August 12, 2024/United Capital Research
Global Markets: A Bearish Undertone in the Markets for Risk Asset Classes
Last week, US markets recorded mild weekly losses after rebounding from the biggest sell-off in nearly two (2) years. The S&P 500 was on the brink of a correction on Monday morning, plunging nearly 10.0% from its January peak. The Nasdaq Composite, which had already entered correction territory the previous Friday, was down by over 15.0%. The more dramatic swings were seen in the CBOE Volatility Index (VIX), often referred to as Wall Street’s fear gauge. It briefly spiked on Monday to 65.73, its highest level since late March 2020, before falling back to end the week at 20.69 Technical factors and programmed trading strategies appeared to be partly behind the swings. A recent increase in Japanese short-term interest rates, albeit modest (see below), seemed to result in a partial unwind in the so-called carry trade, in which investors borrow at near-zero interest rates in Japan and then invest the funds in higher-yielding assets in the U.S. and other countries. A sharp rise in the yen over the preceding few weeks made the trade unprofitable, however, causing many investors to pull out of their positions. That said, having recovered from the early week’s losses, the major US indices including DJIA (-0.6% w/w) and NASDAQ (-0.2% w/w) closed the week with mild losses, but the S&P 500 closed flat.
In Europe, the pan-European STOXX Europe 600 Index rebounded from sharp losses from earlier in the week, closing with a modest 0.3% higher. Meanwhile, major European stock indexes were mixed. Germany’s DAX gained 0.35% w/w, and France’s CAC 40 Index added 0.25% w/w. The UK’s FTSE 100 Index was little changed. Italy’s FTSE MIB, however, fell by 0.7% w/w. Retail sales volumes in the eurozone unexpectedly declined by 0.3% sequentially in June after increasing by 0.1% in May. This weakness reflected a drop in the sales of food, drinks, and tobacco. The data suggested that consumers are taking longer to recover from the inflationary squeeze, adding to doubts about the strength of demand in the second quarter.
Elsewhere, Asian equities recorded bearish sentiments in tandem. Japanese equities started the week with the most severe one-day sell-off in decades, driven by a rebounding yen on the back of the Bank of Japan’s (BoJ’s) hawkish turn at its July meeting, where the BoJ raised interest rates and revealed detailed plans to taper its bond purchases. Growing concerns about a global economic slowdown dampened investor enthusiasm, accelerating the unwinding of the yen carry trade (borrowing yen at Japan’s ultralow interest rates to invest in higher-yielding foreign markets). This trend was fueled by expectations of a narrowing interest rate gap between the US and Japan, which would likely strengthen the yen. By the end of the week, Japan’s markets had recouped much of the lost ground, however, with the Nikkei 225 Index and the broader TOPIX Index down by 2.5% and 2.1%, respectively. Chinese stocks retreated as a stronger-than-expected increase in consumer prices failed to offset concerns about deflationary pressures. The Shanghai Composite Index fell by 1.5% w/w, while the blue-chip CSI 300 shed 1.6% w/w. In Hong Kong, the benchmark Hang Seng Index gained 0.85% w/w.
In Energy markets, oil prices settled higher on Friday, posting weekly gains of over 3.5%. Positive economic data and indications from Fed policymakers that interest rates could be cut as early as September eased demand concerns, while fears of a widening Middle East conflict continue to raise supply risks. That said, the benchmark Brent Crude Oil saw its price climb by 3.7% w/w to close the week at $79.66/bbl.
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 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, the 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 Central Bank of Nigeria (CBN) has auctioned a total sum of $876.26mn at N1,495.0/$1 to 26 qualified banks who participated in the latest Retail Dutch Auction System (RDAS) undertaken by the Apex Bank. A total bid valued at $1.18bn was received from 32 authorised dealer banks, while bids valued at $313.69m from six banks were disqualified. Of the disqualified bids. four banks submitted their bids after the cut-off time, while two banks did not provide bids in the submitted template. The auction was conducted to reduce Foreign Exchange (FX) demand pressure and promote price discovery.
Fitch Ratings has downgraded Dangote Industries, noting a decline in the group’s liquidity position amid operational and financial underperformance. The latest review of the creditworthiness of the corporation saw Fitch lower its National Long-Term Rating to ‘B+(nga)’ from ‘AA (nga)’ and placed the ratings of the group on Rating Watch Negative (RWN). The slide in Dangote Industries’ creditworthiness was also influenced by the Naira devaluation as well as a lack of contracted backup funding to repay its significant debt facilities maturing on 31 August 2024.
The CBN has approved the merger of Providus and Unity Bank, as both financial institutions await the Securities and Exchange Commission (SEC)’s approval. While granting permission, Apex Bank also approved financial support totaling N700,0bn for the new entity to be repaid with an interest rate of 6.0%. The CBN noted that the support, structured as a 20-year term loan, will begin repayment after a five-year moratorium without further indicating the source of funds.
The Manufacturers Association of Nigeria (MAN) has called on the Central Bank of Nigeria to settle the $2.4bn foreign exchange forward contracts to prevent the manufacturing sector from entering a crisis. According to MAN, the $2.4bn worth of forward contracts from the backlog of $7.0bn has triggered a severe crisis for the manufacturing sector and the Nigerian economy.
This week, we expect the National Bureau of Statistics (NBS) to release Nigeria’s CPI and Inflation report for the month of Jul-2024.
Domestic Equities: Bullish Sentiments Return…NGX-ASI Up by 0.88% w/w
Last week, the domestic equities market had a turnaround, ending the week with bullish momentum. Following the end of the H1-2024 earnings season, market participants continued to bargain hunt strong stocks with strong fundamentals, with companies like MTNN driving the rally. 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 23 stocks advanced while 25 declined. The bears continued their dominance in the market in the second trading session of the week. The bulls gained momentum on Wednesday, evidenced by the market’s breadth, which printed at 1.1x, implying that 27 stocks advanced while 22 declined. The bulls continued their dominance in the last two trading sessions of the week, with the market breadth on the last trading day of the week printing at 2.1x, implying that 38 stocks advanced while 18 declined. The northward pull of the bourse was driven by buy-ins in large-cap stock, MTNN (+5.16% w/w), and OANDO (+60.47% w/w), UBA (+14.71% w/w) and ZENITHBA (+7.92% w/w) led the positive performance. That said, the benchmark NGX-ASI advanced by 88bps to settle at 98,605.79 points. As a result, YTD return strengthened to 31.9%, while market capitalisation closed at N56.0tn. Activity level closed lower last week, as the average value and volume of stocks traded fell by 6.7% and 21.0% to print at 9.8bn units and N535.8mn units, respectively. In line with the bullish trend for the week, investor sentiment strengthened to 1.3x (from 1.1x last week), as 69 tickers appreciated while 52 depreciated.
Similarly, on a sectorial level, performance was bullish as four (4) out of the five (5) sectors under our coverage closed in the green territory. The Banking Sector (+5.14% w/w) led the gainers on the back of share price appreciation in UBA (+14.71% w/w) and ZENITHBA (+7.92% w/w). The Consumer Goods sector (+2.35% w/w) followed due to buy interests in NB (+19.23% w/w) and DANGSUGA (+7.94% w/w). Following was the Insurance sector (+1.79% w/w) on the back of share price appreciations in VERITASK (+24.21% w/w) and CORNERST (+7.14% w/w). The Oil and Gas sector (+0.97% w/w) followed due to buy-interests in ETERNA (+4.21% w/w). On the other side of the coin, the Industrial Goods sector (-3.67% w/w) was the sole laggard due to share price depreciation in BUACEMEN (-9.99% w/w) and BERGER (-3.70% w/w).
Looking forward, the equities market is expected to show mixed performance as investors adopt opportunistic investment strategy. We foresee selective buying of fundamentally strong stocks continuing into the upcoming week. Market activity is anticipated to rise due to the ongoing banks’ recapitalization efforts and anticipated corporate actions in the near term. Conversely, elevated interest rates in the fixed-income market are likely to exert 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: System Liquidity Tightens after CBN FX Retain Sales
Last week, the financial system opened with a surplus balance of N655.5bn. During the week, system liquidity remained buoyant in part due to N80.0bn OMO maturities. However, following the Central Bank of Nigeria’s (CBN) retail FX sales to end users through authorized dealer banks via the Retail Dutch Auction System (RDAS), on 6 August 2024, the financial system was met with outflow of approximately N1.3trn, which drove the system into a mild deficit at the close of the week. For context, the financial system closed the week with a mild deficit balance of N12.2bn. Consequently, funding rates between banks trended higher in sight of the mild deficit situation, with the weekly average of the Open Repo Rate (OPR) and Overnight Rate (OVN) climbing by 2.64ppts w/w and 2.75bps w/w to settle at 28.10% and 28.66%, respectively.
The Central Bank conducted an CBN auction with an offer size of N216.1bn across the 91-day, 181-day, and 364-day bills. At the auction, investors’ demand was decent, as total subscription printed at N486.9bn (in line with our expectation), majorly skewed towards the longer-tenured instrument (N431.6bn). Given the fixed supply of bills vis-a-vis the demand at the auction, we saw pricing power in the hands of the CBN. Consequently, stop rate on the 364-day bill tapered by 21bps to record at 21.899%. Stop rates on the other bills remained unchanged at 18.5% and 19.5%, respectively.
In the secondary NT-bills market, we observed more of bearish sentiments. As a result, the average yield on NT bills climbed by 32bps w/w to close at 25.80% (previously, 25.48%). Conversely, the average yield on OMO bills climbed by 87bps to settle at 26.14% (previously, 25.27%).
This week, we expect the financial system liquidity to improve on the back of FAAC payments. Also, increased activities at the CBN’s Standing Deposit Facility (SDF) window will also look to underpin the expected improvement in financial system liquidity. If the current illiquidity persists, we expect short-term rates like FTD and money market rates to climb significantly. However, all things being equal, we expect the financial system liquidity profile to improve significantly this week, weighing on the northward trend of short-term rates. The efficacy of the CBN’s favorite mop-up mechanism will determine the extent of liquidity to remain in the financial system .
Bond Market: Bearish Sentiments Dominate the Secondary Bonds Market
The secondary bonds market was bearish, as the average bond yield climbed by 28bps to close at 20.05% (previously 19.77%). In tandem, corporate bonds were bearish, as the average yield on corporate bonds rose by 58bps w/w to 23.05% (previously 22.47%).
In the Nigerian secondary Eurobonds market, we observed mild sell-offs as the nation’s fiscal health remains worrisome. Thus, the average yields in the market increased by 4bps w/w to settle at 10.49% (previously, 10.45%).
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. However, given the reduction in the expected supply bonds (from expected N300.0bn to N190.0bn) in August bond auction, we expect supply and demand fundamentals to force bond yields down at the auction. Additionally, the DMO’s August bond auction was rescheduled to hold 19-Aug 2024 (previously 12 Aug 2024). For the Eurobonds market, we expect the sentiments across the central banks in advanced economies, especially the US Fed’s propensity to cut rates for the 1st time in September meeting, to stimulate buy-interests. Also, there will be $59.06mn of coupon payments this week, which will also underpin buy-interests. Overall, we expect more of bullish sentiments in the Nigerian Eurobonds market.
Currency Market: Naira Appreciated at the NAFEM Window
Last week, the Naira appreciated by 2.7% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,574.2/$, from its previous close of N1,617.1/$. At the parallel market, the Naira closed flat to settle at N1605.0/$. Meanwhile, activities in the NAFEM window decreased, as average FX turnover fell by 29.4% w/w to settle at $161.5mn. Lastly, Nigeria’s external reserves rose by 3bps to settle at $36.8bn.
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.
