May 13, 2024/United Capital Research
Global Markets – Equities Followed An Upward Trend.
US equities traded bullishly in the 1st full trading week of the month. Following market swings in previous weeks led by the BLS Employment Cost Index which showed that Labor costs increased, US equities rebounded given there was no imminent rate hike by the US Fed. The positive sentiment continued after April’s Jobs data which showed weaker-than-expected job growth and slowing wages. Concurrently, US equities have posted strong gains supported by the declining US Treasury yield curve. The S&P 500 was up 1.9% w/w. Within the S&P 500, all sectors rose w/w, led by Utilities and Financials, up by 4.0% w/w and 3.1% w/w, respectively. Among the best performing factors is Momentum, up by 2.5% w/w (+17.7% YTD) due to demand for mega caps and semiconductors. The NTSE FANG+ and NYSE Semi Index were up 1.0% w/w and 1.8% w/w, respectively.
Market performance in other global markets was mostly positively skewed. In Europe, Germany’s DAX outperformed other indexes on the continent with a weekly increase of 4.3% w/w. The Germany’s Dax Index has now risen 12.1% YTD. Trailing closely was the broad STOXX Europe 600 which rose by 3.0% w/w, supported by financial sector stocks following strong earnings from UBS(Switzerland) and UniCredit (Italy). The UK’s FTSE 100 rose to a new record high of 8,433.76 pts, up 2.7% w/w.
In Asia, Japan was a big winner among the continent’s key financial markets due to the weakness of the Japanese Yen and positive company earnings. The Nikkei 225 is up by 14.2% YTD. However, it closed flat w/w. The rest of Asia posted solid equity market gains between 1.5% w/w – 2.5% w/w. Hong Kong’s Hang Seng index rose to its highest level since Nov-2023 as China considers a dividend tax waiver for shares bought via StockConnect. Other emerging markets closed bearish as the pullback in Brazil continues. IBOVESPA was down by 0.7% w/w, and India’s NSE was down by 1.6% w/w. The Emerging Markets ex-China index was down 0.3% w/w.
Oil prices fell by 0.2% w/w due to a mix of inventory build-up and some demand concerns as economic data moderates. Additionally, there was some easing of geopolitical concerns with hopes for a ceasefire in Gaza and reports of a US – Saudi Arabia defense pact. Also, OPEC+ members have not been adhering to their previously announced production quotas. Consequently, brent price has fallen below its 50-day moving average to $82.72/bbl.
This week, US inflation, PPI and Retail Sales will be the main catalysts for financial markets. The Fed Chair, Jerome Powell will speak on Tuesday, 14th May. A speech by Bank of England policymaker Catherine L. Mann is scheduled for Friday, 17 May. In oil markets, we expect OPEC to release its monthly report. This week, China will release its House Price Index, Industrial Production and Retail Sales figures. The US may announce a decision on China tariffs this week, placing duties on strategic categories such as electric vehicles. This weekend, we expect the interest rate decision from China’s PBoC on its 1-yr and 5-yr LPR.
Macroeconomic Highlights
The Central Bank of Nigeria (CBN) has ordered banks operating in the country to start charging a 0.5% cybersecurity levy on transactions. This was announced in a circular from the Apex Bank and the implementation of the levy would commence in two weeks (20th May 2024). The circular was directed at all commercial, merchant, non-interest and payment service banks, other financial institutions, mobile money operators and payment service providers. According to the CBN The levy shall be applied at the point of electronic transfer origination, then deducted and remitted by the financial institution. The deducted amount shall be reflected in the customer’s account with the narration. ‘Cybersecurity Levy’.
According to the latest money and credit statistics on the website of the Central Bank of Nigeria (CBN), the currency in circulation was N3.87tn in March, higher than N3.69tn in February and N3.65tn in January. However, currency outside banks have also increased progressively during the first quarter, growing from N3.28tn in January to N3.41tn and N3.63tn in February and March, respectively. The data revealed that over 90.0% of currency in circulation is held outside of the banking system, indicating Nigerians are holding more cash.
The Presidential Committee on Fiscal Policy and Tax Reforms has proposed reviewing states and local governments’ share of the Value Added Tax revenue to 90.0% and reducing the Federal Government’s share from 15.0% to 10.0%. The panel also recommended an upward review of the current 7.5% rates charged to customers. This was disclosed by the Chairman of the committee, Taiwo Oyedele, at a stakeholder’s exposure and impact assessment session organised to discuss some of the major proposals in the National Tax Policy in Abuja.
The CBN has instructed banks to stop charges on cash deposits until September 30, 2024. This directive was communicated through a circular signed by Adetona Adedeji, the Director of Banking Supervision at the apex bank. Previously, individuals were to be charged 2.0% on deposits exceeding N500,000, while corporate account holders faced a 2.0% charge on deposits surpassing N3.0 million.
Commercial banks’ credit to the government dipped to a one-year low in the first quarter of 2024 despite higher interest rates on government securities. Data obtained from the CBN showed that credit to the government declined by 28.8% to N19.59tn in March 2024, down from N27.53tn recorded in the corresponding period of March 2023. On a m/m basis, credit to the government dropped from N33.92tn recorded in February 2024 to N19.59tn in March 2024, indicating a decrease of 42.25%. Similarly, loans granted by commercial banks to the private sector also declined by 11.93% to N71.21tn at the end of March 2024 compared to the level of N80.86tn in February 2024.
The Federal Government spent about $1.12bn on foreign debt service payments in the first quarter of 2024, highlighting the growing burden of external debt on the nation’s finances. According to data from the international payment segment of the Central Bank of Nigeria (CBN) website debt service payments increased steadily between January and March and over the past few years. In Q1-2023, debt servicing stood at $801.36mn, but in Q1-2024, it shoots up by 39.7% to $1.12bn.
This week, we expect the National Bureau of Statistics to release the National Identity Registration Statistics 2023 Report, CPI and Inflation Report April 2024, Liquefied Petroleum Gas (Cooking Gas) Price Watch April 2024, and Premium motor spirit (PETROL) Price watch April 2024. We expect Inflationary pressure to remain unabated in April 2024, propelled by petrol scarcity, rebound in NGN/USD trajectory and elevated prices of petroleum related products.
Domestic Equities: NGX-ASI Closed Lower…Down by 1.4% w/w
Last week, the Nigerian Exchange commenced the week on a positive note as revealed by the market’s breadth on Monday, which printed at 2.1x, indicating that 37 stocks advanced, while 18 declined. However, share price depreciation in AIRTELAFRI (-10.0%) led to a negative close (-0.9%) on Monday. Nevertheless, sentiments on Tuesday were mostly dictated by primary market activities which looked to clean up the existing system liquidity. This further buttresses the positive relationship between system liquidity and the NGX-ASI. Into the last three days of the week under review, the performance of the bourse was flat, with the index inching up by only 1bp. Overall, the benchmark NGX-ASI closed southward, shedding 136bps w/w to print at 98,233.8 points. Hence, YTD return weakened to 31.4%, while market capitalisation closed at N55.6tn. Activity level was mixed, as the average value of stocks traded improved by 26.3% w/w to N9.98bn from N7.9bn, while the average volume of stocks traded declined by 8.7% w/w to settle at 435.1mn units from 476.3mn units. Investors sentiments toward equities investments diminished as indicated by the market’s breadth, which printed at 1.1x from 1.2x in the prior week.
On a sectorial level, performance was bearish as four (4) sectors out of the five (5) under our coverage closed in the red territory. The Consumer goods (-1.2% w/w) sector led the laggards on the back of share price depreciation across PZ (-27.0% w/w), DANGSUGA (-4.3% w/w), NB (-8.2% w/w), and INTBREW (-15.3% w/w). The Insurance (-1.0% w/w), Oil & Gas (-0.3% w/w), and Banking (-0.1% w/w) trailed on the back of bearish activities across MANSARD (-12.9% w/w), WAPIC (-6.8% w/w), SOVERENIN (-9.5% w/w), LINKASSU (-3.5% w/w), ETERNA (-9.9% w/w), ZENITHBA (-1.7% w/w), STERLING (-8.6% w/w) and FIDELITY (-3.3% w/w). On the flip side, the Industrial goods (+0.1% w/w) sector closed green on the back of share price appreciation in WAPCO (+1.7% w/w).
This week, we expect activities in the fixed income market to continue to stand as a strong demotivator toward equities investments. We expect April-2024 Inflation report to stand as a key economic data that investors will watch out for this week.
Money Market Review: Stop Rates at the NT-Bills Auction Remained Unchanged
Last week, the financial system opened with a surplus balance of N259.5bn. During the week, system liquidity depleted due to the mop-up activity via the primary market auctions (OMO auction and over-selling at the NT-bills auction). As a result, the financial system position decreased and closed the week lower with a surplus balance of N81.1bn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 5bps and 24bps w/w to settle at 28.31% and 29.05%, respectively.
In the primary market, the CBN conducted a NT-bills auction, rolling over a total of N179.4bn 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 N914.1bn. The bulk of the bids were skewed towards the longer-tenured instrument (365-day bill) which recorded a total subscription of N879.8bn. Notably, CBN oversold the auction, allotting a total of N274.7bn worth of bills. Thus, the stop rates across the 91-day, 182-day and 365-day bills remained unchanged at 16.24%, 17.00% and 21.12%, respectively.
Also, the Central Bank conducted an OMO auction with an offer size of N500.0bn across the 99-day, 183-day and 365-day bills. At the auction, investors’ demand was weak, as total subscription printed at N286.7bn, implying an undersubscription rate of 57.3%. Nevertheless, the bulk of the demand came in for the 365-day bill, receiving a total of N265.2bn worth of bids. Notably, CBN undersold the auction, allotting a total of N260.7bn worth of bills. Thus, the stop rates across the 99-day, 183-day and 365-day bills settled at 18.99%, 19.48% and 21.50%, respectively.
In the secondary NT-bills market, we observed bearish sentiments at the tail-end of the curve wiping out the mild bullish sentiments recorded at the shorter end (91 and 182-day bills) of the curve. As a result, the average yield on NT-bills rose by 20bps w/w to close at 22.5% (previously 22.3%). Similarly, the average yield on OMO bills increased by 128bps to settle at 20.0% (previously, 18.7%).
This week, we expect the financial system to be tight in the absence of any inflows from maturities or coupon payments. As a result, we project that FTDs and money market rates will remain at current levels, with a likelihood of inching higher.
Bond Market: Bullish Sentiments Dominates the Secondary Market
The secondary bonds market was dominated by bullish investor sentiments as average bond yield fell by 20bps to close at 18.6% (previously 18.8%). Conversely, corporate bonds traded on a mild bearish note, as the average yield on corporate bonds climbed marginally by 2bps w/w to 20.8%.
In the Nigerian secondary Eurobonds market, we observed continued buy-interest across the various instruments as cheery-picking amongst investors persists. Thus, the average yields in the market declined by 11bps w/w to settle at 9.7% (previously 9.8%).
This week, we expect the Debt Management Office (DMO) to conduct the May-2024 FGN bond auction with an offer size of N450.0bn. The offer size is across the reopened 5-YR paper “2029”, the reopened 7-YR paper “2031” and a newly issued 9-YR paper “2033”. AT the auction, we expect investors’ demand to be strong, with a likelihood of marginal rates settling around current levels. Meanwhile, in the Eurobonds market, we expect the mild bullish sentiments in the market to persist.
Currency Market: Naira Depreciated at the I&E Window
Last week, the Naira depreciated by 4.7% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,466.31/$, from its previous close of N1,400.40/$. Meanwhile, activities in the NAFEM window decreased, as average FX turnover fell by 47.1% w/w to settle at $159mn. Lastly, Nigeria’s external reserves rose by 35bps to settle at $32.4bn. At the parallel market, the Naira depreciated by 4.6% w/w to close the week at N1465.0/$ (previously, 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.
