July 15, 2024/United Capital Research
Global Markets
Last week, US markets had a slow start as traders digested the previous Friday’s employment data. Similarly, focus was shifted to Fed Chair, Jerome Powell’s two-day testimony before Congress. The Fed Chair was slightly dovish, pointing to progress on inflation and suggesting that the disinflationary process has started. On Thursday, CPI data came in better than expected. The annual inflation rate in the US fell for a third straight month to 3.0% in June 2024, the lowest since June 2023, compared to 3.3% in May and below forecasts of 3.1%. Meanwhile, annual core inflation also slowed to 3.3%, a fresh low since April 2021, from 3.4% in May and forecasts it would remain steady. Last week was also the start of the earnings season. According to FactSet, analysts are looking for Q2 EPS to be up by 9.0% y/y which will be the highest growth rate since Q1-2022. Thus, the Russell 2000 was the outperformer last week, with the index ending the week up by 6.1% w/w and hitting a new high of 6.2% YTD. The S&P 500 was up by 0.9% w/w.
In Europe, the major stock market indices ended the week higher with momentum in the 2nd half of the week. In the preceding weekend, there were surprise election results in France with the left-wing New Popular Front surpassing the right-wing National Front which finished in 3rd place. This result has left France with no majority in Parliament, which weighed on European indexes at the start of the week. Nonetheless, the STOXX Europe 600 rose by 1.4% w/w, the German DAX rose by 1.5% w/w, the France CAC 40 rose by 0.6% w/w, and the UK FTSE 100 rose by 0.6% w/w.
The market performance in Asia was mixed. On Friday, tech-heavy indexes underperformed following selloffs in the US. This was most pronounced in Japan. The Nikkei 225 fell -2.4% on Friday, however, it rose by 0.7% w/w. Also, the Yen closed the week up by 1.8% w/w due to speculation of impending government intervention following Thursday’s CPI result. In China, the Government took steps to curb short selling and stabilize markets ahead of the country’s Third Plenum (which runs from 15-Jul to 18-Jul). Additionally, the PBOC took steps to stop a bond market rally, announcing it will conduct temporary bond repurchases and reverse repos. The Shanghai Composite rose by 0.7% w/w.
In commodity markets, Brent Crude broke its 4-week winning streak, falling by 1.7% w/w. This was as Hurricane Beryl missed the oil producing region in the Gulf of Mexico, but it temporarily knocked out some refineries. Also, reports of progress on a framework for a Middle East ceasefire also appeared to weigh on oil prices. On that note, the Baltic Dry Index has fallen by 2.5% this month.
This week, there will be a few macroeconomic catalysts. On Monday, The US Fed Chair, Jerome Powell will be interviewed by David Rubinstein at the Economic Club of Washington. In recent weeks, both at the Sintra Conference and at his two-day testimony before congress, Chair Powell’s messaging has taken more dovish undertones. It would be interesting to see if he is more emboldened given last week’s US CPI figures. The ECB will be making its July interest rate decision on Thursday. We expect a HOLD decision. However, over the next few weeks, focus will shift to the microeconomy as markets head into the earnings season. In the US this week, earnings will be dominated by companies in the financial sector.
Macroeconomic Highlights
The Supreme Court has granted financial autonomy to the 774 local government councils in the country. In a landmark judgement, the apex court ordered the Federal Government to immediately start the direct payment of local government funds to the latter’s exclusive accounts. Notably, only democratically elected local government administrations are entitled to these funds and not caretaker committees.
The Senate has rejected a bill seeking to amend the Foreign Exchange Act of 2004 to introduce provisions for the control, monitoring, and supervision of transactions in the Foreign Exchange Market. The bill as described by the Chairman of the Senate Committee, Sani Musa, was intended to regulate, monitor, and supervise market transactions and related matters. However, the senators expressed concerns that the new legislation would be counterproductive.
Nigeria’s daily oil production rose by 25,000 barrels per day, increasing from 1.251 million barrels per day (mbpd) in May-2024 to 1.276mbpd in Jun-2024. This was disclosed in the Organisation of the Petroleum Exporting Countries’ (OPEC) Monthly Oil Market Report (MOMR). According to the report, the country’s oil production had fallen from 1.28mbpd in April 2024 to 1.25mbpd in May 2024.
The Federal Government is planning to borrow an additional $2.0bn in crude oil-backed loans from international creditors to boost its financial inflow. This follows the recent revelation that NNPC is struggling to pay international oil traders a backlog of $6.0bn amid subsidy removal. According to Mele Kyari, the GCEO of NNPC, the cash raised would be used for all of NNPC’s business activities including supporting production growth.
According to data from the Central Bank of Nigeria (CBN), total credit to the government surged by 30.0% m/m (N8.4trn) from N19.98tn in Apr-2024 to N28.38tn in May-2024. On a y/y basis, total credit to government decreased by 8.0% from N30.71tn in May-2023 to N28.38tn in May-2024. Meanwhile, total credit to the private sector increased by 2.0% m/m from N72.92tn in Apr-2024 to N74.31tn in May-2024.
The Nigerian Senate is evaluating a new bill aimed at increasing the proportion of gold in the country’s foreign reserve assets from 4.0% to 30.0%. This move seeks to diversify the reserves away from reliance on the US Dollar and towards a more sustainable commodity. Currently, Nigeria’s reserves stand at $34.8bn, with gold accounting for only 4.0% as of the end of November. If the bill is adopted, the gold mining industry will be integrated into the formal sector and come under the jurisdiction of the Central Bank.
The Federal Government has approved a 150-day duty-free window to allow the importation of maize, husked brown rice and wheat as part of measures to combat rising food inflation in the country. Also, 250,000 metric tonnes of wheat and maize will be imported to fill the depleted strategic grain reserve.
This week, we expect the National Bureau of Statistics (NBS) to release Nigeria’s CPI and Inflation report for the month of Jun-2024. We expect headline inflation to trend higher, albeit at a slow pace, as food, energy and FX pressures persist.
Domestic Equities: NGX-ASI Closed Lower…Down by 0.35% w/w
Last week, 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 0.9x, implying that 21 stocks advanced while 23 declined. The bearish trend remained unabated on Tuesday. The market was flat in the third trading session of the week, as the market was in a lull and investors maintained a standoffish approach towards the market. In the last two (2) trade sessions of the week the market was mixed with the bears dominating on Thursday and the bulls on Friday. Overall, we note that share price depreciation across GTCO (-3.91% w/w), TRANSCOR (-8.95% w/w), SEPLAT (-1.71% w/w) and UBA (-4.01% w/w) led the negative performance. That said, the benchmark NGX-ASI declined by 35bps to settle at 99,671.28 points. As a result, YTD return weakened to 33.77%, while market capitalisation closed at N56.44tn.
On a sectorial level, performance was bearish as three (3) out of the five (5) sectors under our coverage closed in the red territory. The Banking Sector (-2.08% w/w) led the laggards on the back of share price depreciation in UBA (-4.01% w/w) and ZENITHBA (-1.20% w/w). The Insurance sector (-0.36% w/w) followed due to sell offs in NEM (+2.38% w/w). Following was the Consumer Goods sector (-0.09% w/w) due to share price depreciation in GUINNESS (-7.14% w/w) and PZ (-10.00% w/w). On the other side of the coin the Oil and Gas sector (+1.38% w/w) led the gainers on the back of gains in CONOIL (+8.26% w/w). The Industrial Goods Sector (+0.05% w/w) followed on the back of buy interest in WAPCO (+0.83% w/w) and CUTIX (+10.00% w/w).
On corporate actions, Access Bank announced the commencement of their Rights issue, which commenced July 8, 2024, and will close on Wednesday, August 14, 2024 .
Looking forward, the equities market is expected to show mixed performance as investors adopt opportunistic investment strategies. We foresee selective buying of fundamentally strong stocks continuing into the upcoming week. Market activity is anticipated to rise due to ongoing banks’ recapitalization efforts, Q2 filings, and anticipated corporate actions in the near term. Conversely, elevated interest rates in the fixed income market are likely to exert a negative influence on equities as investors capitalize on higher fixed income yields. Overall, fund managers and investors are advised to maintain an opportunistic approach to capitalize on prevailing market opportunities.
Money Market Review: System Liquidity Remained Tight
Last week, the financial system opened with a deficit balance of N1.4tn. During the week, system liquidity remained deflated due to the absence of any inflow (via OMO maturities or coupon payments). Also, the activities in the primary market further left the financial system suppressed. As a result, the financial system closed the week with a deficit balance of N663.8bn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) climbed by 136bps and 153bps w/w to settle at 31.83% and 32.53%, respectively.
The Central Bank conducted a NT-bills auction, rolling over a total of N166.1bn worth of maturing bills across the 91-day, 182-day and 364-day bills. At the auction, investors’ demand was mildly strong, as total subscription printed at N308.7bn, majorly skewed towards the longer-tenured instrument (364-day bill). Notably, the CBN oversold the auction, selling a total of N207.3bn bills. Thus, the stop rate on the 364-day bill rose by 56bps from 20.68% to settle at 21.24%. Meanwhile, the stop rates across the 91-day and 182-day bills remained unchanged at 16.30% and 17.44%, respectively.
In the secondary NT-bills market, we observed bearish sentiments across the curve. As a result, the average yield on NT-bills rose by 57bps w/w to close at 23.33% (previously, 22.76%). On the other hand, the average yield on OMO bills fell by 12bps to settle at 24.24% (previously, 24.36%).
This week, we expect the financial system to be bolstered due to inflows from FAAC payments. Additionally, we expect a total of N16.0bn worth of OMO maturities to hit the system. This will help ease the liquidity pressure in the financial system. Nevertheless, we project that FTDs, and money market rates will remain at current levels, with a likelihood of slipping lower.
Bond Market: Bearish Sentiments Dominated the Secondary Bonds Market
The secondary bonds market was bearish as average bond yield climbed by 49bps to close at 19.26% (previously, 18.77%). Similarly, corporate bonds traded on a bearish note, as the average yield on corporate bonds rose significantly by 120bps w/w to 22.13% (previously, 20.93%).
In the Nigerian Eurobonds market, we observed buy-interests as investors take positions in the market given the anticipation of rate cuts among global Central Banks. Thus, the average yields in the market declined by 33bps w/w to settle at 9.76% (previously, 10.09%).
Looking forward, we anticipate an overall bearish sentiment to dominate the market underpinned by concerns about the nation’s fiscal sustainability 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 3.6% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,563.8/$, from its previous close of N1,509.7/$. At the parallel market, the Naira depreciated by 2.6% w/w to close the week at N1565.0/$ (previously, N1,525.0/$). Meanwhile, activities in the NAFEM window increased, as average FX turnover rose by 33.7% w/w to settle at $220.7mn. Lastly, Nigeria’s external reserves rose by 146bps to settle at $35.3bn.
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.
