July 29, 2024/United Capital Research
Global Markets: Mixed Sentiments Dominated the Market
Last week, the global equities market closed on a mixed note due to a broad tech sell-off after underwhelming megacap earnings raised doubts about the sustainability of the artificial intelligence-driven bull market. In the US, market sentiment was dampened due to ongoing profit-taking activities in mega-cap and semiconductor stocks. In particular, disappointing results from Alphabet and Tesla weighed on the overall US equities market. The market also reacted to a variety of mixed economic data releases. The US core PCE price index, the Federal Reserve’s preferred gauge to measure underlying inflation, rose by 0.2% m/m in Jun-2024, above the previous month’s print of 0.1% m/m and market expectations of a 0.1% increase. On economic growth, the US economy expanded by 2.8% q/q in Q2-2024, up from 1.4% q/q in Q1-2024, and above forecasts of 2.0%. This reinforced the view that the Federal Reserve can curb inflation without hurting the economy. Still, the growth rate is below levels seen later in 2023, and price pressures slowed, reinforcing bets that the Fed could cut interest rates in September. Additionally, the S&P Global Flash US Manufacturing PMI unexpectedly declined to 49.5pts in Jul-2024, the lowest reading this year, compared to 51.6pts in Jun-2024. The reading signalled a deterioration in business conditions within the goods-producing sector amid falls in new orders, production and inventories. Politically, the market continued to assess the political situation as President Biden exited the 2024 presidential race and endorsed Kamala Harris for the candidacy. Nevertheless, Donald Trump, of the Republican House, continues to lead the presidential race. As a result, the US indices closed on a negative note, with the NASDAQ (-2.1% w/w) and S&P 500 (-0.8% w/w) closing the week lower. Meanwhile, the DIJA climbed by 0.7% w/w.
In tandem, the European markets recorded w/w gains as earnings reports lifted investors’ mood. Unilever exceeded H1-2024 profit expectations with a 17.0% increase in underlying operating profit to €6.1bn, beating the €5.4bn forecast. Despite a lower-than-expected 3.9% rise in Q2-2024 underlying sales, Unilever maintained its full-year sales growth forecast of 3.0-5.0% and projected a strong operating margin of at least 18.0%. On data releases, the S&P Global UK Composite PMI rose from 52.3pts in Jun-2024 to 52.7pts in Jul-2024, indicating a strong upturn in private sector activity driven by services and manufacturing output growth. Consequently, Germany’s DAX (+1.4% w/w), Europe’s STOXX (+0.5% w/w) and UK’s FTSE (+1.6% w/w) edged higher. Elsewhere in France, disappointing corporate results dampened market sentiments. STMicroelectronics shares led the drop after cutting its full-year revenue and margins for the second consecutive time, citing stagnant industrial customer orders and a drop in automotive demand. The HCOB France Manufacturing PMI also fell to 44.1pts in Jul-2024, marking the 26th consecutive month of declining output due to weak sales and customer delays. Thus, France’s CAC lost 0.2% w/w, marking its second consecutive week of losses.
The Asian market closed on a negative note. The People’s Bank of China (PBOC) delivered an off-schedule cut to its one-year medium-term lending facility rate, lowering it by 20bps from 2.5% to 2.3% amid efforts to support the economy with monetary stimulus. Nevertheless, this did not bolster investor’s sentiment in the market. Also, recent data showed that China’s economy grew less than expected in Q2-2024, while the Third Plenum failed to lay out concrete measures to tackle economic challenges. Thus, the Chinese Shanghai Composite lost 3.1% w/w. Elsewhere in Japan, investors geared up for the Bank of Japan’s policy meeting next week, which could see a potential rate hike. Data showed that Tokyo’s core inflation rate accelerated for a third month in July, supporting a hawkish outlook on domestic monetary policy. That said, the Japanese NIKKEI declined by 6.0% w/w.
In the oil market, crude oil prices dropped due to declining Chinese demand and hopes of a Gaza ceasefire agreement that could ease Middle East tensions and accompanying supply concerns. Data showed that China’s total fuel oil imports dropped 11.0% in the first half of 2024. As a result, oil prices closed lower, with Brent Crude falling by 182bps w/w to print at $81.13/bbl (previously $82.63/bbl).
This week, the Federal Reserve is scheduled to meet on the 30th-31st of July to determine the direction of interest rate. We expect the policymakers to HOLD the Fed fund rate constant at 5.25%. Investors’ attention will be centred on the release of the US JOLTs job openings, non-farm payrolls report and the ISM Manufacturing PMI. On corporate earnings, megacaps such as Microsoft, Meta, Apple, and Amazon are scheduled to release their financial results. Globally, the Bank of England (BoE) and the Bank of Japan (BoJ) will also provide updates on their monetary policy stance. In Europe, the markets will follow closely the release of inflation rates and GDP growth rates for France, Germany and the Euro Area. Lastly, China will release its manufacturing and services PMI figures.
Macroeconomic Highlights
The Monetary Policy Committee (MPC) has raised the interest rate by 50 basis points from 26.25% to 26.75%. The MPC also pegged the Cash Reserve Ratio (CRR) for Deposit Money Banks at 45.0%, while that of Merchant Banks was put at 14.0%. The Liquidity Ratio was pegged at 30.0%. The Policy Makers also adjusted the Asymmetric Corridor around the MPR from +100 to –300 basis points around the MPR to +500 and –100 basis points around the MPR. Also, The Governor of the CBN, Yemi Cardoso, has disclosed that capital importation has risen to $5.92bn between January and June 2024. When compared to same period last year, total capital importation upsurge by 234.0% from $1.77bn in June 2023 to $5.92bn in June 2024. The official Q2-2024 Capital Importation report by the NBS will be released on 23-Aug-2024.
The Nigerian senate passed the amendment bill of the 2023 Finance Act and increased the windfall levy on banks’ foreign exchange revaluation gains from 50.0% as proposed by the President to 70.0%. Members of the red chamber also increased the timeline for the application of the windfall levy from the end of 2023 to all profits from foreign exchange transactions from the beginning of the new forex policy to the 2025 financial year as stipulated in clause 2 of the amendment.
The Federal Government has proposed the imprisonment of principal officers of banks who refuse to comply with the one-time windfall tax on banks’ foreign exchange profits in 2023. It also proposed a penalty of 10% of the levy withheld or not remitted annually and interest at the prevailing Central Bank of Nigeria (CBN) minimum re-discount rate.
Also, the senate passed the amendment bill of the 2024 Appropriation Act to add N6.2tn to the 2024 budget for recurrent expenditure which includes payment of the new N70,000 minimum wage and renewed hope infrastructure projects across the country. Furthermore, the senate also amended the commencement date of the amended act from 1st January 2023 to the commencement of the new foreign exchange policy (14 June 2023).
The federal government has announced plans to issue $500mn in domestic foreign currency-denominated bonds in three to four weeks’ time. This was disclosed by the Minister of Finance and Coordinating Minister of the Economy, Wale Edun.
Finally, Foreign exchange inflows from International Money Transfer Operators (IMTOs) increased by 38.86% to $1.07bn in the first quarter of 2024, from $770.23mn recorded in the same period in the previous year. in January, the IMTOs recorded inflows worth $383.04m, it dropped in February to $322.83m and returned upward in March to $363.70m. When compared with the last quarter of 2023, the inflows from IMTOs grew by 10.74%.
This week, we expect the release of the Q1-2024 Nigeria Labour Force Report. Nonetheless, we anticipate an otherwise quiet macroeconomic environment.
Domestic Equities: Local Bourse Falls…NGX-ASI Down by 2.33% w/w
Last week, the equity market’s bullish run from the previous week halted and reversed as actors began to react to the MPC’s decision to hike the benchmark interest rate by 50bps. The Nigerian Exchange was overridden by the bulls at the start of the week, evidenced by the market’s breadth on Monday, which printed at 1.4x, implying that 21 stocks advanced while 15 declined. The bears dominated the market in the remaining four (4) trading sessions of the week. The downward pull of the bourse was driven by sell-offs in DANGCEM (-9.99% w/w), and banking stocks like UBA (-7.88% w/w), FBNH (-4.76% w/w) and ZENITHBA (-3.11% w/w) led the negative performance. That said, the benchmark NGX-ASI declined by 233bps to settle at 98,201.5 points. As a result, YTD return weakened to 31.30%, while market capitalisation closed at N55.61tn. Activity level improved last week, as average value and volume of stocks traded rose by 11.4% w/w and 25.80% w/w to print at N9.4bn units and N711.5mn units, respectively. Investor sentiment was subdued, declining to 0.7x (from 1.2x last week), as 50 tickers appreciated while 67 depreciated.
Similarly on a sectorial level, performance was bearish as all five (5) out of the five (5) sectors under our coverage closed in the red territory. The Industrial Goods Sector (-5.89% w/w) led the laggards on the back of share price depreciation in DANGCEM (-9.99% w/w) and CUTIX (-14.02% w/w). The Banking sector (-2.94% w/w) followed due to sell offs in UBA (-7.88% w/w) and ZENITHBA (-3.11% w/w). Following was the Consumer Goods sector (-0.73% w/w) due to share price depreciation in DANGSUGA (-7.29% w/w) and NASCON (-3.95% w/w). Trailing behind were the Oil and Gas (-0.54% w/w) and Insurance (-0.27% w/w) sectors. This was resultant of share price depreciation in ETERNA (-10.00% w/w), MANSARD (-7.72% w/w) and VERITASK (-7.55% w/w).
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: Adjustment in CBN’s Asymmetric Corridor Reflates Financial System Liquidity
Last week, the financial system opened with a mild surplus balance of N107.5bn. Following the conclusion of the CBN’s 296th Monetary Policy Committee (MPC) on Tuesday, which saw another +50bps hike in MPR and an adjustment of the CBN’s asymmetric corridor to +500/-100 basis points (previously, +100/-300 basis points), we saw significant improvement in the system’s liquidity profile. For context, the new asymmetric corridor suggests that commercial banks or any other eligible financial institution will now access the CBN’s SLF window at MPR (26.75%) plus 500bps = 31.75%. On the other side, it suggests that commercial banks and any other eligible financial institution will now be able to deposit their excess liquidity with the CBN via the SDF at MPR (26.75%) minus 100bps = 25.75%. Consequently, we observed a significant reduction in the activities at the CBN’s SLF, with increased activities at the SDF window underpinning a liquid financial system. Notably, the financial system remained liquid, despite the primary market auction (PMA) on Wednesday. Ultimately, the financial system closed the week with a surplus balance of N276.5bn.
That said, funding rates between banks witnessed a crash below the 30.0% mark, following the outcome of the MPC meeting. The two measures of funding rates between banks, the Open Repo Rate (OPR) and Overnight Rate (OVN) saw their weekly averages fall by 265bps w/w and 296bps w/w, to print at 28.94% and 29.27% respectively (previously, 31.59% and 32.23%).
On details of last week’s primary market activity, the Central Bank conducted an NT-Bill Primary Market Auction (PMA) with an offer size of N278.0bn across the 91-day, 182-day and 364-day bills. At the auction, investors’ demand was mildly strong, as total subscription printed at N373.9bn, majorly skewed towards the 364-day instrument. This implies an oversubscription rate of 1.3x. In the aftermath. the CBN opted to allot exactly the amount on offer. Given the mildly strong demand at the auction, the CBN decided to allow stop rates to inch higher at the auction, with stop rates across all the bills offered climbing by 220bps, 206bps, and 86bps, to settle at 18.5%, 19.5%, and 22.1%, respectively.
At the secondary market for NT-bills, we observed a broad-based bearish sentiment (particularly skewed toward the mid-tenor papers), powered by the +50bps MPR hike. However, a class of investors continued to exploit the elevated interest rates on short-term instruments in the secondary market (particularly around auction papers). That said, the average yield on NT-bills climbed by 34bps to close at 25.23% from 24.89%.
Going forward, we expect the outcome of the MPC’s 296th meeting to continue to encourage more activities at the CBN’s SDF window, compared to the SLF window. This will look to underpin the financial system’s liquidity profile. The efficacy of the CBN’s preferred mop up mechanism will determine the extent of liquidity in the financial system. We expect the CBN to continue to tactically manage its cost of capital. At the secondary market for NT bills, we expect more of bullish sentiments in the week ahead. Ultimately, short-term rates like FTD, money market rates, and funding rates between banks will likely remain around current levels, subject to the liquidity profile of the banks.
Bond Market: Lacklustre Interest Toward Duration Exposure Remained Unabated
On 22-July-2024, the DMO conducted a bond auction with a total of N300.0bn on offer, across the 2029, 2031 and 2033 papers. The auction was undersubscribed reflective of investors lacklustre interest toward duration exposure. Investors’ total bids printed at N279.7bn, implying an undersubscription rate of 0.9x. The DMO opted to undersell the auction, selling papers to the tune of N225.7bn. Given the weak demand for duration exposed instruments at the auction, marginal rates on all three offerings rose: on the 2029 (+25bps to 19.89%), the 2031 (+81bps to 21.00%), and the 2033 (+48bps to 21.98%).
The secondary market for bonds was relatively quiet. Investors’ interest toward duration exposure remained lackluster. However, there was some mild selloff, which saw the average yield on sovereign bonds inch up by 4bp w/w to close at 19.45% from 19.41%. Similarly, we observed a relatively quiet market in the corporate bonds segment, with some mild sell offs which saw average yields on corporate bonds inch up by 2bps w/w to close at 22.26% from 22.24%.
In the Nigerian Eurobonds market, we observed bearish sentiments as debt sustainability concerns continued to linger. Hence, the average yield on sovereign Eurobonds climbed by 7bps w/w to 10.14% from 10.07%.
Looking forward, we expect the bonds market to remain quiet, with lackluster interest from investors. As for the Eurobonds market, we expect bearish sentiments to remain unabated, albeit mild. The bearish sentiment expected is on the back of weak local demand (underpinned by zero imminent coupon payments), amid the lingering debt sustainability concerns across the Sub Saharan Africa (SSA). The inclinations of the US Fed to cut rate in September will look to spur bullish sentiments at intervals.
Currency Market: Naira Depreciated at the NAFEM Window
Last week, the Naira depreciated by 0.59% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,606.29/$, from its previous close of N1,596.92/$. At the parallel market, the Naira appreciated by 0.88% w/w to close the week at N1,586.0/$ (previously, N1600.0/$). Meanwhile, activities in the NAFEM window decreased, as average FX turnover rose by 11.5% w/w to settle at $260.5mn. Lastly, Nigeria’s external reserves rose by 139bps to settle at $36.4bn.
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.
