June 24, 2024/United Capital Research
Global Markets: Tech Stocks Lost Steam
US equities market took a breather last week after a period of strong gains. Recent weeks had seen the market become increasingly reliant on a narrow range of stocks, particularly those in the Information Technology sector, with Nvidia leading the charge. In a surprising move, the company briefly had the largest market capitalisation in the world and was more valuable than the entire market capitalisation of the equities indices in the UK, France and Germany. This positive sentiment spilled over to the US equities market, which rallied at the beginning of the week with broad-based strength. However, trading was interrupted by the Juneteenth holiday on Wednesday; afterwards, the market began to show signs of fatigue in mega-cap tech stocks and other momentum stocks. These groups of stocks reversed sharply in the final trading days of the week. Nevertheless, most major US indices closed the week with modest gains despite some weakness in information technology stocks. On the upside, energy, industrials, financials and consumer discretionary sectors were all up above 1.5% w/w. The underperformers, outside information technology, were REITs and Utilities, down by 0.8% w/w. Broadly speaking, the market’s weakness was contained. The S&P 500 was up by 0.6% w/w.
In Europe last week, there was a slew of Central Bank benchmark rate decisions. Most Central Banks left rates unchanged as expected. The Swiss National Bank cut its rates for a 2nd consecutive meeting, as expected. The Bank of England, with the UK leading the G7 in reaching its 2.0% CPI target, hinted at a possible future rate cut. However, it opted to hold its rate steady at 5.25%. Norway’s Central Bank stated that its policy rate would remain on hold until the end of the year. In financial markets, major European indices ended the week higher, recouping some losses from the preceding week. This was due to the easing of post-election concerns. Therefore, the STOXX Europe 600 was up by 0.6% w/w, the German DAX added 0.9% w/w, France CAC 40 rose by 1.7% w/w, and the UK FTSE advanced by 1.2% w/w.
In commodity markets, Oil witnessed its 2nd consecutive strong week. Brent crude has rallied by 10.0% since its lows 17 days ago. Last week, it rose by 3.2% to $85.24/bbl. This is good for oil producers but is cautionary from an inflation and consumer sentiment perspective if the rally continues. Natural gas markets witnessed more volatility. US Natural Gas fell by 6.1% w/w and Dutch Natural Gas declined by 4.0% w/w. Metals markets ended the week mixed, as sharp selloffs on Friday reversed Thursday’s rally. Consequently, Gold and Copper futures fell by 0.6% and 1.4% w/w, respectively. However, Silver futures rose by 0.3% w/w.
This week marks the final week of Q2-2024. There are a few catalysts to watch. In the US, key economic data to be released will be, consumer confidence (Tuesday), durable goods orders (Thursday), and Personal Consumption Expenditure (Friday). The US Fed’s Stress Test will be released after markets close on Wednesday. Also, there will be over $175.0bn in Treasury auctions throughout the week across the 2-yr, 5-yr, and 7-yr Treasuries Notes. Around the globe, there will be a lot of Central Banks’ commentaries, particularly from the ECB. Finally, on Thursday, the European Council will be meeting. Also on Thursday, the US will witness the First Trump/Biden Debate ahead of November’s elections.
Macroeconomic Highlights
Last week, data released by the Central Bank of Nigeria (CBN) indicated that Currency in Circulation (CIC) rose to N3.97tn at the end of May, representing an all-time high and a 1.07% increase over the previous month. CIC represents banknotes and coins that are actively changing hands between buyers and sellers. CIC 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%.
The World Bank has approved a total of $2.25 billion loan for Nigeria. The purpose of the loan is to stabilise the economy following reforms and scale up support for the poor. You may recall that in April, the Finance Minister, Wale Edun said Nigeria was seeking up to $2.25 billion in World Bank loans and expects the bank’s board to approve the request in June.
Mr. Aliko Dangote, President of Dangote Group disclosed that Dangote Refinery, Africa’s biggest oil refinery will see delay in the commencement of gasoline deliveries, with first batch possibly hitting the economy mid-July 2024 (15 July 2024). No specific reasons were provided for the expected delay.
Nembe creek oil field was forced to shut down due to oil leakages. The Nembe creek oil field is a major oil field producing about 150,000bpd. The shutdown of this facility may negatively affect the average crude oil production per day in June 2024.
Mele Kyari, Group CEO of the Nigerian National Petroleum Company Limited (NNPCL) has revealed that the Ajaokuta-Kaduna-Kano (AKK) Gas Pipeline Project will be delivered by the end of the first quarter of 2025. The Federal Government has highlighted the huge multiplier impact of the AKK Gas Pipeline Project on the nation’s economic growth and industrialisation.
This week, we expect the National Bureau of Statistics (NBS) to release a slew of economic data including Nigeria’s Capital Importation Data in Q1-2024. This data will aid in understanding the magnitude of participation of foreign investors in the Nigerian economy in Q1-2024, vis-à-vis what was anticipated on the back of the CBN’s hawkish stance in Q1-2024.
Domestic Equities: NGX-ASI Closed Lower…down by 0.18% w/w
Following the two days holiday in commemoration of the Salah celebration, the Nigerian Exchange commenced the week with a significant Bull charge as indicated by the market’s breadth on Wednesday which printed at 2.5x indicating that 40 stocks advanced while 16 declined. Notably, the index closed negative on Wednesday (-0.08%) owing to share price depreciation in MTNN (-2.67%). As suspected, bargain hunting activities remained unabated throughout the week given the prospects of fundamentally sound equities currently trading around their oversold region. The observed month-on-month moderation in inflation since March seems to instill some level of confidence in investors, regarding the current monetary policy rate trajectory. Also, indications that fixed income rates have peaked at primary and secondary market levels seems to further encourage investors risk appetite. The Banking sector continued to receive improved sentiments on the back of the recapitalization exercise. Listed corporates (like GUINNESS, PRESCO, and CHAMPION BREWERIES) with recent corporate action on mergers and acquisitions also underpin the bullish sentiment in the market. However, significantly owing to share price depreciation in MTNN (-2.7% w/w), the benchmark NGX-ASI declined by 18bps w/w to settle at 99,222.33 points. As a result, YTD return settled at 33.64%, while market capitalisation closed at N56.53tn.
On a sectorial level, performance was bullish as three (3) out of the five (5) sectors under our coverage closed in the green territory. The Consumer Goods Sector (+0.29% w/w) led the gainers on the back of share price appreciation across GUINNESS (+16.18% w/w), and INTBREW (+11.39% w/w). The Oil and Gas Sector (+0.21% w/w) followed due to buy interests in ETERNA (+3.9% w/w). Following was the Industrial Goods Sector (+0.10% w/w) due to share price appreciation in WAPCO (+2.51% w/w). On the flip side were the Insurance Sector (-1.31% w/w) led the laggards on the back of sell offs in NEM (-11.37% w/w) and MANSARD (-4.55% w/w). The Banking Sector (-0.04% w/w) trailed on the back of bearish activities across UBA (-1.57% w/w).
TotalEnergies, operator of OML 58 onshore license in Nigeria with a 40.0% interest, together with the Nigerian National Petroleum Corporation Ltd (60.0%), have taken the Final Investment Decision for the development of the Ubeta gas field. Located in OML 58, the Ubeta gas condensate field will be developed with a new 6-well cluster connected to the existing Obite facilities through an 11 km buried pipeline. Production start-up is expected in 2027, with a plateau of 300 million cubic feet per day (about 70,000 barrels of oil equivalent per day including condensates). Gas from Ubeta will be supplied to NLNG, a liquefaction plant located in Bonny Island with an on-going capacity expansion from 22 to 30 Mtpa, in which TotalEnergies holds a 15.0% interest.
Fidelity Bank Plc opened its N127.10bn Rights Issue and Public Offer on Thursday, 20-Jun-24. Fidelity Bank is the first bank to announce a public offer following the CBN’s recapitalisation directive issued in March. Fidelity Bank on Thursday commenced its public offer of 10 billion ordinary shares of 50 kobo each at N9.75 Kobo per share and announced Rights Issue of 3.2 billion ordinary shares of 50 Kobo each at N9.25 per share.
EnjoyCorp Limited’s (“EnjoyCorp”) has successfully completed the acquisition of 86.5% stake in Champion Breweries plc. EnjoyCorp acquired 100% shareholding in The Raysun Nigeria Limited, which in turn holds the 86.5% stake in Champion Breweries Plc listed on the Nigerian Exchange.
Looking ahead, we expect activities in the fixed income market to continue to stand as a demotivator toward a broader/deeper scale of equities investments. Investors are only entertaining opportunistic investments in fundamentally sound stocks (relatively/wholly undervalued) and stocks with recent corporate actions (particularly M&As). The observed bargain hunting is expected to remain unabated as a class of investors opt to begin preparation for a moderation in monetary policy posture in H2-2024 (particularly in Q3-2024). A strong basis for the preparation is the expected high base effect for inflation in June 2024. Overall, fund managers and investors may continue to adopt an opportunistic investment strategy, which involves trading market volatility and/or investing in undervalued equities.
Money Market Review: System Liquidity Improved
Last week, the financial system opened with a surplus balance of N768.5bn. The observed liquidity in the financial system was attributed to the FAAC payments distributed in the prior week. In contrast to the norm, we saw FAAC inflow reflect mid-month as opposed to month-end. Given the excess supply of liquidity in the financial system (particularly owing to FAAC inflow), the CBN decided to mop-up as much using its favorite mop-up mechanism, Open Market Operations (OMO). To that effect, the CBN conducted two (2) OMO auctions, which recorded decent demand. However, the restriction on rates saw the CBN record no sale in the second auction (which was conducted on Friday, 21-Jun-24). Hence, the financial system remained in significant surplus, closing the week with excess liquidity of N712.1bn. Funding rates between banks responded sharply, declining on a week-on-week basis. That said, the weekly average of the Open Repo Rate (OPR) and Overnight Rate (OVN) expressively decelerated by 406bps w/w and 388bps w/w, to print at 25.11% and 25.91% respectively (previously, 29.17% and 29.78%)
The CBN conducted two (2) OMO auctions with the intention to mop-up at least N500.0bn from each auction. The first auction recorded strong demand to the tune of N986.9bn, implying an oversubscription rate of 1.97x when compared to N500.0bn on offer across the 90-day, 188-day, and 363-day bills. At the auction, stop rates on the 188-day, and 363-day bills tapered by 16bps and 4bps to print at 19.48% and 22.30%, essentially powered by the strong demand vis-à-vis the supply of bills at the auction. The second auction of the week was met with weak demand as investors demand printed at N321.5bn, implying an undersubscription rate of 0.6x. Given the restriction on rates when compared to investors bid ranges, there was no sale at the second auction, which further empowered the financial system to close the week extremely liquid.
At the secondary market for NT-bills, we observed relatively bearish appetite, powered by the hawkish environment. However, a class of investors continued to exploit the elevated interest rates on short term instruments in the secondary market. That said, the average yield on NT-bills climbed by 6bps to close at 21.97% from 21.91%.
This week, we expect the financial system to remain liquid. Considering the CBN’s preference for OMO as a means of managing liquidity, the Apex bank will need to offer more attractive rates to attract Foreign Portfolio Investors (FPIs), as evidenced in previous OMO auctions. However, given the CBN’s disposition to keep close eye on its debt obligations and the interplay of supply and demand, we anticipate the current trend in the market for short-term instruments to remain unabated. This is expected to keep the financial system liquidity inflated. The CBN will conduct its final NT-bill auction this week. At the auction, stop rates will taper. Other short-term rates like FTD, money market rates and funding rates between banks will likely remain suppressed this week (possibly inching lower), owing to the surplus liquidity situation.
Bond Market: Lacklustre Interest Toward Duration Exposure Remained Unabated
The secondary market for bonds was quiet. Investors’ interest toward duration exposure remained lacklustre. That said, the average yield on sovereign bonds sluggishly inched up by 1bp w/w to close at 18.77% from 18.76%. Similarly, we observed a relatively quiet market in the corporate bonds segment with average yields on corporate bonds inching up by 2bps w/w to close at 20.92% from 20.90%.
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 26bps w/w to 10.01% from 10.27%.
Looking forward, we expect the bonds market to remain quiet, with lacklustre interest from investors 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 Depreciated at the NAFEM Window
Last week, the Naira remained mildly volatile, depreciating by 0.19% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,485.53/$, from its previous close of N1,482.72/$. At the parallel market, the Naira depreciated by 0.34% w/w to close at N1,490.0/$, from its previous close of N1485.0/$. 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
