June 19, 2024/United Capital Research
Global Markets – Mixed Sentiments Toward Risk Asset Classes Persisted.
Last week, the major indexes in the US equities market recorded mixed performances, with the S&P 500 Index and Nasdaq Composite touching new highs. However, the market’s positive sentiment remained exceptionally narrow for the second consecutive week., this was reflected in the performance of the equally weighted S&P 500. Capitalization-weighted counterpart by 215 basis points (2.15 percentage points). A key factor that drove investors sentiments in the US was the reassuring inflation data and falling interest rates, which increased the theoretical value of growth companies’ future earnings. On Wednesday, the Labor Department reported that headline consumer price index (CPI) inflation was flat in May for the first time in nearly two years. Core (less food and energy) prices rose by 0.2%, a tick below expectations and a seven-month low. On a year-over-year basis, core inflation fell to 3.4%, the lowest level since April 2021. Producer price index (PPI) inflation, reported on Thursday, also surprised on the downside, defying expectations for a slight increase and falling by 0.2%. On a year-over-year basis, core PPI fell back to 2.3%, marking an end to five consecutive months of increases. Calming inflation fears and increased hopes for Fed rate cut in September 2024. NASDAQ Composite (+3.2% w/w), and S&P 500 (+1.6% w/w) led major US indices to a positive close. On the flip side, the Dow Jones Industrial Average (-0.5% w/w) closed negative.
Elsewhere in Europe, the pan-European STOXX Europe 600 Index returned -2.4% w/w as political uncertainty undermined confidence following the strong showing by far-right parties in the European Parliament elections the previous weekend. None of the major European bourses avoided the fallout. Italy’s FTSE MIB fell by 5.76%, Germany’s DAX declined by 2.99% w/w, and France’s CAC 40 Index shed 6.2% w/w. The UK’s FTSE 100 Index lost1.2% w/w. European markets started the week on uncertain footing, weighed down by political risk after French President, Emmanuel Macron called for snap legislative elections later in June after the European Union elections showed a broad shift toward right-wing and far-right parties. Meanwhile, comments from European Central Bank President, Christine Lagarde confirming that restrictive monetary policy in Europe has not ended—and not to expect any further rate cuts any time soon—did little to sway the mood.
In Asia, equities recorded mixed performances. Considering the Japan stock markets, we observed mixed weekly returns, with the Nikkei 225 Index gaining 0.3% w/w and the broader TOPIX Index down by 0.3% w/w. The outcome of the Bank of Japan (BoJ)’s June meeting was viewed as broadly dovish, lending support to equities. The BoJ kept monetary policy unchanged and voted to scale back its JGB purchases—a detailed plan on the tapering for the next one to two years will only be released at its July meeting, however. The decision defied market expectations that the central bank would reduce its massive bond buying this month and was viewed as broadly dovish, as it reaffirmed the likelihood that the pace of monetary normalization is likely to be gradual. Elsewhere in China, stocks retreated in a holiday-shortened week as data showed that deflationary pressures continued to weigh on the economy. The Shanghai Composite Index declined by 0.6% w/w, while the blue-chip CSI 300 declined by 0.9% w/w. In Hong Kong, the benchmark Hang Seng Index was down by 2.3% w/w. Markets in China were closed on Monday for the Dragon Boat Festival.
In the oil market, oil prices settled lower on Friday, but still snapped a three-week losing streak, buoyed by hopes that a seasonal fuel demand over the summer period is poised to gather steam and dent crude stocks in the weeks ahead. A significant portion of crude’s gains this week came as prices rebounded from four-month lows, after the Organization of Petroleum Exporting Countries and allies (OPEC+) reiterated its commitment to keeping production low to support prices. Nonetheless, softer US inflation data spurred hopes for sooner rates cuts, also helped to lift sentiment on oil, with many now pricing in two rate cuts for the year. That’s said, the benchmark Brent crude closed higher week-on-week, gaining 3.8% to $82.62/bbl. from $79.62/bbl.
This week, we expect the US Bureau of Statistics to release the country’s retail sales data for May-2024. This data is very important and crucial because it reflects the strength of consumer spending in the US and stands as a key metric that the Fed considers in its interest rate decisions. Overall, we expect subsequent economic data on inflation, personal consumption expenditure (PCE), retail sales and job report, to play a strong and definitive role in the Fed’s future decisions. That said, we anticipate mixed sentiments in the US equities market. In Europe, we expect the political risks to continue to weigh on the performance of listed corporates.
Macroeconomic Highlights
Last week, data released by the Central Bank of Nigeria (CBN) indicated that Currency in Circulation has risen to N3.97tn at the end of April, representing an all-time high and a 1.07% increase over the previous month. Currency in circulation represents banknotes and coins that have been produced and issued for use in the economy. Currency in Circulation has been rising consistently over the months from N3.86tn in March to N3.92tn in April. This is despite the CBN’s monetary policy tightening which has seen the benchmark interest rate set at 26.65%.
Also, the most recent figures from the CBN reveal that Nigeria’s debt servicing gulped about N2.2bn in the first five months of this year. This is almost half of the $4.8bn projected for the entire year by Fitch Ratings in a report that predicted Nigeria’s external debt servicing would rise by $400m to $5.2bn next year. This is also despite the government’s claims that it is focusing more on borrowing from the domestic market.
The Federation Accounts Allocation Committee (FAAC) has announced the disbursement of N1.143 trillion as the total revenue for May 2024. There was a 5.38% decline from the previous month’s distributable revenue as N1.208tn was shared as April 2024 revenue. The total revenue in May 2024 was 325tn, which is a slight increase of 6.07% from N2.192tn made in the previous month. Approximately 49.0% of revenue made in May was shared among the three tiers of government by June 2024.
In the oil sector, Dangote Refinery indicates that plans to release premium motor spirit (PMS) into the market in June will no longer be possible, The president of Dangote Group, Aliko Dangote said that petrol from the refinery would be out in the third week of July (10th – 15th).
This week, we expect the National Bureau of Statistics (NBS) to release Price Watch statistics for May-2024, beginning with PMS on Monday, diesel and LPG statistics on Wednesday, and selected food prices and transport fare statistics on Friday. On a sectoral level, Rail Transportation data for Q1-2024 will be released on Saturday. Analysts will be keen to see if the sector is on the path to recovery following the notable incidents of insecurity over the last 2 years that resulted in reduced patronage of rail transportation.
Domestic Equities: NGX-ASI Closed Higher…up by 0.7% w/w
Last week, the Nigerian Exchange recorded a positive performance with the bulls gaining upper hand. Share price appreciation across ZENITHBA (+8.3% w/w), and GTCO (+5.6% w/w) led the positive performance. Hence, the benchmark NGX-ASI advanced by 71bps to settle at 99,222.33 points. As a result, YTD return strengthened to 33.64%, while market capitalisation closed at N56.53tn. Activity level improved greatly, as the average value and volume of stocks traded climbed by 78.9% w/w and 93.3% w/w to print at N10.91bn and 658.3mn units respectively. Ultimately, overall investors sentiments toward equities investments strengthened as indicated by the market’s breadth, which printed at 2.2x from 1.1x in the prior week.
On a sectorial level, performance was bullish as all the five (5) sectors under our coverage closed in the green territory. The Oil & Gas Sector (+5.3% w/w) led the gainers on the back of share price appreciation across TOTAL (+20.96% w/w), and SEPLAT (+2.5% w/w). The Banking (+3.6% w/w), Insurance (+3.4% w/w), Consumer Goods Sector (+1.05% w/w) and Industrial Goods Sector (+0.3% w/w) trailed on the back of bullish activities across ZENITHBA (+8.3% w/w), ACCESSCO (+8.1% w/w), UBA (+6.4% w/w), NEM (+9.8% w/w), VERITASK (+17.5% w/w), NB (+15.7% w/w), GUINNESS (+19.2% w/w) FLOURMILL (+13.2% w/w), and WAPCO (+6.2% w/w).
Looking ahead, we expect activities in the fixed income market to continue to stand as a strong demotivator toward equities investments. A strong hope for the market is the expected high base effect for inflation in June 2024. Given the indications that equities market is considerably oversold, induced by the +750bps MPR hike year-to-date, we expect bargain-hunting in the equities market to remain unabated, particularly around fundamentally sound stocks (currently trading around their oversold region), and stocks with pending corporate actions.
Money Market Review: System Liquidity Improved
Last week, the financial system opened with a deficit balance of N213.0bn. The CBN rolled over a total of N44.2bn of maturing bills across the 91-day, 182-day and 364-day bills. Despite the absence of any inflows from coupon or OMO maturities, the financial system closed the week with surplus balance of N132.7bn. The improved system liquidity situation resulted in a decline in the weekly average of funding rates between banks, with the Open Repo Rate (OPR) and Overnight Rate (OVN) tapering by 3bps w/w and 5bps w/w, to print at 29.17% and 29.78% respectively (previously, 29.20% and 29.83%)
The Central Bank conducted an NTB Primary Market Auction (PMA) with an offer size of N44.2bn across the 91-day, 182-day and 364-day bills. At the auction, investors’ demand was strong, as total subscription printed at N407.8bn, majorly skewed towards the longer-tenured instrument. The CBN oversold, allotting N55.2bn. Given the strong demand at the auction, stop rates across all the tenors offered tapered. For context, the stop rates across the 91-day, 182-day and 364-day bills tapered by 20bps, 6bps, and 17bps to print at 16.30%, 17.44%, and 20.50%, respectively.
At the secondary market for NT-bills, we observed bullish appetite, as investors took advantage of the elevated short-term rates. Also, the excess demand from the PMA also trickled, underpinning the bullish strides seen in the secondary market. That said, the average yield on NT-bills declined by 9bps to close at 21.91% from 22.00%.
This week, we expect the current liquidity in the financial system to linger. The outcome of last week’s auction further strengthens the prognosis that short-term rates have peaked in the primary market. Hence, this factor expected to serve as tailwind for bullish strides in the secondary market. However, the disposition of the CBN’s hawkish stance will continue to cause bearish sentiments to linger at the background. Overall, we expect mixed sentiments in the secondary market for NT-bills, with FTD and money market rates remaining at current levels (reserving the likelihood of inching slightly lower).
Bond Market: Bond Yields Trended Slightly Higher
The secondary market for bonds was mildly bearish, with most papers trading flat. Investors’ interest toward duration exposure remained lackluster. Overall, the average yield on sovereign bonds inched up by 3bps w/w to close at 18.76% from 18.73%. Similarly, we observed mild bearish sentiments in the corporate bonds segment with average yields on corporate bonds climbing by 4bps w/w to close at 20.90% from 20.86%.
In the Nigerian Eurobonds market, we observed bearish sentiments as debt sustainability concerns continued to linger amid zero expected coupon payments in June. The higher for longer disposition of the Fed continued to limit the participation of foreign players in the Nigerian Eurobonds market. That said, the average yield on sovereign Eurobonds climbed by 11bps w/w to 10.01% from 9.90%.
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. However, there would be some buy-interest given that most market participants are of the view that rates in fixed-income markets have peaked. Ultimately, in the Eurobonds market, we expect bearish sentiments to remain unabated, albeit mild.
Currency Market: Naira Appreciated at the NAFEM Window
Last week, the Naira appreciated slightly by 0.09% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,482.72/$, from its previous close of N1,483.99/$. At the parallel market, the Naira appreciated by 1.15% w/w to close at N1,473.0/$, from its previous close of N1490.0/$. Lastly, Nigeria’s external reserves rose by $360.0mn to settle at $33.16bn.
This week, we expect the Naira to hover around current levels due to continued pressure on the currency across all market segments. Additionally, FX pressures will persist as Dollar earnings remain weak, and demand outweighs supply.
