July 1, 2024/United Capital Research
Global Markets – Mixed Sentiments Toward Risk Asset Classes
Last week, most major U.S. stock indexes posted gains in a light news week during what seemed to be a bit of a lull in market activity ahead of second-quarter earnings reports. The banking sector featured prominently in the headlines and drove the KBW Bank Index, a common benchmark for the sector, to a strong performance. Early in the week, media reports said that the Federal Reserve (Fed) is considering significantly lighter additional capital requirements for banks than regulators originally proposed in the wake of the regional banking crisis in March 2023. This good news was followed by the Fed’s announcement that all 31 of the large U.S. banks that the central bank assessed in its latest round of stress testing remained above their minimum capital levels, potentially allowing them to return capital to shareholders in the form of dividends and buybacks. As a result, banking equities in the US recorded strong gains. On Friday morning, the Bureau of Economic Analysis released May data for the core personal consumption expenditures (PCE) price index, which showed that prices excluding food and energy rose by 0.1% from April. Core PCE is the Fed’s preferred measure of inflation, so markets welcomed the deceleration from April’s upwardly revised 0.3% pace as an indication that a September Fed rate cut is more likely. That said, despite the good news, major US benchmark indices, the DJIA (-0.1% w/w), and S&P 500(-0.1% w/w) closed the week recording mild losses. Meanwhile, the NASDAQ (+0.2% w/w) posted weekly gains.
In Europe, the pan-European STOXX Europe 600 Index ended 0.7% lower week-on-week, amid heightened political uncertainty in France as the snap election called by President Emmanuel Macron approaches. Major stock indexes also recorded mixed performances. Germany’s DAX rose by 0.4% w/w, Italy’s FTSE MIB fell by 0.5% w/w, and France’s CAC 40 Index lost 2.0% w/w. Lastly, the UK’s FTSE 100 Index eased 0.9% w/w. Eurozone government bond yields rose ahead of inflation prints in the eurozone and the U.S. Comments from European Central Bank officials leaning toward a more cautious approach to cutting interest rates this year added upward pressure on yields.
Elsewhere in Asia, sentiments were mixed. Chinese equities recorded mild losses as a light economic calendar and concerns about the slowing economy curbed risk appetite. The Shanghai Composite Index (-1.0% w/w) and the blue chip CSI 300 Index (-1.0% w/w) both recorded slight declines for the week, while Hong Kong’s benchmark Hang Seng Index slid by 1.5% w/w. Elsewhere in Japan, equities rose over the week, with the Nikkei 225 Index gaining 2.6% w/w and the broader TOPIX Index up by 3.1% w/w, sponsored by the historic weakness in the Yen, which continued to support the country’s export-heavy industries.
In commodity markets, oil prices recorded weekly gains, May inflation data in the US boosted the chances the Federal Reserve will start to cut interest rates this year. That said, the benchmark brent crude oil climbed by 1.4% w/w, from $85.24/bbl to $86.41/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
Last week, the CBN announced that eligible International Money Transfer Operators (IMTOs) will now have access to the official window to sell foreign exchange. This new development would enable IMTOs to access Naira liquidity at the official window, thus enabling timely settlement of diaspora remittances.
The Federal Government has announced the construction of three key gas projects with a combined worth of about $4.15bn. The projects being handled by the Nigerian National Petroleum Company Limited (NNPCL), include the Ajaokuta-Kaduna-Kano Gas Pipeline Project; Obiafu-Obrikom-Oben Gas Pipeline Project, popularly called OB3 gas project; and the Assa North-Ohaji South gas project, also known as ANOH project.
The Central Bank of Nigeria (CBN) disclosed its discontinuance with the foreign exchange price verification system portal used by importers from July 01. It also noted that the Price Verification Report will no longer be a requirement for the completion of a Form ‘M’. The Form ‘M’ is a declaration of intention to import physical goods into Nigeria.
On public debt related matters, the Debt Management Office (DMO) disclosed that the rise in Nigeria’s public debt stock from N97.3trn in December 2023 to N121.7trn in March is partly due to exchange rate fluctuations. Another major reason is the securitisation of N4.9tn as part of the securitisation of the N7.3tn Ways and Means Advances. There is also the interest rate, as well as new borrowing of N2.81tn as part of the N6.06tn provided in the 2024 budget.
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 Higher…up by 0.32% w/w
Last week, the floor of the Nigerian Exchange was overridden by the bears at the start of the week, evidenced by the market’s breadth on Monday, which printed at 0.7x, implying that 19 stocks advanced while 26 declined. The bearish trend remained unabated on Tuesday, with bearish sentiments driving losses in the banking, consumer goods and industrial goods sectors. The bulls seemed to regain some momentum on the third trading session of the week, also led by gains in the banks. Bargain hunting continued in the last two (2) trade sessions of the week. Overall, we note that share price appreciation across SEPLAT (+10.00% w/w), TRANSCOH (+9.33% w/w), TRANSCOR (+8.33% w/w) and GTCO (+2.27% w/w) led the positive performance. That said, the benchmark NGX-ASI improved by 32bps to settle at 100,057.49 points. As a result, YTD return strengthened to 33.81%, while market capitalisation closed at N56.60tn.
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 Oil & Gas Sector (+5.71% w/w) led the gainers on the back of share price appreciation in SEPLAT (+10.00% w/w). The Insurance sector (+3.33% w/w) followed due to buy interest in NEM (+7.59% w/w) and MBENEFIT (+19.94% w/w). Following was the Banking sector (+1.14% w/w) due to share price appreciation in UBA (+2.05% w/w). On the flip side were the Consumer Goods Sector (-0.56% w/w) led the laggards on the back of sell offs in DANGSUGA (-8.51% w/w) and GUINNESS (-4.29% w/w). The Industrial Goods Sector (-0.33% w/w) trailed on the back of bearish activities on WAPCO (-4.47% w/w).
Looking ahead, the equities market would be mixed as investors explore opportunistic investment strategy. Thus, we anticipate cherry picking of fundamentally sound stocks to persist in the week ahead. Similarly, market activities will increase due to ongoing banks recapitalization, Q2-filing, and envisaged corporate actions in the weeks ahead. Conversely, elevated interest rates in the fixed income market are expected to continue to negatively impact the equities market in the week as investors continue to take advantage of high interest rates in the fixed income space. Overall, fund managers and investors should continue to adopt an opportunistic investment strategy to take advantage of opportunities the market presents at each given time.
Money Market Review: System Liquidity Remained Surplus
Last week, the financial system opened with a surplus balance of N951.5bn. There were two auctions in the primary market, an NT-Bill auction with N228.7bn on offer, and an FGN Bond auction with N450.0bn on offer. These absorbed some of the excess liquidity. However, the financial system remained in significant surplus, closing the week with excess liquidity of N506.30bn. Consequently, funding rates between banks responded sharply, declining on a week-on-week basis. That said, the Open Repo Rate (OPR) and Overnight Rate (OVN) fell by 108bps w/w and 104bps w/w, to print at 24.17% and 25.00% respectively (previously, 25.25% and 26.04%)
Furthermore, the Central Bank conducted an NT-Bill Primary Market Auction (PMA) with an offer size of N228.71bn across the 91-day, 182-day and 364-day bills. At the auction, investors’ demand was strong, as total subscription printed at N773.98bn, majorly skewed towards the 364-day instrument. The CBN undersold, allotting N284.26bn. Given the strong demand at the auction, the stop rate on the 364-day bill rose by 18bps to 20.68%, while the stop rates on the 91-day and 182-day bills remained unchanged at 16.30% and 17.44%, respectively.
At the secondary market for NT-Bills, we observed a 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 10bps to close at 22.07% from 21.97%.
This week, we expect the financial system to remain liquid. We do not expect any additional inflows into the system through maturities or coupon payments. Also, there will be no NT-Bills and FGN Bond Auctions this week. However, considering the CBN’s preference for OMO as a means of managing liquidity, the CBN could opt for this option to control excess liquidity. We anticipate the current trend in the market for short-term instruments to remain unabated. 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
On 24-June-2024, the DMO conducted a bond auction with a total of N450.0bn on offer, across the 2029, 2031 and 2033 bonds. The auction was undersubscribed as investors looked forward to the NT-Bill auction slated for 26-June. Investors’ total bids printed at N305.26bn, implying an undersubscription rate of 0.7x. The DMO opted to undersell at the auction selling papers to the tune of N297.01bn. Given the weak demand for duration exposed instruments at the auction, marginal rates on all three offerings rose; on the 2029 (+35bps to 19.64%), the 2031 (+45bps to 20.19%), and the 2033 (+161bps to 21.50%).
The secondary market for bonds was quiet. Investors’ interest toward duration exposure remained lackluster. That said, the average yield on sovereign bonds sluggishly fell by 2bp w/w to close at 18.75% from 18.77%. Similarly, we observed a relatively quiet market in the corporate bonds segment with average yields on corporate bonds falling by 2bps w/w to close at 20.90% from 20.92%.
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 18bps w/w to 10.19% from 10.01%.
Looking forward, we expect the bonds market to remain quiet, with lackluster 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. The bearish sentiment expected is on the back of weak local demand (amid zero coupon payments in June), amid the lingering debt sustainability concerns across Sub-Saharan Africa (SSA).
Currency Market: Naira Depreciated at the NAFEM Window
Last week, the Naira remained mildly volatile, depreciating by 1.3% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,505.30/$, from its previous close of N1,485.53/$. At the parallel market, the Naira depreciated by 2.35% w/w to close at N1,525.0/$, from its previous close of N1490.0/$. The weekly average of activity level at the NAFEM declined by 5.3% w/w to print at $206.6mn, from $218.2mn. Lastly, Nigeria’s external reserves rose by 1.3% w/w ($443.0mn) to settle at $34.14bn (previously $33.70bn).
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.
