June 3, 2024/United Capital Research

Global Markets – Global Markets Closed Lower.

Last week saw two very distinct trading dynamics in US markets. The week began with a continuation of technology stocks outperforming the market, while other market segments remained under pressure. The main source of concern was US Treasury Yields, which continued to move higher in the first two trading days of the week. This was in response to unexpected improvement in consumer confidence, more hawkish US Fed commentary, and hotter-than-expected global inflation data. Most notably, there was a string of weak US Treasury auctions. However, yields declined towards the end of the week following downward revisions to the US Q1-2024 GDP figures. Nonetheless, market segments that are more exposed to higher interest rates declined, and tech stocks gave back some of its gains later in the week following a disappointing round of tech earnings especially within the enterprise software space. The S&P 500 was down by 0.5% w/w, but up by 4.9% m/m and rose by 10.6% YTD.

Meanwhile, European markets closed the week modestly lower following a strong performance in the month. This was primarily due to recent inflation data in Germany which rose to 2.4% y/y in May-2024 from 2.2% y/y in Apr-2024. Therefore, risk-off sentiments prevailed ahead of the ECB Jun-2024 policy rate decision this week. The STOXX Europe 600 was down by 0.5% w/w, the German DAX was decline by 1.0% w/w, while the UK FTSE 100 closed flat.

In Asia, most markets closed the week lower. Although it closed lower, mainland China outperformed in the region despite disappointing PMIs. The Shanghai Composite Index closed -0.1% w/w. Comparatively, The Nikkei 225 closed -0.4% w/w, and South Korea’s Kospi closed -1.9% w/w. Overall, emerging markets (EM) underperformed last week as bearish commodity markets weighed on their performances. The EM (ex-China) index closed -2.9% w/w lower.

Commodities closed lower last week but were generally up in the month of May. Oil prices were volatile last week as prices moved higher early in the week only to reverse following larger-than-expected oil inventory build-up. Therefore, brent crude closed -0.6% w/w and -5.5% m/m.  

This week, investors will be focused on economic data and Central Bank interest rate decisions. Key data in the US will be labor market data. Globally, the highlights will be China’s trade data and its PMIs. The ECB will make its interest rate decision on Thursday, 06-Jun. It is widely expected to cut its policy rate. Weak GDP growth in Canada also increases the odds of a rate cut in the G7 country. The US Fed FOMC Media Blackout will continue (from 01-Jun to 13-Jun) ahead of its rate decision next week.

Macroeconomic Highlights

Barring any last-minute change in plan, the $20.0bn Dangote Oil Refinery would be listed on the Nigerian Stock Exchange by December 2024. The Chairman of the Dangote Group, Aliko Dangote, maintained that as a new business, he would love to have Nigerians, Africans, and other investors as shareholders in the refinery, stressing that he wants to allow them to join in making what he called a historic move.

International consumers failed to remit about $51.26mn to Nigeria for electricity exported from Nigeria to the power users in 2023, the Federal Government revealed in the latest industry data showing the non-remittances by the consumers. Also, another group of customers categorised as bilateral power consumers did not remit about N7.61bn to the Nigerian power sector in 2023. International consumers failed to remit $16.11m, $11.97m, $11.16m, and $12.02m to Nigeria for the electricity exported to them in the first, second, third, and fourth quarters of 2023, respectively. Similarly, bilateral consumers did not pay N827m, N2.03bn, N2.8bn, and N1.95bn to the Nigerian government for electricity sold to them in the first, second, third, and fourth quarters of last year.

Money supply (M2), hit a record high of N96.96tn in one year despite monetary tightening by the Central Bank of Nigeria (CBN). The M2 declined by 1.75% to N92.33tn in March 2024 from N93.97tn in February of the same year. Data from the CBN showed that M2 rose significantly by 74.26% in one year to N96.96tn in April 2024 from N55.64tn in April 2023. On a m/m basis, money supply grew by 5.01% from N92.33tn in March 2024.

Shell Petroleum Development of Nigeria Limited and Shell Nigeria Exploration and Production Company Limited remitted $142.5m to the Niger Delta Development Commission (NDDC) in 2023. Shell Nigeria’s Manager, Media Communications and NGO Relations, Mr. Bamidele Odugbesan, disclosed that SPDC paid $112.5m while SNEPCo remitted $30.0m, compared to $59.04m by SPDC and $20.73m by SNEPCo in 2022. He noted that the contributions came from the Shell companies on behalf of themselves and their respective partners—the Nigerian National Petroleum Company Limited; TotalEnergies, EP Nigeria Limited; NAOC; and Esso Exploration and Production Nigeria Limited—as statutory contributions to the interventionist agency.

The Federal Government has secured a $500.00mn World Bank loan. The loan which is to be used to bolster Nigeria’s electricity distribution sector, the Bureau of Public Enterprises (BPE) has announced that the Nigerian Distribution Sector Recovery Programme (DISREP) comprises two main components. It said the first is the programme for results, with an allocation of $345.00m, adding that the purpose is to support the implementation of selected PIP components. The Bureau of Public Enterprises is to implement this. The other component is the Investment Project Financing, with an allocation of $155.00m and the purpose is to finance the procurement of meters, a data aggregation platform, and technical assistance.

Nigeria may add 480,000 barrels to its daily crude oil output as the Nigerian National Petroleum Company Limited (NNPCL) and ExxonMobil took a step towards resolving the disagreement surrounding the sale of the latter’s asset to Seplat Energy. NNPCL confirmed it had signed a settlement agreement with ExxonMobil companies in Nigeria over the proposed divestment of a 100.00% interest in Mobil Producing Nigeria Unlimited to Seplat Energy Offshore Limited.

This week, we expect the National Bureau of Statistics to release Nigeria Capital Importation Report Q1 2024, Nigeria Domestic and Foreign Debt (Q1, 2024) Report, and Foreign Trade in Goods Statistics (Q1 2024).

Domestic Equities: Bullish Sentiments Resumed…ASI up 1.7% w/w

The Nigerian Exchange Limited closed the week on a positive note as the bulls returned to the market. Despite the decision by the Central Bank to hike the benchmark interest rate by 150bps, the local equities market remained significant and market participants did not react negatively to the decision. As a result, the benchmark All Share Index (NGX-ASI) climbed by 173bps w/w to print at 99,300.38 points. Hence, YTD return improved to 32.8%, while market capitalisation climbed by N954.9bn to close at N56.2tn. Activity level improved, as the total value and volume of stocks traded climbed by 1.0% w/w and 30.5% w/w to settle at N8.2bn and 518.3bn units, respectively. However, investors sentiment as measured by the market’s breadth weakened to 0.4x from 0.5x, as 27 tickers appreciated while 64 depreciated.

Across sectors, overall w/w performance was broadly bullish as only four (4) of the five (5) sectors under our coverage closed in the green zone. The Oil & Gas sector (+9.1% w/w) led the gainers. Trailing behind was the Banking sector (+8.7% w/w). This was followed by the Insurance (+3.9% w/w) and Consumer goods (+2.0% w/w) sectors. On the flip side, the Industrial goods sector (-0.1% w/w) was the sole loser.

This week, we expect the mixed sentiments amongst investors to persist in the local equities market. On one hand, we expect pockets of buy-interests in the market as market participants take positions in fundamentally sound stock given their low pricings. Nevertheless, we still anticipate that the high returns in the fixed-income market will continue to negatively impact the equities market as investors switch their asset classes to less risky assets.

Money Market Review: System Liquidity Remains Tight

Last week, the financial system opened with a deficit balance of N46.0bn. During the week, system liquidity was bolstered by inflows from FAAC payments and coupon payments to the tune of c.N600.0bn and N5.6bn, respectively. However, there was a mop-up activity via the OMO primary market auction which reduced liquidity in the financial system. As a result, the financial system closed the week with a surplus balance of N80.7bn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 88bps and 83bps w/w to settle at 30.27% and 31.00%, respectively.

The Central Bank conducted an OMO auction with an offer size of N500.0bn across the 90-day, 174-day and 363-day bills. At the auction, investors’ demand was strong, as total subscription printed at N904.5bn, majorly skewed towards the longer-tenured instrument. Notably, there was no bids for the shorter-tenured instrument (90-day bill) as investors were more interested in the higher rate at the longer end of the curve. Notably, the CBN sold the exact amount on offer. Thus, the stop rates across the 183-day and 365-day bills fell 10bps and 15bps to settle at 19.64% and 22.34%, respectively.

In the secondary NT-bills market, we observed bullish sentiments across the curve. As a result, the average yield on NT bills fell by 25bps w/w to close at 21.7% (previously, 22.0%). On the other hand, the average yield on OMO bills increased by 64bps to settle at 21.4% (previously, 20.8%).

This week, we expect the financial system to be tight in the absence of any inflows from maturities or coupon payments. As result, we project that FTDs and money market rates will remain at current levels, with a likelihood of inching higher. Additionally, the Central Bank of Nigeria (CBN) is scheduled to rollover a total of N221.1bn of maturing bills across the 91-day, 182-day and 364-day bills.

Bond Market: Mixed Sentiments Dominate the Secondary Market

The secondary bonds market was relatively quiet as average bond yield climbed marginally by 2bps to close at 18.7%. Conversely, corporate bonds traded on a mild bullish note, as the average yield on corporate bonds declined by 6bps w/w to 20.8% (previously, 20.9%).

In the Nigerian secondary Eurobonds market, we observed buy-interest as investors sought to re-invest their funds from coupon payments totalling $105.9mn. Thus, the average yields in the market declined by 11bps w/w to settle at 9.9% (previously, 10.0%).

Looking forward, we anticipate an overall bearish sentiment to dominate the market underpinned by concerns about the nation’s fiscal health and the efficacy of its monetary policy. Meanwhile, in the Eurobonds market, we expect the mild bullish sentiments in the market to persist.

Currency Market: Naira Depreciated at the NAFEM Window

Last week, the Naira depreciated by 0.2% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,485.99/$, from its previous close of N1,482.81/$. At the parallel market, the Naira appreciated by 1.3% w/w to close the week at N1490.0/$ (previously, N1510.0/$).

Meanwhile, activities in the NAFEM window increased, as average FX turnover rose by 20.7% w/w to settle at $363.0mn. Lastly, Nigeria’s external reserves rose by 15bps 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.