the Dangote Petroleum Refinery, which boasts a capacity of 650,000bpd. This announcement came during the Stakeholders’ Consultation Forum on Midstream and Petroleum Host Community Development Trust Regulations, hosted by the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) in Abuja. While the agency had previously awarded the refinery a pre-commissioning license, it is now preparing to issue a fully valid operating license.
Nigeria’s electricity generation has surged to 4,800 megawatts, marking a significant increase from around 3,500 megawatts in March. This boost comes on the heels of the commencement of operations at the Zungeru hydroelectric power plant, as announced by Minister of Power, Adebayo Adelabu. The minister made this revelation on Thursday during his visit to Ajah, Lagos State, where he inaugurated a 63MVA, 132/33kV mobile substation installed under Phase 1 of the Presidential Power Initiative. This initiative is a joint effort between the Federal Government’s Power Company and Siemens Energy.
The Stanbic IBTC Bank Nigeria Purchasing Managers’ Index inched up to 51.1 from 51.0 in March. Readings above 50.0 indicate an enhancement in business conditions from the preceding month, while readings below 50.0 signify a decline. The report highlights that this improvement was driven by upticks in purchase costs and selling prices observed in March. Despite the progress, the inflation rate remained elevated, constraining output and new orders growth, which prompted some firms to maintain unchanged employment levels from the previous month.
This week, we expect the National Bureau of Statistics to release the Electricity Report (Q1 2024), State Disaggregated Mining and Quarrying Data (2023), Nigeria Gross Domestic Product Report (Expenditure & Income approach) Q3 and Q4 2023, and Full Year 2023 Air Transportation Data.
Domestic Equities: Stock Market Appreciated by 1.46% w/w.
Last week, the local equities market closed bullishly for the 1st time since the week ending 15-Mar. As a result, the benchmark All Share Index (NGX-ASI) rose by 149bps w/w to close at 99,587.25 points. Hence, YTD return strengthened to 33.18%, while market capitalisation rose to N56.32tn. Activity level improved, as the average value of stocks traded rose by 19.1% w/w to N8.1bn, while the volume of stocks traded rose by 31.9% w/w to 485.3mn units.
On a sectorial level, performance was bearish as three (3) out of the five (5) sectors under our coverage closed lower. The Oil and Gas sector (-0.68% w/w) led the laggards. Trailing behind were the Industrial Goods sector (-0.36% w/w) and the Consumer goods sector (-0.26% w/w). On the flip side, the Banking sector (+9.42% w/w) led the gainers. Lastly, the Insurance sector climbed by 0.98% w/w.
On corporate actions, First City Monument Bank declared a N0.50 dividend for the period ended 31-Dec-2023.
This week, we expect the bearish sentiments amongst investors to persist in the local equities market given the recent developments 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. However, we expect bargain hunting activities to lurk in the shadows, owing to the tremendous opportunities presented by the recent bearish trend (particularly around the banks).
Money Market Review: System Liquidity Improved Slightly
Last week, the liquidity squeeze in the financial system remained unabated, with a deficit opening balance of N549.3bn. Despite the absence of any significant maturity (taking into account the N43.0bn OMO maturity inflow), the system liquidity position of the financial system appeared to improve toward the end of the week, helped by inflow from FAAC payment. Hence, the financial system wrapped up the week with a surplus balance of N19.6bn. Funding rates between banks responded accordingly, as the weekly average reading of the Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 95bps and 124bps w/w to settle at 28.36% and 29.29%, (previously, 29.31% and 30.53%), respectively.
In the secondary NT-bills market, we observed mild bullish sentiments with most investors opting for a more standoffish approach. The slight improvement of system liquidity helped spur some buy-interest. That said, the average yield on NT-bills tapered by a 3bps margin w/w, to close at 22.26% (previously 22.29%). Similarly, the average yield on OMO bills declined by 7bps to settle at 18.72% (previously, 18.79%).
This week, we expect a total of N134.0bn worth of NT-bills to be auctioned by the CBN. At the auction, we anticipate stop rates to taper. We expect the divergent trend of NT-bill yields witnessed at the primary and secondary market levels to improve, with the outcome of the primary market auction expected to play a key role in the direction of yields at secondary market level. Given the absence of any maturity, we expect the liquidity position of the financial system to drop into the deficit terrain. This situation will look to help short term rates to remain elevated around current levels (particularly at secondary market levels).
Bond Market: Bullish Sentiments in the Secondary Market
The secondary bonds market exhibited bullish strides, as investors continued cherry-picking duration exposed instruments, in a bid to take advantage of the current elevation of yields. Accordingly, we saw a drop in the weekly average bond yields from to 18.81%, down by 12bps from 18.93%. Similarly, corporate bonds traded on a bullish note, as the average yield on corporate bonds tapered by 5bps w/w to 20.77% (previously 20.82%).
In the same vein, we observed buy interest in the Nigerian secondary Eurobonds market as investors looked to exploit the elevated yields in that space. Thus, the average yields in the market declined by 18bps w/w to settle at 9.80% (previously 9.98%).
This week, we anticipate some mixed sentiments in the secondary market. The CBN’s hawkish posture will continue to encourage rates elevation. However, concerns of the efficacy of the CBN’s monetary policy approach and heightened cost of borrowing by the FG (compared to its subpar revenue generation prowess) will continue to propel buy interests, thus encouraging the paradigm that rates have likely peaked across board. Meanwhile, in the Eurobonds market, we expect the recent upgrade of Nigeria’s credit outlook from stable to positive to help sustain some bullish strides. However, the “higher for longer” rates situation in the United States is set to continue encouraging mild capital outflow from SSA economies.
Currency Market: Naira Depreciated at the I&E Window
Last week, the Naira depreciated by 4.6% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,400.40/$, from its previous close of N1,339.23/$. Meanwhile, activities in the NAFEM window decreased, as average FX turnover rose by 9.9% w/w to settle at $290mn. Lastly, Nigeria’s external reserves rose by 41bps to settle at $32.2bn. At the parallel market, the Naira remained unchanged w/w to close the week at N1400.0/$.
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.
