Image Credit: United Capital Research

February 3, 2025/United Capital  Research

Global Market Volatility: US Tech Concerns, European Rate Cuts, and Asia’s AI Competition Drove Mixed Performance
Investor optimism buoyed by US President Trump’s inauguration and the launch of the $500.00bn Stargate AI infrastructure venture drove the S&P 500 to a new all-time high in the previous week. However, last week, the AI rally faced volatility after the release of DeepSeek R1, a Chinese open-source AI model that rivals top US models like ChatGPT. The model’s development at a lower cost and with limited access to advanced chips raised concerns about the US’ technological lead, leading to a sharp market pullback. Stocks linked to AI infrastructure and semiconductor demand were hit hard. Volatility continued as tech earnings reports showed mixed results, with many companies highlighting AI’s potential to drive cost efficiency and adoption. Despite solid financial results, multinationals flagged challenges from a strong US dollar and weakness in Europe. Despite these fluctuations, the S&P 500 finished the week down by 1.00% w/w, with the Fed’s decision to hold rates steady in line with expectations, signaling a cautious but resilient economic outlook.

The latest economic data supported the Federal Open Market Committee’s (FOMC) decision to keep interest rates unchanged at 4.25 – 4.50% in its Wednesday meeting, following a cumulative 100 basis point reduction in 2024. Powell’s remarks were consistent with his December message, emphasizing a resilient economic outlook and the expectation that inflation would gradually return to the Fed’s 2.00% target. He reiterated that current interest rates remain restrictive, and while there is a bias towards further easing, the FOMC is not in a rush to act.

European indices outperformed last week, with the German Dax and Europe Stoxx 600 reaching new all-time highs. However, the economic backdrop remains weak, as recent GDP data (EU GDP grew 0.80% y/y in 2024) missed expectations and retail sales figures (EU retail sales rose by 1.2% y/y in Nov-2024) showed ongoing weakness. Germany’s Jan-2025 harmonized inflation released on Friday showed that inflation held at 2.80% y/y, while core inflation eased from to 3.30% y/y to 2.90% y/y, supporting the European Central Bank’s (ECB) decision to cut interest rates to 2.75% on Thursday, and keeping intact expectations of further interest rate cuts from the ECB.

In Asia, the Nikkei index in Japan ended the week down by 0.90%, with gains in financials and autos offsetting sharp declines in SoftBank and semiconductor stocks. The Japanese yen strengthened against the US dollar, driven by stronger-than-expected inflation data and a hawkish commentary from the Japanese Central Bank. In China and Hong Kong, markets initially responded positively to the DeepSeek headlines, particularly in Hong Kong on Monday, but local markets were closed when Alibaba released its Qwen AI model, which has been well-received. The week underscored the intensifying global AI competition, raising questions about the US’ dominant position in the sector. This dynamic highlighted significant valuation discrepancies between US and Chinese tech stocks. Meanwhile, Nvidia’s CEO, Jensen Huang met with President Trump amid speculation that the US government may further tighten restrictions on tech exports. Chinese ADRs traded higher throughout the week, with the FXI up by 1.80% and KWEB up by 2.40%, although both indices saw a pullback late in the week, driven by concerns over potential tariff escalations.

Energy markets traded lower in the week. Following a surge in the first two weeks of 2025, oil prices have reversed, giving up most of its gains. Brent crude was down by 2.20% w/w but up by 2.80% YTD. Oil futures have now pulled back to retest its 200-day moving average which could act as a support. However, the pullback in oil prices is easing inflation concerns in developed economies.

Trump’s 01-Feb tariffs on Mexico, Canada and China will set the tone for the week. This will be another busy earnings week, with a quarter of the companies in the S&P500 expected to report. The focus will be GOOGLE, UBER, ICE, and AMZN. The key economic data releases in the US will be ISM surveys and labor market data – JOLTS Job Openings and BLS Employment Report. They are expected to moderate following a strong Dec-2024 report. The Treasury Refunding announcement on Monday will also get attention. In energy markets, the OPEC+ Joint Ministerial Meeting will be crucially watched. There will be more Central Bank Interest Rate Decisions, this time from the UK BoE, Banco de Mexico, and the Central Bank of India.

Macroeconomic Highlights
The Nigerian Communications Commission (NCC) and telecommunications companies has ruled out any extension to the deadline for banks to settle their Unstructured Supplementary Service Data (USSD) debts, leaving defaulting lenders scrambling to meet the deadline by close of business on 27-Jan-2024.

According to the National Insurance Commission (NAICOM), total assets in the insurance sector expanded by 5.15% to N3.88tn at the end of Q3-2024 compared to N3.69tn reported in the previous quarter. In terms of assets for the Q3, the report revealed that the non-life business accounted for a majority of the assets at N2.34tn, while the life business’ assets stood at N1.54tn.

President Bola Ahmed Tinubu has secured a $1.10bn fund from the African Development Bank (AfDB) for the provision of electricity for 5 million people by the end of 2026. He also stated that the AfDB’s $200.00mn in the Nigeria Electrification Project will provide electricity for 500,000 people by the end of 2025.

According to the Governor of the Central Bank of Nigeria, Olayemi Cardoso, the Federal Government has cleared the outstanding $7.00bn foreign exchange backlog to various firms following a successful verification exercise by forensic auditors. He also added that, the CBN is looking at the Unverified claims and are at the final stages of separating what qualifies as fully verified, and we will surely be paying out those money that have been verified by the forensic auditors.

The Nigerian National Petroleum Company Limited (NNPCL) has flagged off the construction of five mini–Liquefied Natural Gas (LNG) plants in Ajaokuta, Kogi State, as part of its commitment to driving the country’s gas revolution. This initiative, is expected to boost energy access, support industrialisation, and create job opportunities.

The Federal Government has unveiled an ambitious energy access programme to transform Nigeria’s energy sector. The programme will require $23.20bn, out of which $15.50bn will be provided by the private sector.  These funds will be directed toward expanding power generation, strengthening transmission and distribution networks, and integrating distributed renewable energy solutions.

This week, we expect the macroeconomic environment to be relatively quiet in the absence of any major economic data releases.

Domestic Equities: The Bulls Maintained Momentum…NGX-ASI Up by 0.87% w/w
Last week, the domestic equities market closed on a positive note as the bulls dominated the market despite the bears operating in the background. Investors’ appetites in the market have been sustained by the mid-long-term opportunities present in the market. Notably, share price appreciation in NESTLE (+11.43% w/w) was sufficient to lift the main index higher. Also worthy of mention are gains in STANBIC (+8.15% w/w) and NB (+15.48% w/w). As a result, the benchmark NGX-ASI improved by 87bps to close at 104,496.12 points, bringing the YTD return to a steady 1.53% and raising market capitalization to N64.71tn. In terms of trading, market activity was mixed as the average value of stocks declined 18.29% to print at N12.85bn. Meanwhile, the volume of stocks traded rose by 3.60% w/w to settle at 648.93mn units, respectively. As measured by the market breadth, investors’ sentiments improved to 1.18x (previously, 1.00x) as 52 stocks appreciated while 44 depreciated.

Meanwhile, on a sectorial level, performance was mainly bullish as three (3) sectors under our coverage closed in the green territory. The Consumer goods sector (+4.01% w/w) led the gainer due to buy interests in NESTLE (+11.43% w/w) and NB (+15.48 w/w). Following was the Banking sector (+2.54% w/w) on account of gains in UBA (+2.54% w/w) and ZENITHBA (+2.02%). The Oil & Gas sector (+0.97% w/w) climbed owing to share price appreciation in ETERNA (+0.36% w/w). On the flip side, the Insurance sector (-2.86% w/w) led the laggards on the back of selloffs in AIICO (-10.00% w/w) and VERITASK (-29.68% w/w). Lastly, the Industrial Goods sector declined by (-0.52% w/w) due to losses in DANGCEM (-1.50% w/w) and CUTIX (-8.15% w/w).

On corporate actions, Sterling Financial Holdings Company released their Q4 unaudited financial statement for the period ended 31-Dec-2024, announcing a profit before tax (PBT) of N44.75bn and a profit after tax (PAT) of N37.52bn.

FBN Holding Plc released their Q4 unaudited financial statement for the period ended 31-Dec-2024. announcing a profit before tax (PBT) of N251.51bn and a profit after tax (PAT) of N210.46bn.

Eterna Plc released their Q4 unaudited financial statement for the period ended 31-Dec-2024, announcing a profit before Tax (PBT) of N4.86bn and a profit after tax (PAT) of N3.23bn.

Looking forward, the equities market is expected to maintain its positive momentum as investors continue to position themselves ahead of the FY-2024 earnings season and possible corporate action declarations. Nevertheless, given the elevated interest rate environment in the fixed-income market, we still expect bearish sentiments to linger in the background.

Money Market: System Liquidity Remained Elevated
Last week, the financial system opened with a surplus balance of N401.95bn, particularly sponsored by heightened activities at the CBN’s Standing Deposit Facility (SDF) window. The status quo remained the same throughout the week, as the financial system liquidity was bolstered further by inflows from OMO maturities (N330.00bn) and residues from FAAC payments. Reflective of the elevated liquidity status of the financial system, funding rates between banks tapered. For further background, the weekly average of funding rates between banks trended lower, with the weekly average of the Open Repo Rate (OPR) and Overnight Rate (OVN) falling by 285bps w/w and 305bps w/w to record at 27.15% and 27.65% (previously, 30.00% and 30.70%), respectively. Finally, there was no activity from the CBN at the primary market, hence the financial system wrapped up the week in surplus, closing with a balance of N721.33bn.

However, the secondary market for NT-bills, we observed persistent bullish sentiments, underpinned by the liquid financial system and fuelled by the dovish outlook for yields in H1-2025. That said, the average yield on NT-bills tapered by 140bps w/w to close the week at 23.43% (previously, 24.83%). Similarly, we saw buy interests at the secondary OMO segment with the average yield on OMO bills tapering by 48bps w/w to settle at 27.55% (previously, 28.03%).

This week, we expect the financial system to remain in surplus, as activities at the CBN Standing Deposit Facility window remains heightened. The downside to this projection will be a possible mop up activity by the CBN via OMO auction. Overall, the expected system liquidity will look to spur further buy-interests for NT-bills at both primary and secondary market levels. We maintain a dovish outlook for short-term rates in H1-2025, particularly sponsored by a normalisation of the yield curve. Ultimately, funding rates between banks, FTD and money market rates will remain greatly influenced by the liquidity level of the financial system at every point in time.

Bond Market: Mixed Sentiments 
Last week, the DMO conducted January’s bond auction with total offering of N450.00bn, across the 2029s (N100.00bn), 2031s, (N150.00bn) and 2035s (N200.00bn). The auction was met with decent demand, with total bids amounting to N669.94bn, implying a bid-to-cover ratio of 1.49x. The CBN opted to oversell the auction, selling papers to the tune of N606.46bn. Ultimately, marginal rates on the papers printed at 21.79%, 22.50% and 22.60% respectively.

Meanwhile, at the secondary bonds market, investors sentiment was marginally bullish as unmet bids at PMA sought fulfilment. That said, the average bond yields in the secondary market marginally fell by 3bps to close at 20.69% (previously, 20.72%). Conversely, activities were bearish in the corporate bonds market, as the average yield on corporate bonds climbed by 14bps to settle at 23.72% (previously, 23.58%).

At the Nigerian secondary Eurobonds market, we observed bullish sentiments underpinned by the premium offered (relative to SSA Economies). That said, average yields on Eurobonds in the secondary market tapered by 10bps w/w to settle at 9.32% (previously 9.42%).

Looking forward, we expect the cautious trend in the bonds market to persist as investors remain attracted to the elevated rates at the shorter end of the yield curve. This situation is expected to persist given the inverted yield curve. Meanwhile, we expect continued mixed sentiments in the Nigerian Eurobonds market as investors look to create a balance between high quality assets and high-premium yielding assets.

Currency Market: Naira Appreciated at the Official Market
Last week, the Naira appreciated by 359bps w/w at the official market to close at N1,478.22/$, from its previous close of N1,533.26/$. The broad appreciation of the NAFEM was particularly influenced by increased FCY liquidity in the banks, following the CBN’s FX swaps settlement (amount not specified). Meanwhile, the Naira appreciated by 241bps w/w at the parallel market to settle at N1,620.0/$ from its previous close of N1,660.0/$. Lastly, Nigeria’s external reserves fell by 55bps to settle at $39.772bn (previously, $39.991bn).

This week, we expect the recent stability of the Naira to be sustained in the short term, following improved FX supply and weaker FX demand. The successful $2.20bn Eurobond issuance signals a positive improvement in investors’ confidence in the Nigerian economy, particularly helped by recent economic reforms. Also, the ongoing normalization of monetary policy in key advanced economies which signals that borrowing costs in the International Capital Markets (ICM) will continue to taper into 2025, provides additional support for FX supply via increased external borrowings in 2025. Additionally, the recent improvement in FCY liquidity of financial institutions will look to preserve the Naira’s strength around current level. However, the country’s crude oil production output must improve significantly (to at least 2.06mbpd, which is FG’s 2025 budget assumption) to provide the required buffer for the Naira’s value to remain strong below FG’s 2025 budget projection range of N1,500/$ – N1,700/$. Overall, in the long-run, the stability and consistent growth of the country’s crude oil output will play a key role in the Naira’s sustained appreciation below the N1,500/$ mark.