August 19, 2024/United Capital Research
Global Markets: Positive Sentiments Dominate the Market
Last week, the global equities market closed on a positive note due to better-than-expected economic data releases. In the US, market sentiments recovered from earlier losses recorded at the beginning of the month following a busy week of economic data releases. To be precise, softer inflation, robust retail sales, and fewer unemployment claims helped calm concerns about any potential recession. Additionally, investors sentiments were boosted by signals from Federal Reserve officials suggesting a possible rate cut in September, sustaining the week’s momentum. According to the Bureau of Labour Statistics, the annual inflation rate in the US slowed for a fourth consecutive month to 2.9% y/y in Jul-2024, the lowest since Mar-2021, compared to 3.0% recorded in Jun-2024. Core inflation rate, which excludes food and energy, eased further to an over three-year low of 3.2% in Jul-2024, down from 3.3% in the prior month. The disinflation contributed to optimism around the Fed’s rate cut path, which sent yields lower and boosted equities. Additionally, producers’ prices rose to 2.2% y/y, which is nearly in line with the Federal Reserve’s 2.0% inflation target, offering some reassurance to the market. Lastly, retail sales unexpectedly soared 1.0% m/m in Jul-2024, following a downwardly revised 0.2% drop in Jun-2024 and way better than forecasts of a 0.3% gain. This marks the biggest increase since Jan-2023, offering some evidence that consumer spending remains robust while initial jobless claims declined to one month lows. As a result, the US indices closed on a positive note, with the DIJA (+2.9% w/w), NASDAQ (+5.3% w/w), S&P 500 (+3.9% w/w) and RUSSELL 2000 (+2.9% w/w) closing the week higher.
In tandem, European stocks closed firmly higher, consolidating the rebound from the equity selloff that bottomed in the prior week as lower concerns of a US recession raised demand for riskier assets. The Euro Area logged a trade surplus of €22.3bn in Jun-2024, exceeding market expectations of €13.3bn and surpassing the €18.0bn surplus reported in the corresponding period of 2023. This boost in the region’s trade surplus was due to the 8.6% y/y decline in Imports to €214.0bn, primarily due to lower purchases of manufactured goods. On economic growth, the Euro Area GDP expanded by 0.6% y/y in Q2- 2024, marking the highest growth in five quarters. Meanwhile, the earnings season continues with shares of UBS rising after the lender beat net profit forecasts for Q2-2024 due a revenue jump at its global wealth management and investment bank units. Additionally, the company plans to liquidate a $2.0bn real estate fund acquired from Credit Suisse. Consequently, Euro’s STOXX (+2.5% w/w), UK’s FTSE (+1.8% w/w), Germany’s DAX (+3.4% w/w) and France’s CAC (+2.5% w/w) edged higher.
Similarly, the Asian market closed on a positive note as gains in the power, real estate and insurance sectors drove the market. Domestically, data showed that the Japanese economy expanded by 3.1% y/y in Q2-2024, shifting from a 2.3% y/y decline in Q1-2024 mainly supported by a strong rebound in private consumption following an average pay raise of 5.2% in the country. Moreover, there was a bounce back in business spending, helped by the ongoing recovery in the automotive industry. This helped overshadow concerns about the Bank of Japan’s hawkish shift. Thus, the Chinese SHANGHAI (+0.6% w/w), Japenese’s NIKKEI (+8.9% w/w) and the Indian SENSEX (+0.9% w/w) closed the week higher.
In the oil market, crude oil prices traded on a volatile note due to expectations of a widening Middle Eastern conflict that could tighten global crude oil supplies. Nevertheless, a surprise build in US stockpiles as reported by the American Petroleum Institute (API), weighed on oil prices. As a result, oil prices closed marginally higher, with Brent Crude climbing by 3bps w/w to print at $79.68/bbl (previously $79.66/bbl).
This week, we expect the minutes of the Federal Reserve (Fed) meeting in Jul-2024 to be released. This, coupled with several Fed official speeches, will further shed light on interest rate directions for the region. On data release, we expect the US Purchasing Managers’ Index (PMI) figures for the month of Jul-2024. In Europe, the markets will follow closely the release of the manufacturing and services Jul-2024 PMI figures for France, Germany, the UK and the Euro Area. Lastly, Japan will release its manufacturing and services Jul-2024 PMI figures, Jul-2024 headline inflation figure and the country’s balance of trade data. The outcome of these data releases will shape the global equities market this week.
Macroeconomic Highlights
Extracts from the Jul-2024 Consumer Price Index (CPI) report released by the National Bureau of Statistics (NBS) revealed that Nigeria’s headline inflation printed at 33.40% y/y, indicating a 79bps decline from Jun-2024’s print of 34.19% y/y. This marks the first decline in the headline inflation rate since December 2022, when it last dropped to 21.34%. Looking from a m/m viewpoint, the data revealed a corresponding slowdown in inflation growth rate in the local economy. For context, headline inflation rate climbed by 2.28% m/m in July, 3bps slower than the 2.31% recorded in June.
Food inflation, which accounts for the bulk of the CPI basket, continued to rise in July, but at a slightly slower pace than the previous month (June). Notably, the country’s food inflation rate recorded at 39.53% y/y, a 134bps decrease from June’s 40.87% y/y. The slowdown in July can be attributed to fiscal interventions, and exchange rate stability/harmonization. Meanwhile, the core inflation rate remained under pressure printing at 27.47% y/y. This is 7bps faster than 27.40% y/y recorded in Jun-2024. Elevated petrol pump prices, petrol scarcity, and the unprecedented 230.9% electricity tariff hike for band A electricity users continued to plague the core inflation component in July 2024.
According to the Central Bank’s Purchasing Managers’ Index (PMI), economic activities in Nigeria fell for the thirteenth month in July 2024 as high costs reduced new orders and employment declined. The composite PMI stood at 49.7 points in Jul-2024, a slight improvement compared to the 48.8 points recorded in Jun-2024, indicating a 1.8 point increase. High inflation, nearing a three-decade high, and a 70.0% Naira depreciation have increased operational costs and reduced consumer demand, negatively impacting new orders.
According to the Organisation of the Petroleum Exporting Countries (OPEC), Nigeria’s average daily crude oil production increased marginally by 2.3% m/m from 1.27mbpd in June to 1.30mbpd in July. OPEC’s figure is contrary to claims by President Bola Tinubu and the Chief Executive of the Nigerian Upstream Petroleum Regulatory Commission, Gbenga Komolafe, that the country’s oil production had risen to 1.6mbpd.
Nigeria’s budget deficit has reduced by 29.0% to N2.83tn in the first quarter of 2024 from N3.96tn in the same period of 2023. A breakdown of CBN’s quarterly statistical bulletin reveals that the country’s revenue in the first quarter of 2024 amounted to N1.76tn while its expenditure stood at N1.53tn during the period. Revenue increased to N1.76tn in the first quarter of 2024 from N1.32tn in the same period of 2024.
President Bola Tinubu has approved the implementation of 0.0% import duty and exemption of Value-Added Tax (VAT) on basic food items with effect from 15th July 2024 until the 31st day of December 2024. However, the Nigerian Customs Service noted that the Federal Government may forfeit N188.37bn worth of revenue due to the duty waiver granted for staple foods importation during the period.
This week, we expect the National Bureau of Statistics (NBS) to release Nigeria’s capital importation data for Q2-2024.
Domestic Equities: Bearish Sentiments Return…NGX-ASI Down by 1.53% w/w
Last week, the domestic equities market reversed its bullish momentum from the prior week as market participants book profits off impressive H1-2024 earnings results, and the fixed income market remains attractive due to high rates. 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 1.5x, implying that 29 stocks advanced while 20 declined. However, the bears dominated in the second trading session of the week with the market breadth printing at 0.9x, implying that 26 stocks advanced while 29 declined. The bears continued their dominance on Wednesday, and Thursday. Nevertheless, the bulls gained momentum in the last trading session of the week with the market breadth printing at 1.0x, implying that 23 stocks advanced while 22 declined. The southward pull of the bourse was driven by sell-offs in CUTIX (-17.50% w/w), and BUACEMEN (-13.48% w/w), OANDO (-11.70% w/w) and LEARNAFR (-10.89% w/w) led the negative performance. That said, the benchmark NGX-ASI declined by 153bps to settle at 97,100.31 points. As a result, YTD return weakened to 29.9%, while market capitalisation closed at N55.1tn. The activity level closed lower last week, as the average value and volume of stocks traded fell by 14.3% and 24.1% to print at N8.4bn and 406.6mn units, respectively. investor sentiment weakened to 1.1x (from 1.3x last week), as 62 tickers appreciated while 58 depreciated.
Similarly 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 and Gas Sector (+5.25% w/w) led the gainers on the back of share price appreciation in TOTAL (+19.69% w/w) and ETERNA (+11.11% w/w). The Insurance Sector (+0.79% w/w) followed due to buy interests in MANSARD (+8.55% w/w) and UNIVINSU (+6.67% w/w). Following was the Consumer Goods Sector (+0.37% w/w) on the back of share price appreciation in NASCON (+11.59% w/w) and DANGSUGA (+10.76% w/w). On the flip side, the Industrial Goods Sector (-5.16% w/w) led the laggards on the back of selloffs in CUTIX (-17.50% w/w) and BUACEMEN (-13.48%). The Banking Sector (-2.28% w/w) followed due to share price depreciation in ETI (-6.18% w/w) and FIDELITY (-4.27% w/w).
On corporate actions, the Securities and Exchange Commission (SEC) has approved the extension of the Rights Issue of Access Holdings Plc to August 23. The N351.0bn Rights Issue, earlier scheduled to end Wednesday 14th August has been extended due to the hunger protests across the country in early August.
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 and anticipated 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: System Liquidity Reflates, Mildly Positive
Last week, the financial system opened with a deficit balance of N478.05bn. The deficit story reemerged in the aftermath of the CBN’s FX Retail Auction in the prior week, of which approximately N1.3trn was withdrawn from the financial system. However, a blend of a N20.5bn OMO maturity sum, coupled with inflow from FAAC payments helped the liquidity shortage, but was not sufficient to stimulate more activities at the CBN’s Standing Deposit Facility (SDF). Nonetheless, given the reduction of activities at the CBN’s Standing Lending Facility (SLF) window (particularly owing to cost-implications), the financial system wrapped up the week under review with a mild surplus of N33.0bn.
Owing to the shortage of liquidity throughout the week, funding rates between banks stayed elevated above the 30.0% mark, even higher than the 31.75% offered at the CBN’s SLF window (hence the increased activity witnessed at the CBN’s SLF window). For context, the weekly average of the Open Repo Rate (OPR) and Overnight Rate (OVN) surged by 6.23ppts w/w and 6.34ppts w/w to settle at 34.33% and 35.00%, respectively (previously 28.10% and 28.66%).
In the secondary NT-bills market, we observed bullish sentiments, particularly following the emergence of the anticipated high-base effect on domestic inflation rate in July 2024. Consequently, the average yield on NT -bills declined by 86bps w/w to close at 24.94% (previously, 25.80%). Similarly, the average yield on OMO bills tapered by 31bps to settle at 25.83% (previously, 26.14%).
This week, we expect primary market activities to weigh on overall system liquidity. We expect the liquidity in the financial system to be driven by increased activities at the CBN’s Standing Deposit Facility window. We might see extra remnants from FAAC payments trickle in at the start of the week. The CBN will conduct a Treasury Bill auction to roll over maturing bills to the tune of N741.0bn. At the auction, we expect the significant supply of bills to place northward pressure on yields, particularly subject to investors’ demand. However, given the recent trend and outlook of domestic inflation rate, which has raised speculation of a HOLD in the CBN’s next MPC meeting on September 23 and 24, we expect investors demand to be elevated at the auction, possibly outweighing the supply. This will help NT-bill stop rates to remain around current levels post-PMA. Other short-term rates like FTD and money market rates will remain around current levels.
Bond Market: Bullish Undertone Resurfaces
In tandem with the overall bullish strides across the fixed income market (fuelled by increased hopes of neutral monetary policy stance in September), the secondary bonds market also recorded buy-interests, with the average yield on sovereign bonds tapering by 35bps to close at 19.70% (previously 20.05%). In the same vein, corporate bonds were bullish, as the average yield on corporate bonds declined by 25bps w/w to 22.80% (previously 23.05%).
In the Nigerian secondary Eurobonds market, we observed buy-interests, as sentiments that the Fed will cut rates in September remained positive, following further improvements in US Inflation rate. Additionally, $59.06mn worth of coupon inflows played a role in the overall positive sentiments in the Nigerian Eurobonds market. As a result, we saw average yields on sovereign Eurobonds taper by 16bps w/w to settle at 10.33% (previously, 10.49%).
This week, we foresee further BUY interests toward duration instruments, particularly seeing the lesser amount on offering (from expected N300.0bn to N190.0bn) for DMO’s August bond auction. Notions of possible neutral monetary policy stance in September will further instigate the bulls. At the DMO August bond auction on Monday 19 August 2024, we expect marginal rates to taper. 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 continue to stimulate buy-interests from local and foreign investors. There will be $92.74mn worth of coupon payments this week, which will also underpin buy-interests from the local investors. Overall, we expect more of bullish sentiments in the Nigerian Eurobonds market.
Currency Market: Naira Depreciated at the NAFEM Window
Last week, the Naira depreciated by 0.4% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,579.89/$, from its previous close of N1,574.20/$. At the parallel market, the Naira appreciated by 0.3% w/w to close at N1600.0/$, from its previous close of N1605.0/$. Meanwhile, activities in the NAFEM window increased, as average FX turnover rose by 5.8% w/w to settle at $181.5mn. Lastly, Nigeria’s external reserves fell by 81bps to settle at $36.5bn.
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.
