May 27, 2024/United Capital Research
Global Markets – Bearish Sentiments Toward Risk Asset Classes
Last week, the major indexes in the U.S. equities market recorded widely varying results over the week, with the Dow Jones Industrial Average (DJIA) recording its biggest weekly loss since early April, while the technology-heavy Nasdaq Composite continued its recent upward trajectory. Meanwhile, the broad S&P 500 Index was roughly flat week-on-week, while small-cap stocks lost ground. A primary factor that drove market’s divergence last week was the gain in shares of artificial intelligence chipmaker NVIDIA, which is now the third-largest company in the S&P 500 by market capitalization (trailing only Apple and Microsoft). The company reported its first-quarter earnings after the close of trading on Wednesday. Interestingly, market anticipation over the report seemed to play an important role in driving sentiment even earlier in the week. (As of Tuesday, Bank of America noted that NVIDIA had accounted for 37% of the S&P 500’s earnings-per-share gains over the previous 12 months, while Bloomberg reported that the stock had been responsible for 25.0% of the S&P’s 11.3% gain for the year-to-date period.) After beating consensus estimates, NVIDIA shares rose by 9.3% on Thursday, adding roughly USD 220 billion to its market capitalization. Overall, NVIDIA’s positive sentiments did not translate into broader gains for the market. Nearly 90.0% of the stocks in the S&P 500 closed lower on Thursday, possibly because data indicated a rebound in US growth metrics for May. This has fueled speculation that the Federal Reserve might delay to cut interest rates. That said, the major US benchmark indices closed mixed, the DJIA (-2.3% w/w) closed lower, S&P 500 closed flat w/w, while the NASDAQ (+1.4% w/w) recorded gains.
In Europe, the pan-European STOXX Europe 600 Index ended 0.45% lower, as questions emerged about the pace of potential interest rate cuts this year. Annual growth in the UK consumer prices came in hotter-then-expected, printing at 2.3% in April 2024 from 3.2% in March 2024. The headline reading came in above the consensus and BoE projection of 2.1%. The data seemed to cause a scale back in rate cut expectations in the UK. In an interview with Irish television channel RTE, the European Central Bank (ECB) President, Christine Lagarde iterated the “strong likelihood” that the central bank would reduce interest rates in June. However, she disclosed the vital role of economic data (particularly inflation) in boosting the committee’s confidence level for rate cuts in 2024. That said, the major European stock indexes recorded weak performances. Italy’s FTSE MIB (-2.6% w/w), France’s CAC 40 Index (-0.9% w/w), UK’s FTSE 100 index (-1.2% w/w) and Germany’s DAX index (-0.1% w/w) recorded weekly losses.
Elsewhere in Asia, sentiments were bearish. Chinese stocks retreated as fears that rates would remain elevated in the U.S. overshadowed optimism about Beijing’s latest measures to shore up the ailing property sector. The Shanghai Composite Index declined by 2.1% w/w, while the blue-chip CSI 300 lost 2.1% w/w. Similarly, Japanese equities finished the week lower, with the Nikkei 225 Index falling by 0.36% and the broader TOPIX Index experiencing a marginal decline. Equities were supported by upbeat economic data releases and a stellar earnings update from U.S. chip giant NVIDIA, which helped lift Japanese tech stocks. However, these gains were wiped out on Friday as Japanese indexes tracked Wall Street lower, driven by U.S. data that pushed the potential for a U.S. interest rate cut further into the future.
In commodity markets, oil prices recorded weekly losses on the back of worries that strong U.S. economic data would keep interest rates elevated for a longer period, curbing fuel demand. On Thursday, Brent closed at its weakest ($81.36/bbl) since 07-Feb and U.S. WTI futures ($76.87/bbl) at their lowest since 23-Feb. Minutes of the Fed’s latest policy meeting released on Wednesday showed policymakers questioning whether interest rates were high enough to tame stubborn inflation. Some officials were willing to raise borrowing costs again if inflation surged. However, Fed Chair, Jerome Powell and a hand-full of other policymakers have since stated that further interest rate increases are unlikely. For context, higher interest rates increase the cost of borrowing, which can slow economic activity and dampen demand for oil. That said, the benchmark brent crude oil price declined from $83.98/bbl to $82.12/bbl, representing a 2.2% w/w decline.
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 U.S. to influence investors sentiments toward risk asset classes.
Macroeconomic Highlights
The National Bureau of Statistics (NBS) has commenced activities to rebase the country’s Consumer Price Index (CPI) and Gross Domestic Product (GDP) to reflect more updated economic conditions. The exercise, according to the NBS, is in line with the recommendations of the United Nations Statistical Commission, which states that countries should rebase their GDP every five years to reflect more updated economic conditions. However, in Nigeria, the last rebasing exercise was done in 2014 and the current exercise will be the second in almost a decade.
Nigeria’s Gross Domestic Product (GDP) growth declined to 2.98%, lower than the rate recorded in the fourth quarter of 2023 which was 3.46%, according to the latest report from the National Bureau of Statistics (NBS) released on Friday. However, the GDP growth rate in the quarter is higher than the figure recorded in the corresponding quarter of 2023 which was 2.31%. The performance of GDP in the first quarter of 2024 was primarily driven by the services sector, which grew by 4.32% and contributed 58.04% to the overall GDP. The agriculture sector saw a modest growth of 0.18%, improving from a decline of -0.90% in the first quarter of 2023.
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has increased the benchmark interest rate by 150bps from 24.75% to 26.25%. The MPC retained the asymmetric corridor around the MPR to +100/-300bps, retained the cash reserve ratio of Deposit Money Banks at 45.00%, and held the liquidity ratio at 30.00%.
The Federal Government has approved a $750mn World Bank funding for the construction of 1,200 mini-grids in rural communities across Nigeria. This was disclosed by the Managing Director/Chief Executive Officer of the Rural Electrification Agency, Abba Aliyu, on Tuesday. According to Aliyu, President Bola Tinubu approved the fund for the Distributed Access through Renewable Energy Scale-up project, he also noted that about 19 million of the 85 million Nigerians without access to energy would be provided electricity under the scheme.
The CBN has updated its regulatory guidelines for Bureau De Change (BDC) operators. The following changes were made: The mandatory caution deposit of N200mn for tier-1 BDC license holders has been removed, N50m for tier-2 license holders has also been waived, the non-refundable annual license renewal fee has been withdrawn. Consequently, existing BDCs must re-apply for a new license based on their preferred tier or license category as outlined in the guidelines.
The Governor of the CBN, Dr Olayemi Cardoso, has disclosed that the foreign exchange inflows recorded in the first quarter of 2024 into Nigeria were about 136.0% of the total inflows recorded in 2023.
Nigeria produced 159,158,191 barrels of crude oil in the first four months of 2024. According to the NUPRC data, 44.2mn barrels of crude were produced in January, with an average daily production of 1.42mn barrels per day. In February, the country pumped 38.3mn barrels of oil at an average of 1.32mbpd. In March 38.1mn barrels were produced and in April, daily oil production rose marginally to 1.28mbp, while the monthly production was 38.4mn barrels.
This week, we expect the National Bureau of Statistics to release Nigeria’s Labour Force Report (Q1-2024), Pension Asset and Membership Data (Q1-2024), Road Transport Data (Q1-2024), Company Income Tax (Q1-2024), Sectoral Distribution of Value Added Tax (Q1-2024), Internally Displaced Persons Survey Report, Selected Banking Sector Data: Sectorial Breakdown of Credit, ePayment Channels and Staff Strength (Q1-2024), and Telecoms Data: Active Voice and Internet per State, Porting and Tariff Information (Q1-2024).
Domestic Equities: Bearish Sentiments Sustained…ASI Down by 0.52%.
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 Banking stocks, UBA (-12.13% w/w), losses in FBNH (-10.89% w/w), ZENITHBA (-8.54% w/w), GTCO (-6.52% w/w) and TRANSCOR (-12.13% w/w), weighed on the domestic equities market. As a result, the benchmark All Share Index (NGX-ASI) declined by 52bps w/w to print at 97,612.51 points. Hence, YTD return weakened to 30.54%, while market capitalisation fell to N55.2tn. Activity level was mixed, as the average value of stocks traded fell by 4.2% w/w to settle at N8.1bn, while the average volume of stocks traded rose by 19.6% w/w to 395.0mn units.
On a sectorial level, performance was mixed as three (3) out of the five (5) sectors under our coverage closed in the green zone. The Oil and Gas (0.72% w/w) and Consumer Goods sectors (0.31% w/w) led the gainers due to share price appreciations in SEPLAT (1.28% w/w), NESTLE (9.76% w/w), and NB (3.26% w/w). Trailing behind was the Industrial Goods sector (0.19% w/w) following buy-interest in WAPCO (4.48% w/w). On the flip side, the Banking sector (-7.35% w/w) declined on the back of losses in UBA (-12.13% w/w) and ZENITHBA (-8.54% w/w). Similarly, the Insurance sector declined (-3.5% w/w) on account of selloffs in NEM (-9.47% w/w), MANSARD (-5.66% w/w), and MBENEFIT (-10.34% 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 selloffs 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: Funding Rates Remained Elevated
Last week, the financial system opened with a deficit position of N863.0bn. During the week, there was primary market auction (PMA), which looked to keep the financial system in deficit terrain. Helped by the deficit situation of the financial system, funding rates between banks remained elevated above the 30.0% mark. For context, the Open Repo Rate (OPR) and Overnight Rate (OVN) closed at 32.40% and 33.00%, respectively. Interestingly, the financial system closed in surplus of N170.4bn on Friday. Obviously, the financial system received a boost from FAAC payments, reversing the deficit situation into a surplus position of N170.4bn on Friday.
In the primary market, the CBN conducted a NT-bills auction, rolling over a total of N509.0bn 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 N1.6trn. The bulk of the bids were skewed towards the longer-tenured instrument (365-day bill) which recorded a total subscription of N1.4trn. Notably, the CBN oversold the auction, allotting a total of N639.0bn worth of bills. Ultimately, the stop rates across the 91-day, and 182-day bill climbed by 26bps and 45bps to 16.50% and 17.45% respectively, while the 365-day bills moved lower by a 1bp margin to close at 20.69% from 20.70%.
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 FTD and money market rates will remain at current levels, with a likelihood of inching higher (backed by the recent MPR hike).
Bond Market
This week, we anticipate a bearish trend in the bond market, driven by the challenging monetary policy environment and ongoing debt sustainability concerns. These issues will continue to weigh heavily on the market. Additionally, the high cost of debt will remain a significant concern for the Debt Management Office (DMO), likely accelerating the upward trajectory of bond yields. In the Eurobonds market, expectations of prolonged high interest rates by the U.S. Federal Reserve are expected to prompt selloffs in Sub-Saharan African (SSA) Eurobonds, although these are likely to be mild.
Currency Market: Naira Appreciated at the NAFEM Window
Last week, the Naira appreciated by 0.7% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,485.66/$, from its previous close of N1,497.33/$. At the parallel market, the Naira remained unchanged w/w to close the week at N1510.0/$ as at Thursday.
Meanwhile, Nigeria’s external reserves rose by 28bps to settle at $32.7bn.
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.
