August 5, 2024/United Capital Research
Global Markets: Negatively Skewed markets; Central Banks maintain dovish tilt.
Last week in US markets, the falling US labour market, mixed Technology earnings, US election risk and Middle East tensions drove price movements . The Q2 earnings season picked up with results from mega cap stocks and sound earnings from life insurance companies. Momentum and small cap stocks drove markets on the expectation that the US Fed would HOLD rate cuts till Sept-2024. However, the market plunged after softening economic data. Growth stocks underperformed Value stocks across market cap categories, and cyclically oriented sectors dragged major indices down with the S&P was down 2.1% w/w.
The US economic catalysts were labour market data including JOLTS and BLS nonfarm payrolls, ISM Manufacturing PMI, all of which had some weak elements but do not point to an imminent recession. The ISM manufacturing sector PMI fell on lower orders. The BLS nonfarm payrolls for July fell to 114k, below the expected 175k, and June’s 179k print. On the US FED, Chairman Jerome Powell stated last week that the economy is growing at a decent pace, and that metrics are getting more consistent and closer to the 2.0% inflation target. At its 31-Jul meeting, the Fed decided to HOLD its interest rate at 5.25-5.50%, however, it is expected to start the easing cycle with maintenance cuts to manage the slowdown transition.
In Europe, equities markets closed mostly lower. The STOXX Europe 600 was down 2.9% w/w. The German DAX was the major underperformer amongst its peers, down 4.1% w/w, as economic data suggests there is broad weakness. The country’s CPI rose to 2.3% y/y in Jul-2024 from 2.2% y/y in Jun-2024. German industrial production, balance of trade, and final inflation print are expected this week. However, YTD, the DAX is up 5.4%, the second-best performer in the region behind the UK FTSE 100 an 7.1% YTD. Economic data releases showed
In Asia, Japanese equities tumbled on Friday, down 5.8%. The Nikkei 225 was down 4.7% w/w as the Bank of Japan (BoJ) raised interest rates. The market still expects another hike this year. China posted a positive performance. The Shanghai Composite was up 0.5% w/w. On economic data, China’s demand is yet to gain traction. The Caixin PMI for Jul-2024 fell to 49 vs 51 consensus due to weak new orders. It follows an expansionary 51.8 print in June. Government officials have begun rolling out economic stimulus to support H2-2024 output and consumption. Emerging markets (ex-China) closed lower on weak forex. However, India remains the standout with a solid 12.1% YTD performance.
In Energy markets, Oil prices surged 5.0% on Wednesday following events (the assassination of Hamas’s political leader “Ismail Haniyeh” in Iran and a senior Hezbollah official in Lebanon) in the Middle East which raised supply risk concerns. However, OPEC maintained its production cut plans. On the demand side, the DOE EIA US crude oil inventories fell again. Oil prices failed to increase despite the weak supply data due to concerns about China and H2-2024 demand. Nonetheless, oil prices could rise in the coming weeks as storms are forecasted in the Gulf of Mexico. Brent futures fell 4.3% w/w.
This week kicks off the 2nd month of Q3-2024. Company earnings and economic releases will continue to roll out. Globally, Retail Sales, CPI and PPI, Industrial Production and Export/Import prints are expected to be published in the EU, Germany, China, and Mexico. Important Central Bank Interest Rate decisions will be made in Australia, India and Mexico.
Macroeconomic Highlights
The Purchasing Managers’ Index (PMI) showed that business activity in Nigeria fell for the first time in eight months, in June 2024, as a result of price pressures which weakened demand. monthly PMI by Stanbic IBTC Bank released on Thursday showed the headline index contracted to 49.2 in July from 50.1 in June. Readings above 50.0 signal an improvement in business conditions, while those below shows deterioration.
President Bola Tinubu has signed the new N70,000 national minimum wage into law during a Federal Executive Council (FEC) meeting held at the Council Chambers of the Presidential Villa on Monday in Abuja.
The Senate and the House of Representatives passed a bill to increase the percentage of Ways and Means loans the Central Bank of Nigeria (CBN) can give to the Federal Government, from 5.0% to 10.0% of the revenue of a fiscal year.
Money supply (M3), which is a broad measure of the total amount of money in an economy, has surpassed N100 trillion, reaching an all-time high for the country. . recent data from the Central Bank of Nigeria (CBN) showed that M3 rose to a record N101.34 trillion in June 2024, represents a 56.15 percent increase to N64.90 trillion recorded in the corresponding period of June 2023. Although this signals an expansion in economic activities however it points to further inflation fares.
The Dangote Petroleum Refinery is going to need about N1.7tn worth of crude oil monthly following the directive of President Bola Tinubu mandating the Nigerian National Petroleum Company Limited to sell crude to the plant and other domestic refineries in Naira. According to the President, Dangote Industries, Alhaji Aliko Dangote, his refinery would hit 500,000 barrels per day capacity in August, and 550,000bpd in December 2024.
The World Bank has restructured a $350.0mn loan to Nigeria to ensure the completion of seven critical power plants, bolstering the nation’s energy infrastructure, this restructuring involves an extension of the project’s closing date by 5 months, with the new deadline for the loan project set to 31 December 2024.
The African Development Bank Group (AfDB) has approved a loan of $500mn to the Federal Republic of Nigeria. this funding will finance the first phase of the Economic Governance and Energy Transition Support Program (EGET-SP), aimed at transforming the country’s electricity infrastructure and improving access to cleaner energy sources. As of July 2024, the African Development Bank Group’s active portfolio in Nigeria is valued at about $4.4bn.
This week, we expect the release of the Q2-2024 Nigeria Electricity Report. Nonetheless, we anticipate an otherwise quiet macroeconomic environment.
Domestic Equities: Local Bourse Falls…NGX-ASI Down by 0.46% w/w
Last week, the equity market maintained its bearish momentum closing in the red on three out of five trading sessions of the week. 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 1.0x, implying that 22 stocks advanced while 21 declined. The bears dominated the market in the second trading session of the week as the market breadth printed at 0.5x, implying that 19 stocks advanced while 37 declined. The bearish sentiments continued on Wednesday. In the last two trading sessions of the week the bulls gained momentum with the market breadth at the last trading day of the week printing at 3.6x, implying that 36 stocks advanced while 10 declined. The downward pull of the bourse was driven by sell-offs in large-cap stock, NESTLE (-9.78% w/w), and UBA (-5.26% w/w), UCAP (-9.92% w/w) and ZENITHBA (-2.03% w/w) led the negative performance. That said, the benchmark NGX-ASI declined by 46bps to settle at 97,830.65 points. As a result, YTD return weakened to 30.72%, while market capitalisation closed at N55.49tn. Activity level was mixed last week, as average value of stocks traded rose by 11.4% to print at 10.5bn units and the total volume of stocks traded fell by 4.6% w/w to print at N678.5mn units, respectively. Investor sentiment strengthened to 1.1x (from 0.7x last week), as 39 tickers appreciated while 36 depreciated.
Similarly 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 Consumer Goods Sector (-3.33% w/w) led the laggards on the back of share price depreciation in NESTLE (-9.78% w/w) and DANGSUGA (-9.33% w/w). The Banking sector (-0.48% w/w) followed due to sell offs in UBA (-4.75% w/w) and ETI (-2.27% w/w). Following was the Industrial Goods sector (-0.01% w/w) closing almost flat due to share price depreciation in WAPCO (-0.54% w/w) and BERGER (-10.00% w/w). On the flip side, the Oil and Gas sector (+4.27% w/w) led the gainers on the back of buy interests in TOTAL (+9.98% w/w) and CONOIL (+5.15% w/w). The Insurance sector (+1.59% w/w) followed due to share price depreciation in MANSARD (+15.88% w/w) and CORNERST (+6.06% 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 remain elevated due to ongoing banks’ recapitalization efforts, Q2 filings, and corporate actions in the near term. Conversely, elevated interest rates in the fixed income market are likely to exert a negative pressure on the equities market 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: No Sale at OMO Auction
Last week, the financial system opened with a surplus balance of N230.3bn. During the week, system liquidity remained repressed following increased activities in the Standing Deposit Facility (SDF) amid the adjustment to the asymmetric corridor around the MPR. As a result, the financial system closed the week with a surplus balance of N660.5bn. Consequently, the average Open Repo Rate (OPR) and Overnight Rate (OVN) declined by 335bps and 349bps w/w to settle at 25.46% and 25.91%, respectively.
The Central Bank conducted an OMO auction with an offer size of N150.0bn across the 98-day, 182-day, and 364-day bills. At the auction, investors’ demand was lacklustre, as total subscription printed at N86.5bn, majorly skewed towards the longer-tenured instrument. There were no bids for the shorter-tenured instrument (90-day bill) as investors were more interested in the higher rate at the longer end of the curve. Notably, there was no sale at the auction as the Apex Bank did not allot any paper. This marks the second consecutive auction with no sale.
In the secondary NT-bills market, we observed more of bearish sentiments particularly at the mid curve, with bullish sentiments remaining skewed toward auction bills. As a result, the average yield on NT bills climbed by 25bps w/w to close at 25.48% (previously, 25.23%). Conversely, the average yield on OMO bills declined by 68bps to settle at 25.27% (previously, 24.95%).
This week, we expect the financial system to remain repressed, given that the Central Bank’s decision at the last Monetary Policy Committee (MPC) meeting will continue encouraging activities at the SDF window. We also anticipate inflows of N80.0bn from OMO maturities. Nevertheless, we project that FTDs and money market rates will remain at current levels. Additionally, the Central Bank of Nigeria (CBN) is scheduled to roll over a total of N199.5bn of maturing bills across the 91-day, 182-day, and 364-day bills.
Bond Market: Bearish Sentiments Dominated to the Secondary Market
The secondary bonds market was bearish, as the average bond yield climbed by 32bps to close at 19.77% (previously 19.45%). In tandem, corporate bonds were bearish , as the average yield on corporate bonds rose by 21bps w/w to 22.47% (previously 22.26%).
In the Nigerian secondary Eurobonds market, we observed sell-offs as the nation’s fiscal health remains worrisome. Thus, the average yields in the market increased by 31bps w/w to settle at 10.45% (previously, 10.14%).
Looking forward, we expect an overall bearish sentiment to dominate the market underpinned by concerns about the nation’s fiscal health and the efficacy of its monetary policy.
Currency Market: Naira Depreciated at the NAFEM Window
Last week, the Naira depreciated by 0.48% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,617.08/$, from its previous close of N1,609.29/$. At the parallel market, the Naira appreciated by 0.94% w/w to close the week at N1,605.0/$ (previously N1,590.0/$). Meanwhile, activities in the NAFEM window decreased, as average FX turnover rose by 18.5% w/w to settle at $217.5mn. 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.
