September 30, 2024/United Capital Research
Global Markets: Accommodative Monetary Policy Stance Drove the Market
Last week, the global equities market closed on a positive note, following monetary policy easing across global central banks. A series of impressive economic reports also supported the positive market momentum as market participants remained optimistic about a soft-landing scenario for the global economy. In the US, weekly jobless claims dropped to a four-month low, signaling a resilient labor market, while second-quarter GDP growth was confirmed at a solid 3.0%, easing concerns of a broader economic slowdown. Additionally, China’s renewed stimulus measures added to the upbeat sentiment, with investors anticipating potential ripple effects across global markets. On price movement, the Personal Consumption Expenditure (PCE) index, the Fed’s preferred inflation measure, showed a mild 0.1% m/m increase in Aug-2024, below market expectations of a 0.2% increase, signalling cooling price pressures in the region. This fueled expectations for a potential rate cut, with traders split between a 25 or 50bps benchmark interest rate reduction in the next Fed meeting in Nov-2024. Meanwhile, the US consumer sentiment reached a five-month high at 70.1pts in Sep-2024 as borrowing costs eased, supporting hopes for a continued cooling of inflation towards the Fed’s 2.0% target in 2024. Lastly, the US trade deficit shrank to $94.3bn in Aug-2024 from a $102.8bn shortfall in the previous month. This marks the lowest deficit since Mar-2023, on the back of a 2.4% growth in exports and a 1.6% decline in imports during the period. As a result, the US indices closed on a positive note, with the NASDAQ (+1.0% w/w), DIJA (+0.6% w/w), and S&P 500 (+0.6% w/w) closing the week higher.
In tandem, the European markets recorded w/w gains as evidence of slowing inflation in the Eurozone favored the credit outlook for the bloc’s corporate sector. Lower-than-expected inflation in France and Spain boosted bets on another interest rate cut by the European Central Bank (ECB) in Oct-2024, currently priced in by around 70.0% of the market. Median expectations for inflation over the next 12 months in the Euro Area edged down to 2.7% compared to 2.8% in the previous three months. Also, companies exposed to China continued to benefit from the country’s stimulus announcements this week. The consumer confidence indicator in the Euro Area rose by 0.5 points from the previous month, as consumers were more optimistic about their households expected financial situation and, to a lesser extent, about their households past financial situation. Consequently, Germany’s DAX (+4.0% w/w), France’s CAC (+3.9% w/w), Europe’s STOXX (+2.7% w/w) and UK’s FTSE (+1.1% w/w) edged higher.
Market attention in Asia was primarily focused on China during the past week, as the country’s officials announced a raft of measures aimed at boosting consumption, property demand, and stock market liquidity. The People’s Bank of China lowered its reserve requirement ratio by 50bps to 9.5%, the repurchase rate by 20bps to 1.5%, the medium-term lending facility rate by 30bps to 2.0%, and the down payment requirement for second-home buyers by 10bps to 15.0%. The Central Bank also hinted at a potential cut to the loan prime rate and a CNY800.0bn ($113.0bn) liquidity support facility for stocks. Thus, the Chinese Shanghai Composite rose by 12.8% w/w. Elsewhere in Japan, investors reacted to data showing Tokyo’s core inflation rate, a leading indicator of nationwide price trends, slowed to 2.0% y /y in Sep-2024 from 2.4% y/y in Aug-2024. This supports the case for the Bank of Japan to take a cautious approach to rate hikes. That said, the Japanese NIKKEI (+5.6% w/w) and Indian SENSEX (+1.2% w/w) climbed upward.
In the oil market, crude oil prices dropped as worries over supply disruptions in Libya eased and demand concerns continued despite China’s latest stimulus plans. OPEC+ announced it would proceed with the planned oil output increases in Dec-2024. As a result, oil prices closed lower, with Brent Crude falling by 337bps w/w to print at $71.98/bbl (previously $74.49/bbl).
This week, all attention in the US will be on the labour market report and speeches by several Fed officials. Along with the jobs report, other key data, such as the JOLTS report, ADP employment figures, and Challenger Job Cuts, will also be released. In addition, the ISM Manufacturing PMI is anticipated to reflect a continued contraction in the factory sector, while the ISM Services PMI is expected to show steady growth. Globally, inflation rates will be released for the Euro Area and Germany. In Asia, Japan will report on industrial production, retail sales, unemployment, consumer confidence, and the Tankan Manufacturers Index. Meanwhile, China will release both NBS and Caixin Manufacturing and Services PMI.
Macroeconomic Highlights
Last week, the Federal Executive Council (FEC) approved the recommendations of the Presidential Committee on Fiscal Policy and Tax Reforms in the economic stabilisation plan of the Federal Government. The new reforms in the nation’s tax laws include tax reliefs for companies employing more staff and personal income relief to workers in both public and private sectors earning between N200,000 and N400,000. The FEC also approved the bill seeking the collaboration of Federal and State Government to remove haulage levies, livestock levies, market taxes etc.
Meanwhile, the Monetary Policy Committee (MPC or the Committee) has concluded its 296th meeting held between 23rd and 24th Jul-2024. At the meeting, the Committee decided to raise the Monetary Policy Rate (MPR) by 50bps from 26.75% to 27.25%, a new all-time high. Additionally, the Committee increased the Cash Reserve Ratio (CRR) by +500bps to 50.0% (previously, 45.0%), while CRR for merchant banks was raised by +200bps to 16.0% (previously, 14.0%). Other monetary policy tools like the Liquidity Ratio was retained at 30.0% and Asymmetric Corridor at +500/-100 basis around the MPR. This decision marks the MPC’s 12th consecutive increase in MPR since May-2022, bringing the cumulative hikes in this cycle to +1,525bps and 800bps for 2024.
On Wednesday 25-Sept, The Central Bank of Nigeria (CBN) announced its decision to sell foreign exchange worth $20,000 at the rate of N1,590/$ to eligible Bureau De Change operator across the country. The CBN, however, warned that operators must not sell above 1.0% of the purchase rate.
Nigeria’s export volume to Niger Republic surged significantly in the second quarter of 2024, following the reopening of borders, amid political tensions caused by the coup in Niger. Nigeria’s exports to Niger Republic skyrocketed by 204.0%, climbing from N6.72bn in Q1-2024 to N20.46bn in Q2-2024. Niger Republic now ranks as the 8th largest African trading partner for Nigeria, accounting for 0.87% of Nigeria’s total export volume in Q2-2024, up from 0.30% in the previous quarter.
In another news, manufacturers have repaid N1.595tn owed to Deposit Money Banks (DMBs) and other creditors in the first half of 2024. This amount repaid as interests and loan principals was a 143.76% surge from the N654.27bn spent by 11 top companies in the first six months of 2023. The amount spent on loan repayments during this period is reflective of the high interest-rate operating environment, with the country’s benchmark rate at a whopping 27.25% (as of September 2024).
Lastly, Vice President, Kashim Shettima, has welcomed ExxonMobil’s proposed $10.0bn investment in Nigeria’s deep-water oil operations. The centerpiece of ExxonMobil’s new strategy is the Owo project, a substantial subsea tie-back that could represent a $10.0bn investment.
This week, we expect the macroeconomic environment to be relatively quiet in the absence of any data releases.
Domestic Equities: Local Bourse Sustains Bullish Momentum…NGX-ASI Up by 0.21% w/w
Last week, the domestic equities market closed on a positive note, with bullish sentiment driving gains for three (3) out of five (5) trading days. A standout performer was SEPLAT, which saw a significant rise of (+10.00% w/w), playing a key role in pushing the main index higher. Bargain-hunting also continued, and the market’s breadth improved to 1.4x implying that 65 stocks advanced while 47 declined, up from (1.3x the week before). Overall, investors remained optimistic about riskier assets, thanks in part to recent trends in the money and fixed-income markets. As a result, the benchmark NGX-ASI climbed by 21 bps to close at 98,458.68 points, bringing the YTD return to a solid 31.7% and lifting market capitalization to N56.6tn. In terms of trading activity, it was a mixed bag: while the average value of stocks traded dipped by 4.2% to N9.2bn, the total volume of stocks traded jumped by 42.7% to 663.7mn units.
Similarly, on a sectorial level, performance was bullish as three (3) sectors under our coverage closed in the green territory. The Oil and Gas sector (+3.28% w/w) led the gainers on the back of interests in SEPLAT (+10.00% w/w). Following was the Banking sector (+2.45% w/w) on the back of share price appreciation in UBA (+6.19%) and FIDELITY (+10.29%). The Insurance sector (+0.43% w/w) gained on the back of share price appreciation in REGALINS (+53.33% w/w) and MANSARD (+1.85% w/w). On the flip side, the Consumer Goods sector (-0.15%) led the laggards on the back of share price depreciation in INTBREW (-8.86%) and DANGSUGA (-1.83% w/w). The Industrial Goods sector (-0.04% w/w) followed owing to profit booking activities in WAPCO (-0.68% w/w) and BERGER (-9.83% w/w).
On corporate actions, First City Monument Bank (FCMB) has declared a delay in filing its Q3-2024 financial results, due to the commencement of the interim audit of the company’s largest subsidiary, FCMB Limited for the period ended 30 Sept-2024.
Looking forward, the equities market is expected to retain its buy interest as investors cherry-pick undervalued stocks. However, fixed income biased investors are expected to lock in on current rates in the fixed income space given the sentiment that rates might have peaked. Thus, we expect the equities market to retain its current posture. Additionally, the recent 50bps hike by the MPC would have little or no impact due to government’s tight hand to increase yields at the fixed income and money markets. Notably, the Bulls will remain incentivized to persist in bargain hunting, given the tremendous mid-long-term opportunities in the equities market. Fund managers and businesses may begin to entertain mid-long-term (≥6 months) investment objectives, cherry-picking only sound equities with strong fundamentals and ongoing corporate actions. This strategy will maximise market opportunities, thereby optimising portfolio returns.
Money Market Review: MPC +50bps Hike in MPR Fuelled Bearish Sentiments
Last week, the financial system opened with a surplus balance of N283.8bn, particularly bolstered by FAAC inflows (≥N600.0bn) at the close of the prior week. Interestingly, the CBN concluded its 297th MPC meeting on Tuesday 24 Sept-2024, of which the Monetary Policy Rate (MPR, or benchmark interest rate) was unexpectedly raised by 50bps, from 26.75% to 27.25%, further tightening financial conditions in the local economy. However, the asymmetric corridor (+500/-100 basis around the MPR) was left unchanged at previous level, thus further encouraging banks’ deposit with the CBN. The Committee also tightened the Cash Reserve Ratio (CRR) of the banks, hiking CRR for merchant banks by +200bps, from 14.0% to 16.0%, and for commercial banks by +500bps, from 45.0% to 50.0%. Further improving system liquidity was the receipt of the expected coupon inflows of N202.3bn. As expected, the CBN mopped the excess liquidity in the financial system. Nonetheless, despite the mop-up activities, the financial system wrapped up the week with a surplus balance of N668.2bn. Consequently, average funding rates between banks tapered significantly, with the weekly average of Open Repo Rate (OPR) and Overnight Rate (OVN) declining by 785bps and 758bps w/w to settle at 22.43% and 23.06%, respectively.
Speaking to last week’s mop-up activity, the CBN conducted two Open Market Operation (OMO) auctions with total offering of N1.0trn (N500.0bn per auction). The auction was met with lacklustre demand with subscription rate printing at 0.5x, implying that total bids amounted to N497.9bn. The total bids came in entirely for the longest tenor bills offerings at the two auctions. For more context, following the 50bps hike by the MPC on Tuesday, investors demand for higher rates resurfaced, with most investors demanding higher rates than the CBN could offer (particularly at the second OMO auction). Consequently, the CBN undersold the auctions, selling total OMO bills to the tune of N254.9bn. However, the CBN allowed stop rates on the longest tenor bill to climb higher to close at 24.3% (previously 21.8% as of OMO auction conducted on 02 Sept-2024).
Elsewhere in the primary market for Nigerian Treasury Bills, the CBN rolled over maturing bills to the tune of N227.5bn. The auction was met with strong demand with total bids printing at N304.3bn, implying bid-to-cover ratio of 1.3x (but weak when compared to prior auctions in Q3-2024). Similarly, the bids were majorly skewed towards the longer-tenured instrument “365-day bill”, which received total bids of N250.4bn (82.3% of total bids). Notably, the CBN sold the exact amount on offer to the tune of N227.5bn. Following the weak demand at the auction, the CBN allowed stop rates on the bill offerings (91-day, 182-day and 364-day bills) to climb higher. Hence the stop rates on the 91-day, 182-day and 364-day bills climbed by 37bps, 50bps and 141bps to settle at 17.00%, 17.50% and 20.00%, respectively.
Meanwhile, at the secondary market, we observed bearish sentiments, fuelled by the 50bps MPR hike. Hence, the average yield on NT-bills climbed by 113bps w/w to close at 21.92% (previously, 20.79%). Similarly, the average yield on OMO bills climbed by 23bps to settle at 23.65% (previously, 23.42%).
This week, we expect the financial system to remain liquid, driven by sustained activities at the CBN’s Standing Deposit Facility (SDF) window. Overall, we project that FTDs and money market rates will remain at current levels, with a likelihood of tapering. In the secondary market, we anticipate mixed sentiments as investors re-access market fundamentals.
Bond Market: Bond Yields Slightly Inched Higher at Secondary Market
Last week, the Debt Management Office (DMO) conducted the Sept-2024 bond auction with an offer size of N150.0bn across the reopened 2029, 2031 and 2033 bond papers. At the auction, investors’ demand was strong, as total subscriptions printed at N414.9bn, indicating an oversubscription rate of 2.8x. The bulk of the bids were skewed towards the longest tenor instrument, “2033”, which received total bids of N337.3bn. Notably, the DMO over-allotted the auction, selling a total of N264.5bn worth of bond papers. As a result, the marginal rates on the 2029s, 2031s and 2033s declined by 130bps, 91bps and 145bps to settle at 19.00%, 19.99% and 20.05%, respectively.
Meanwhile, the secondary bonds market was mildly bearish (fuelled by the 50bps hike in MPR), as the average bond yield climbed by 9bps to close at 18.75% (previously 18.66%). In tandem, corporate bonds traded on a bearish note, as the average yield on corporate bonds climbed by 12bps w/w to 21.61% (previously 21.49%).
However, in the Nigerian secondary Eurobonds market, we observed mild buy-interest amongst investors as cherry-picking activities continued. That said, the average yields in the market declined by 3bps w/w to settle at 9.57% (previously, 9.60%).
This week, we expect the mixed sentiment in the secondary bonds market. At the Eurobonds market, we expect sustained buy interests in the Nigerian Eurobonds market given the ongoing ease in global monetary policy.
Currency Market: Naira Appreciated at the NAFEM Window
Last week, the Naira appreciated by 0.4% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,540.78/$, from its previous close of N1,546.41/$. At the parallel market, the Naira depreciated by 0.9% w/w to settle at N1680.0/$, from its previous close of N1,665.0/$. Meanwhile, activities in the NAFEM window decreased, as average FX turnover rose by 30.8% w/w to settle at $248.3mn. Lastly, Nigeria’s external reserves rose by 1.02% w/w to settle at $37.8bn.
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.
