May 20, 2024/United Capital Research

Global Markets – Mixed Sentiments Toward Risk Asset Classes
Last week, the Dow Jones Industrial Average, S&P 500 Index, and Nasdaq Composite climbed to record highs, with the Dow crossing the 40,000 thresholds for the first time. The rally was fueled by easing concerns about inflation and interest rates. Growth stocks, especially those in technology, led the gains, possibly because investors are now placing a higher value on their future earnings potential. Notably, investors optimism seemed to hinge on the release of the April CPI data on Wednesday. The figures met or slightly beat expectations, a welcome change after three consecutive months of higher-than-anticipated inflation reports. Headline prices rose 3.4% in April, down from 3.5% in March and in line with the 3.4% gain economists were expecting. On a monthly basis, the Consumer Price Index (CPI) rose by 0.3% in April, falling short of economists’ expectations of a 0.4% increase. Retail sales in April were flat, aligning with consensus estimates. The Commerce Department revised its March sales estimate down slightly, from a 0.7% increase to a 0.6% increase. The data revealed a 1.2% decline in non-store sales, predominantly among online retailers, while sales at restaurants and bars saw moderate growth. That said, the major US benchmark indices, the DJIA (+1.2% w/w), S&P 500(+1.5% w/w), and NASDAQ (+2.1% w/w) all recording weekly gains.

In Europe, the pan-European STOXX Europe 600 Index rose 0.4% w/w despite slipping from the record high hit during the week. Cautious comments from European Central Bank (ECB) members appeared to cool optimism about the extent to which monetary policy might ease this year. Major stock indexes were mixed. Germany’s DAX fell 0.4% w/w, while France’s CAC 40 Index declined 0.6% w/w. Italy’s FTSE MIB advanced 2.1% w/w. In the UK, the FTSE 100 Index (-0.2% w/w) finished modestly lower. ECB policymakers Francois Villeroy de Galhau, Madis Muller, and Martins Kazaks indicated that a rate cut is likely in June but that the path thereafter is uncertain. Executive Board member Isabel Schnabel told the Nikkei newspaper that the current data did not justify another reduction in July, in part because the disinflation process appears to have slowed significantly. On the data front, Eurozone industrial production rose for a second month running in March, increasing 0.6% sequentially. However, the stronger-than-expected reading was driven by a jump in Ireland’s output, a data point that historically has been quite volatile.

Elsewhere in Asia, sentiments were mixed. Chinese equities were little changed after the central government unveiled on Friday a historic rescue package to stabilize the country’s ailing property sector. The Shanghai Composite Index was broadly flat, while the blue-chip CSI 300 added 0.3% w/w. In Hong Kong, the benchmark Hang Seng Index gained 3.1% w/w. The People’s Bank of China (PBOC) lowered the minimum down payment ratio by 5% to 15% for first-time buyers and to 25% for second home purchases in an attempt to ignite demand. The PBOC also said that it would scrap the nationwide floor level of mortgage rates and allow cities to make their own decisions on what mortgage rates to charge. Under a so-called re-lending program, the central bank said it would extend RMB 300 billion in low-cost funds to a select group of state-owned banks to lend to local state-owned entities for the purchase of unsold homes. The unprecedented support package came as data showed no sign of turnaround in China’s years long housing crisis. Elsewhere in Japan, Japanese equities finished the week higher, with the Nikkei 225 Index gaining 1.5% and the broader TOPIX Index up 0.6%. This was despite a backdrop of economic weakness and a range-bound yen on expectations of U.S. interest rate cuts in contrast to tentative hawkishness on the part of the Bank of Japan (BoJ), the latter also sending Japanese government bond (JGB) yields modestly higher.

In commodity markets, oil prices settled higher Friday, wrapping up the week with a win as signs of slowing U.S. inflation boosted rate cut hopes just as China rolled out more stimulus, giving a big boost to hopes for firmer demand. Strings of Fed officials warning that the central bank needed more convincing that inflation was coming down, before it could begin trimming rates, looked to limit weekly gains of oil prices. That said, the benchmark brent crude oil saw a 14% w/w climb in its market price, from $82.79/bbl to $83.96/bbl.

Looking into the coming week, we expect sentiments toward risk asset classes to remain mixed, with subsequent economic data in the United States playing a strong role in convincing the Fed to lean more toward a dovish posture. For Europe, we expect similar sentiments in the US to influence investors sentiments toward risk asset classes.

Macroeconomic Highlights
Latest report from the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) shows Nigeria’s average crude oil production increased slightly by 4.14% in April 2024, reaching 1.28mn barrels per day (excluding condensates), up from 1.23mn bpd in March. This marks the first uptick after two consecutive months of decline in February and March, following a peak of 1.43mn bpd in January 2024.

The Central Bank of Nigeria (CBN) said on Wednesday that it has granted 14 new International Money Transfer Operators (IMTOs) Approval-in-Principle (AIP) in new effort to double foreign-currency remittance inflows through formal channels.

Nigeria has received approval from the United Nations to extend its continental shelf by 16,300 square kilometres, a territory five times the size of Lagos State. President Bola Ahmed Tinubu received the report from the High-Powered Presidential Committee (HPPC) on Nigeria’s Extended Continental Shelf Project on Tuesday. The UN’s approval, based on the United Nations Convention on the Law of the Sea (UNCLOS) 1982, grants Nigeria sovereignty over this additional maritime territory, expanding its jurisdiction beyond the existing 200 nautical miles.

In April 2024, the headline inflation rate rose to 33.69%, up from 33.20% in March 2024, marking an increase of 0.49% points according to the Nigeria Bureau of Statistics (NBS). Comparing y/y data, the inflation rate in April 2024 was 11.47% points higher than in April 2023, where it stood at 22.22%. This indicates that the headline inflation rate has risen significantly over the past year. Additionally, on a month-to-month basis, the inflation rate for April 2024 was 2.29%, which is 0.73% lower than the 3.02% recorded in March 2024. This suggests that the rate at which prices increased in April 2024 was slower than the rate in March 2024.

Nigeria recorded $282.61mn as total direct foreign exchange (FX) remittances in the first quarter (Q1) of 2024. The figure represents a decrease of $18.96mn or 6.28% compared to the $301.57mn diaspora remittances recorded in Q1 2023. This is according to international payment data from the website of the Central Bank of Nigeria (CBN).

As part of the measures to tackle incessant power outages in the country, the President has approved the gradual payments of power sector debts estimated at over N3.3tn. Consequently, about N1.3tn will be paid via cash injections and promissory notes to the GenCos, while about $1.3bn (N1.994tn using the current official closing rate) owed to gas companies will be paid via cash and future royalties. Already, the Federal Government has commenced payment of the cash part of the N1.3tn debt to GenCos and concluded plans to settle the second part via promissory notes within a timeframe ranging from two to five years.

This week, we expect the National Bureau of Statistics to release Nigeria’s Gross Domestic Product (GDP) by Output Report for Q1-2024.

Domestic Equities: Bearish Sentiments Sustained…ASI down 0.1%
Last week, the local equities market closed in the red zone as negative investors sentiments dominated the market. Investors remained biased towards risky assets given the high yield offerings in the fixed income market. Notably, share price depreciations in large-cap stocks, SEPLAT (-10.0% w/w) dragged the local bourse southwards. Additionally, losses in TRANSCOHOT (-9.7% w/w), UBA (-9.7% w/w), FBNH (-8.2% w/w) and DANGSUGA (-11.1% w/w), weighed on the domestic equities market. As a result, the benchmark All Share Index (NGX-ASI) declined by 11bps w/w to print at 98,125.73 points. Hence, YTD return weakened to 31.2%, while market capitalisation fell by N54.0bn to print at N55.5tn. Activity level declined, as the average value and volume of stocks traded fell by 15.8% w/w and 24.5% w/w to settle at N8.5bn and 330.4mn units.

On a sectorial level, performance was mainly bearish as four (4) out of the five (5) sectors under our coverage closed in the red zone. The Oil & Gas sector (-6.5% w/w) led the laggards following sell offs in SEPLAT (-10.0% w/w). Trailing behind was the Banking (-5.3% w/w) and Insurance sector (-4.0% w/w) due to share price depreciations in UBA (-9.7% w/w), ZENITHBA (-3.5% w/w), NEM (-18.4% w/w) and AIICO (-3.9% w/w). The Consumer goods sector (-1.3% w/w) declined on the back of losses in DANGSUGA (-11.1% w/w) and PZ (-22.2% w/w).  On the flip side, the Industrial goods sector was the sole gainer, climbing marginally by 1bp on account of bargain-hunting activities in WAPCO (+0.3% w/w).

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 pockets of bargain-hunting activities across dividend-paying stocks, in anticipation of the corporates’ qualification and payment dates.

Money Market Review: System Liquidity Remains Depressed
Last week, the financial system opened with a deficit balance of N298.3bn. There were no inflows during the week. Also, May-2024 bond auction drew more outflows. As a result, the financial system remained in deficit, closing with a deficit balance of N622.5bn. Consequently, the Open Repo Rate (OPR) and the Overnight Rate (OVN) rose by 196bps w/w and 205bps w/w to 29.96% and 30.68%.

There was no primary market activity during the week. In the secondary NT-bills market, we observed buy-interest. As a result, the average yield on NT-bills fell by 29bps w/w to close at 22.17% (previously 22.46%).

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 rates will remain at current levels, with a likelihood of inching higher. Overall sentiment towards fixed-income markets will be set by the outcome of the MPC meeting on 21-May. A hawkish policy response will see interest rates rise. Finally, we expect the CBN to auction N168.7bn worth of NT-bills. We anticipate investors’ demand to be strong, with a likelihood of marginal rates settling around current levels.

Bond Market: DMO Undersells at The Bond Auction
On 13-May-2024, the DMO conducted the May-2024 Bond Auction, offering a total of N450bn bonds.  This issuance was divided equally among the three bonds maturing in different years: 2029, 2031, and a new 2033 bond. Bids were modest relative to the levels seen in recent months, totaling N551.32bn. Nonetheless, the auction was oversubscribed. The DMO allotted N380.77bn worth of bonds. The marginal rates on the 2029 slipped by1bp to 19.29%, the 2031 by 1bp to 19.74%, and the stop rate on the 2033 was 19.89%.

The secondary bonds market witnessed mild selloffs from investors as average bond yield rose by 8bps to close at 18.69% (previously 18.61%). Similarly, corporate bonds traded on a mild bearish note, as the average yield on corporate bonds climbed by 3bps w/w to 20.82% (previously 20.79%). Also, the Nigerian secondary Eurobonds market, we observed marginal selloffs across the various instruments. Thus, the average yields in the market rose by 4bps w/w to settle at 9.73% (previously 9.69%).

This week, we expect mixed interest in FGN Bonds. The overall direction of the market will be dependent on the outcome of the MPC meeting. Meanwhile, in the Eurobonds market, we expect mild bullish sentiments in the market. There will be $42.64mn in Eurobond coupon payments.

Currency Market: Naira Depreciated at the NAFEM Window
Last week, the Naira depreciated by 2.1% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,497.33/$, from its previous close of N1,466.31/$. At the parallel market, the Naira depreciated by 3.1% w/w to close the week at N1510.0/$ (previously, N1465.0/$).

Meanwhile, activities in the NAFEM window increased as average FX turnover rose by 53.3% w/w to settle at $270mn. Lastly, Nigeria’s external reserves rose by 58bps to settle at $32.6bn.

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.