Image Credit: United Capital Research
December 2, 2024/United Capital Research
Global Markets: Positive Momentum Dominate the Market
Last week, the global equities market mainly closed on a positive note following economic data releases amid rising geopolitical tensions. In the US, the upside bias was fueled by “buy-the-dip interest” following last week’s consolidation, which saw major indices give back some of their post-election gains. Strength in mega-cap stocks and semiconductor-related names contributed to overall index gains. However, Alphabet was among the outliers after news that the Department of Justice (DOJ) is pushing for a forced sale of Chrome and potentially Android. Subsequent reports indicated that Microsoft-backed and ChatGPT owner OpenAI is considering developing its own browser, which would represent a viable competitive threat to Google. Meanwhile, the stock market had opened the week cautiously, reacting to rising geopolitical tensions. There were reports that President Putin had lowered Russia’s threshold for using nuclear weapons, that Ukraine had launched US-made missiles into Russia, and that Russian Foreign Minister Lavrov had called the attack on Russia an “escalation signal.” Nevertheless, the market was triggered positively by the nomination of Scott Bessent as US Treasury Secretary, which provided markets with a sense of stability and eased concerns over potential drastic policy shifts under the incoming Trump administration. As a result, the US indices closed on a positive note, with the NASDAQ (+1.13% w/w), DIJA (+1.39% w/w), and S&P 500 (+1.06% w/w) closing the week higher. Notably, for the month of November, the S&P 500 gained 5.60%, its best month of the year. Similarly, the Dow Jones surged by 7.50%, its best month of the year; and the Nasdaq rose by 4.90%. These gains reflect an optimism that a second Trump administration will adopt a more business-friendly approach, with growing expectations that the President-elect’s Treasury secretary will help temper tariffs.
In tandem, the European markets recorded w/w gains as traders digested the latest inflation reading for the Euro Area and what it means for the European Central Bank’s (ECB) plans. The annual inflation rate in the Eurozone rose for a second month to 2.30% y/y in Nov-2024 from the 2.00% y/y recorded in the prior month, matching market expectations. Meanwhile, core inflation, which excludes volatile food, energy, alcohol, and tobacco prices, remained unchanged at 2.70%. Also, services inflation ticked lower but remained elevated at 4.90%. The data did little to change bets for another ECB cut next month, although the size of the reduction remains uncertain amongst market participants. Consequently, Germany’s DAX (+1.57% w/w), Europe’s STOXX (+0.35% w/w), and UK’s FTSE (+0.31% w/w) edged higher. Meanwhile, France’s CAC (-0.27% w/w) tapered.
Investors’ sentiments in the Asian market were mixed as we saw gains in China, while the Japanese market was bearish. Chinese stocks rallied, with the Shanghai Composite climbing by 1.81 w/w. The rally was driven by expectations that Beijing will introduce additional stimulus measures during key policy meetings next month to address ongoing economic challenges. Data showed that industrial profits in China fell by 4.30% y/y in Oct-2024, a deeper drop than the 3.50% y/y decline in Sep-2024. This reflected weak demand, deflationary pressures, and continued weakness in the property sector. Markets are also betting that Beijing will take action to offset the potential impact of fresh US tariffs under the incoming Trump administration. Elsewhere in Japan, the NIKKEI lost 0.20% w/w as investors reacted to data showing Tokyo’s inflation accelerated above 2.00% in November, reinforcing expectations for another interest rate hike by the Bank of Japan in December. Markets are now pricing a roughly 60.00% chance of a 25bps rate hike next month, up from about 50.00% just a week ago. Tokyo’s inflation data is often seen as a leading indicator for national price trends, with nationwide CPI figures typically following in about three weeks. However, the national CPI for November will not be released until after the BOJ’s December monetary policy meeting.
In the oil market, crude oil prices were pressured as traders weighed a ceasefire deal between Israel and Hezbollah (which will reduce the risk premium on crude oil). Also, an unexpected drawdown in US oil inventories weighed on oil futures. As a result, oil prices closed lower, with Brent Crude falling by 297bps w/w to print at $72.94/bbl (previously $75.17/bbl). Similarly, the WTI Crude oil prices tapered by -4.54% w/w to $68.00/bbl (previously, $71.24/bbl).
This week in the United States, the spotlight will be on the Nov-2024 jobs report and speeches from Federal Reserve officials, including the Chair Jerome Powell. Market attention will also be focused on JOLT’s job openings, ISM Manufacturing and Services PMI data, and foreign trade figures. Elsewhere, unemployment and Q3-2024 growth rates for the Euro Area, alongside PMI numbers, will be released. In China, all eyes will be on the official and Caixin PMIs for the first set of indicators covering November. The figures are expected to show that recent monetary support and fiscal stimulus pledges supported Asia’s largest economy with some traction, both for domestically-focused and export-oriented sectors.
Macroeconomic Highlights
Last week, in its Nov-2024 meeting, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) raised its interest rate, increasing it by 25bps from 27.25% to 27.50%, in a bid to curb the rising inflation in the country. Meanwhile, the MPC decided to retain the Cash Reserve Ratio (CRR) at 50.00% for Deposit Money Banks and 16.00% for Merchant Banks. The Liquidity Ratio (LR) remains unchanged at 30.00%, alongside the Asymmetric Corridor, which stays at +500/-100 basis points around the Monetary Policy Rate (MPR).
There were crucial economic data releases in the week. Importantly, Nigeria’s economy recorded a 3.46% y/y growth in Gross Domestic Product (GDP) in Q3-2024. The growth represents an improvement over the 2.54% recorded in the same period of 2023 and a slight rise from 3.19% in the preceding quarter. The growth was largely driven by the oil sector, as well as continued expansion in non-oil activities, particularly services and agriculture.
Also, Nigeria’s unemployment rate declined to 4.30% in Q2-2024, signalling improved labour market conditions. This marked a decrease from the 5.30% recorded in Q1-2024 and reflected a gradual recovery from the 5.00% in Q3-2023. The Labour Force Participation Rate rose to 79.50%, up from 77.30% in the previous quarter, highlighting increased workforce engagement. The Employment-to-Population Ratio also showed significant improvement, climbing to 76.10% in Q2-2024 from 73.20% in Q1-2024.
On the oil sector, the Port Harcourt Refinery Company has finally commenced fuel production, after seven postponements, promising a daily supply of about 200 trucks, about one million litres of refined products were released by the plant on Tuesday. The refinery is currently operating at a refining capacity of 70.00% of its installed capacity. Meanwhile, the bigger refinery in the Eleme complex that houses the plants, with a 150,000-capacity is yet to be completed.
Finally, in the Banking sector, the CBN has issued fresh guidelines for interbank foreign exchange trading via the Electronic Foreign Exchange Matching System (EFEMS), mandating a minimum trade value of $100,000, with incremental clip sizes of $50,000. The EFEMS is also limited to spot FX transactions involving the Nigerian Naira and the United States Dollar.
This week, we expect the National Bureau of Statistics (NBS) to release the crucial Foreign Trade in Goods Statistics for Q3-2024. However, economic and financial market stakeholders will be looking forward to the all-important Inflation Report for Nov-2024, which is scheduled for release in 2 weeks.
Domestic Equities: The Bears Regained Momentum…NGX-ASI Down by 0.33% w/w
Last week, the domestic equities market closed on a negative note, as bearish sentiments drove losses for three (3) out of five (5) trading days. A notable underperformer was large cap stock SEPLAT, which saw a significant loss of (-6.02% w/w), playing a key role in dragging the main index lower. Bargain-hunting activities declined with the market’s breadth declining to 0.9x implying that 54 stocks appreciated while 62 declined, down from 1.7x the week before. Overall, Investor optimism toward riskier assets remained resilient, though bargain-hunting activities have noticeably tapered. This narrowing of market breadth suggests that while enthusiasm for higher-risk assets persist, investor selectivity is rising, with a keener focus on quality and potential returns. As a result, the benchmark NGX-ASI declined by 33bps to close at 97,506.87 points, bringing the YTD return to a steady 30.40% and lowering market capitalization to N59.11tn. In terms of trading, market activity was improved with the total value and volume of stocks traded improving by 53.00% and 63.62% to print at N10.97bn and 638.81mn units, respectively.
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 Oil and Gas sector (-1.93% w/w) led the laggards owing to loss in SEPLAT (-6.02% w/w) and ETERNA (-16.13% w/w). Following was the Consumer Goods sector (-0.38% w/w) on the back of share price depreciation in UNILEVER (-9.97%) and NB (-5.26%). The Banking sector (-0.28% w/w) followed on the back of sell offs in FIDELITY (-4.37% w/w) and WEMABANK (-1.13% w/w). On the other side of the coin, the Insurance sector (+1.23% w/w) led the gainers on the back of share price appreciation in SUNUASSU (+23.42% w/w) and SOVRENIN (+15.87% w/w). The Industrial Goods sector (+0.62% w/w) followed on the back of gains in WAPCO (+7.41%).
On corporate actions, Access Bank Plc has completed the acquisition of Standard Chartered Bank Angola S.A and Standard Chartered Bank [Sierra Leone] Limited.
Looking forward, the equities market is expected to retain its buy interest as investors cherry-pick undervalued stocks. However, given the high interest rates in the fixed income and money markets, we expect some bearish undertone to persist in the equities market as fixed income biased investors take advantage of the high yields in the fixed income space. Nevertheless, 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 entertain mid-long-term (≥3 months) investment objectives, cherry-picking only sound equities with strong fundamentals and ongoing/pending corporate actions. This strategy will maximise market opportunities, thereby optimising portfolio returns.
Money Market: Bearish Sentiments at Secondary Market
Last week, the financial system opened with a deficit balance of -N269.71bn. The deficit situation of the financial system was largely due to the banks’ exposure at the CBN’s Standing Lending Facility (SLF) window. Owing to the scarce inflow into the financial system, the system remained in deficit. Also, there were no primary market auctions (outflows). Ultimately, given the scarce inflows/outflows in the system, as well as sustained activities at the SLF window (to meet short-term obligations), the financial system closed the week in a deficit position of -N237.03bn, not far apart from its opening balance.
Importantly, the CBN concluded its 298th MPC meeting, unanimously hiking MPR by another +25bps to 27.50%, leaving all other parameters constant. As a result, funding rates between banks remained elevated. For context, the average Open Repo Rate (OPR) and Overnight Rate (OVN) remained elevated closing the week at 29.25% and 29.71% (previously, 29.29% and 29.88%) respectively.
In the secondary NT-bills market, we observed bearish sentiments, particularly due to the hawkish monetary policy environment, as well as the deficit financial system. Hence, the average yield across NT-bills climbed by 113bps w/w to close at 25.16% (previously, 24.03%).
This week, barring any significant inflows from unexpected sources, we expect the current deficit situation to persist, thus encouraging an elevated interest rate environment, particularly between the banks. The CBN’s hawkish monetary policy will also fuel bearish sentiments at the secondary market for NT-bills. However, we expect the mid-long-term outlook for FTD rates around current level, as the banks remain cautious of expensive liabilities.
Bonds Market: Mild Bearish Sentiments
The secondary bonds market experienced a bearish trend, driven primarily by a combination of the 25bps hike in the MPR and prevailing liquidity constraints in the financial system. However, the bearish tone was mild. Thus, the average bond yield inched up by 6bps to close at 19.46% (previously 19.40%). At the corporate bonds market, we observed similar sentiments, with average yields in that segment climbing by 18bps to settle at 23.11% (previously, 22.93%).
In the Nigerian secondary Eurobonds market, given the attractiveness of the premium yields on Nigerian Eurobonds, we saw mild buy-interests, partly from re-investments of the $105.94mn coupon payment that was received last week. Thus, the average yields in the market fell by 4bps w/w to settle at 9.66% (previously 9.70%).
Looking ahead, we anticipate subdued activity in the market for duration-sensitive instruments, influenced by the inverted yield curve, which has made short-term instruments more attractive due to their higher yields. The recent +25bps MPR hike as well as the deficit financial system will continue to set a bearish undertone. Meanwhile, the attractiveness of the premium yields presented by SSA Eurobonds (incl. Nigerian Eurobonds) will sustain buy-interests in the Nigerian Eurobonds market.
Currency Market: Naira Depreciated at the NAFEM Window
Last week, the Naira depreciated by 1.21% w/w at the Nigerian Autonomous Foreign Exchange Market (NAFEM) to close at N1,672.69/$, from its previous close of N1,652.62/$. Meanwhile, the Naira depreciated by 1.53% w/w at the parallel market to settle at N1728.00/$, from its previous close of N1755.00/$. Lastly, Nigeria’s external reserves rose by 1.94% w/w to settle at $40.24bn.
This week, we expect continued pressure on the Naira across all market segments in the short-medium-term, given that Dollar earnings remain weak amid rising demand. The recent upward trend in the nation’s reserves increases the likelihood for a possible intervention to support the currency toward the 2025 budget projection of N1,400/$. Also, the anticipated $2.2bn external borrowing from Eurobonds and SUKUK will provide extra buffer for the Naira’s stability and strength in the short-mid-term. In the long-run, the stability and consistent growth of the country’s crude oil output will play a key role in the Naira’s appreciation.
