Expectations from the Markets This Week

Expectations from the Markets This Week – 300821

Global Economy

  • New economic data from Australia released earlier on in the week, showed that activity slowed in August.  According to the data, private-sector output is shrinking at a faster rate this month as the recent lockdowns introduced in parts of the country affect the economy. This pulled the IHS Markit Flash Australia Composite Output Index down to a 15-month low of 43.5 in August, from 45.2 in July. The purchasing managers’ index survey further showed that the service sector contracted more sharply, as the pandemic continued to dampen demand and output and some firms were forced to cut staff, as cases hit record levels.
  • The US Commerce Department on Thursday announced an upward revision of the second-quarter GDP growth from 6.5% to 6.6%, on the back of an increase in the readings of corporate profits. Corporate profits have allowed businesses to continue buying equipment and hiring workers keeping the economy on a solid growth path in the third quarter even as soaring coronavirus cases cool consumer spending. The economy grew at a 6.3% rate in Q1 2021 and has recouped the steep losses suffered during the two-month Covid-19 recession. The level of GDP is now 0.8pc higher than it was at its peak in the fourth quarter of 2019.
  • Following weeks of anticipation ahead of the Federal Reserve’s Jackson Hole Symposium, some US Analysts believe that the Fed may not provide clear details on the timing and the pace of a tapering of its asset purchase program at the Federal Reserve’s Jackson Hole Symposium. Some observers think the Fed may hold off due to ongoing concerns with the COVID-19 crisis and the delta variant. Mr Powell’s speech at Jackson Hole is scheduled to take place on Saturday morning.

Nigeria Economy

  • According to data from the National Bureau of Statistics, Nigeria’s real GDP grew by +5.01% in Q2 2021. The report which represents a major leap in the country’s GDP from +0.51% in Q12021 has been attributed by analysts to the low base in the corresponding period of 2020. Taken together, the economy has recorded a year-to-date growth of +2.7% which is 4.88 percentage points higher than the growth rate recorded in H1 2020.  The report further revealed that the oil sector of the economy contributed 7.42% to the Q2 2021 GDP, this represents a reduction of 183 basis points from the 9.25% in Q1 2021. Meanwhile, the service sector made the highest contribution to the GDP with about 55.66%, while the Agricultural sector contributed 23.78% and Industries contributed 20.57%.
  • The Director-General of the Budget Office, Alfred Okon stated at the presentation of the “Overview of FGN 2022 Budget Call Circular” report on Thursday that as of June 2021, the Federal Government’s retained revenue was N2.23tr, a figure which amounts to 67.3% of the pro-rata target of N3.3tr for the period. Total expenditure made in the period was 5.81tr which amounts to 92.4% of the target expenditure. According to the report, Debt service in the first half of the year amounted to   N2.02tr an equivalent of 35% of FG expenditures and 91% of revenue.
  • Details of the capital allocation as contained in the budget call circular signed by the Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, showed that the Ministry of Works and Housing was to get the highest allocation of N352.65bn. The N352.65bn represents about 20% of the entire N1.75tn capital allocation for MDAs in the 2022 budget. This is followed by the Ministry of Finance, Budget and National Planning with N158.07bn while Defence with N128.94bn, Transport with N12.6bn; Health with N108.29bn and Education with N100.75bn.
  • The unions of airport workers while addressing journalists in a press conference on Tuesday in Lagos, disclosed that the planned concession policy would be unfavourable to them. The General-Secretary for NUATE, Scheme Aba, who spoke on behalf of the union said that while the sharing ratio currently proposed is 60:40 in favour of the concessionaire, the disadvantaged FAAN is still made to bear the repayment of the $1bn loans utilised to build some terminals, continue to pay emoluments of its staff pensioners, return 25 % of its IGR to the government under the Fiscal Responsibility Act and maintain the remaining 18 airports in Nigeria.
  • According to CBN data, Nigeria’s external reserves could be heading toward the mid-July trough as it fails to sustain the momentum it started four weeks ago. The figures have been on a downtrend since August 11 after what appeared like a rally turned out to be a breather from the bearish trend of the past year. The reserves had risen from an over one-year low. Thereafter, a gradual but consistent accretion started, hitting an average of $33.45 billion on August 10 in a fleeting rally. The figure only managed to regain 1.5 % of its losses when it started a retracement on August 11.
  • The CBN’s Fourth Quarter 2020 Economic report showed that the apex bank recorded a shortfall of N378.5bn in loan repayment by beneficiaries under the Anchor Borrower’s program in six years. Since November 2015, when the ABP scheme was introduced and November 2020, the CBN executed a total of 2.3m projects under the program and disbursed N497.2bn to farmers. However, recent data showed that only N118.7bn had been repaid by the beneficiaries within the review period.
  • The national power grid collapsed for the second time in less than a month, worsening the blackout being experienced by households and businesses in some parts of Nigeria. The collapse, which occurred on Monday, was attributed to the loss of 611 megawatts at two power stations. Prior to the system collapse, total electricity generation in the country stood at 3,555.6MW as of 6 am on Monday, down from 3,789.2MW on Sunday, according to the Nigerian Electricity System Operator. The grid, which is being managed by the government-owned Transmission Company of Nigeria, has continued to suffer system collapse over the years amid a lack of spinning reserves.
  • According to data contained in a communique issued earlier in the week, the Federation Accounts Allocation Committee (FAAC) has shared a total of N760.717 billion total distributable revenue to the Federal Government which received N321.226 billion, the State Governments which received N222.514 billion, and the Local Government Councils which received N166.562 billion. The distributable revenue was sourced from distributable statutory revenue of N617.705 billion; distributable Value Added Tax (VAT) revenue of N140.555 billion and Exchange Gain of N2.457 billion.  According to the Communique, in July 2021, Petroleum Profit Tax (PPT), Companies Income Tax (CIT), Oil and Gas Royalties recorded significant decreases while Value Added Tax (VAT) Import and Excise Duty decreased marginally.

Summary and Outlook

The Nigerian Economy soared by 5.01% in Q2 2021 to exit its tepid growth but analysts consider the figure to be positive but not necessarily impressive because it is primarily attributed to the effect of the low base in Q2 2020 and Q3 2020 when the country recorded its worst contraction in 33 years. The Services sector led the quantum leap by contributing 55.66% to the country’s GDP in the period, a further breakdown of the Gross Domestic Product revealed that the oil sector contracted on account of the reduction in oil production over the period. Analysts have noted that with a half-year GDP growth of 2.7%, the country may be on track to achieve the IMF World Economic Outlook forecast of 2.5%. However, there are concerns as to how sustainable and job elastic the current growth is. The Monetary Policy Committee would be encouraged by the recent growth results as well as Inflation figures (which moderated to 17.38% in July) to further hold rates when it meets in September.

Commodities Market

Weekly Review and Outlook

Energy

Domestic

  • The Minister of State for Petroleum Resources, Timipre Sylvia, on Monday, said despite having a 206 trillion SCF of gas reserves and leading major countries, Nigeria’s per capita consumption of gas remains the lowest in the sub-Saharan African region.
  • The Department of Petroleum Resources on Monday faulted a claim by the Nigeria Customs Service that it was partly responsible for the continuous smuggling of subsidised Premium Motor Spirit (petrol) across the land borders.
  • The President of Nigeria and Minister of Petroleum, Muhammadu Buhari, announced on Thursday that the state-owned Corp, Nigerian National Petroleum Corporation (NNPC) had a profit after tax of N287Billion for FY2020, the first in 44 years of NNPC history. He noted that he has directed the NNPC to publish its audited financial statements for the year 2020.
  • NNPC and Kaduna State Government on Thursday signed a Memorandum of Understanding (MoU) for the utilisation and expansion of gas supply in the state.
  • Also on Thursday, the Director of Finance and Administration of Petroleum Product Pricing and Regulatory Agency (PPPRA) stated that the agency has no records of the volume of Premium Motor Spirit consumed daily in Nigeria.

Foreign

  • Oil prices rose on Monday, recovering from a seven-day losing band with support from a weaker dollar, while concern about surging cases of the Delta coronavirus variant led to cautious trading. Prices increased further on Tuesday as the U.S. drug regulator granted full approval to the Pfizer Inc/BioNTech SE COVID-19 vaccine, fueling hopes that higher fuel demand would follow U.S. coronavirus vaccination rates.
  • The U.S. Department of Energy on Monday said it would sell up to 20 million barrels of crude from the country’s Strategic Petroleum Reserve (SPR) in compliance with legislation passed in recent years.
  • US President Biden administration on Tuesday stated that it would take steps to restart the federal oil and gas leasing program in the forthcoming week and plans to hold a Gulf of Mexico auction as soon as October this year.
  • Oil prices increased on Friday, on track to post big gains for the week, on worries about supply disruptions as energy companies began shutting their operation in the Gulf of Mexico ahead of a potential hurricane forecast to hit on the weekend.
  • Brent had a weekly growth of 10.09% (see Table 1).

Metals

Gold appreciated by 1.76% while Silver also gained by 3.62% W-o-W (see Table 1).

Agriculture

  • Cocoa prices grew by 0.59% this week.
  •  Corn prices appreciated by 2.12% W-o-W while Sugar grew by 2.30% (see Table 1).

Table 1Weekly Change in Commodity Prices

Commodity27-Aug-2120-Aug-2131-Dec-20Weekly ChgYTD Chg
Brent72.4265.7851.810.09%39.81%
Gold1819.417881898.671.76%-4.18%
Silver24.03523.19526.40113.62%-8.96%
Cocoa2579256425970.59%-0.69%
Corn553.25541.754842.12%14.31%
Sugar20.0319.5815.282.30%31.09%

Source: CNBC

*Data for 27th August 2021 is as of 5:17pm (Nigerian Time)

Outlook

  • In the coming week, oil prices are expected rise as energy firms began shutting production in the U.S. Gulf of Mexico ahead of a major hurricane expected to hit early next week.
  • Gold prices are expected to be mixed in the coming week, pressured by the Federal Reserve’s Tapering policy and COVID-19 concerns in the market.
  • Cocoa prices to be choppy as the return of COVID around the world is expected to hurt demand.
  • Sugar prices are expected to continue its rally next week as the prospect of lower production in Centre-South Brazil is likely to shift the global market into deficit.
  • Corn prices are expected to be mixed next week as spreading virus fuels demand concerns.

 Fixed Income and Money Market  

Currency Market

The Naira depreciated against major currencies this week, both at the BDC market and I & E FX window which is majorly attributed to the scarcity of FX.

At the I & E FX window, the domestic currency depreciated by +0.08% on a week-on-week (W-o-W) basis to N412/US$ at the close of trading on Friday.

At the BDC market it closed at US$/N520 depreciating by +0.58% against the US dollar, against the British pound it also fell by +0.71% to close at Pound/N713, and against the Euro it appreciated by -0.16% to close at Euro/N606.

The Naira closed the week at $/N4112 at the I&E FX window, at the NAFEX (spot market) it closed at $/N411.25

Average Benchmark Yields
20-Aug-202127-Aug-2021% Change
I & E FX Window411.67412+0.08%
NAFEX ($/N)411.20411.25+0.01%
BDC ($/N)517520+0.58%

Source: FMDQ, AbokiFX

Money Market

Interbank rates fell this week, as liquidity levels was elevated causing rates to close in single digits.

At the close of the session on Friday, funding rates dipped significantly. Open Buyback (OBB) closed at 8.33% while Overnight (O/N) rates closed at 8.50% indicating a W-o-W decline of -64.29% for OBB and -64.33% for O/N rates.

Money Market Rate
 20-Aug-202127-Aug-2021% Change
OBB (%)23.338.33-64.29%
O/N (%)23.838.50-64.33%

Source: FMDQ

Funding rates are expected to trade in double digits trend in the coming week in the absence of any maturity.

Treasury Bills Market

The bills market was bearish this week, with average benchmark yields edging upward at the close of trading this week.

At the close of the market this week, average benchmark yields for T-bills rose by +5.61% to 4.95%, OMO bills was up by +1.53% W-o-W to close at 6.04%.

Average Benchmark Yields
20-Aug-202127-Aug-2021% Change
T. Bills (%)4.694.95+5.61%
OMO Bills (%)5.956.04+1.53%
SPEB5.66

Source: FMDQ

We expect activity next week to be dictated by the market liquidity situation. 

The CBN sold N307.33 billion worth of notes against N157.21 billion offered at its NTB auction this week. The 91-day, 182-day & 364-day notes were allotted at 2.50%, 3.50%, and 6.80% respectively. Compared to the previous auction, rates on the 91-day & 182-day were unchanged while the 364-day paper fell by 55bps.

Nigerian Capital Market

  • The Nigerian bourse closed the week on a positive note as performance was mildly bullish. The NGXASI closed the week with a growth of +0.01%. The Nigerian Stock Exchange gained N1.41bn, year-to-date return moderated to -1.95%, while the market capitalisation settled at N20.52 trillion.
  • The volume and value of stocks traded on the exchange this week advanced by +24.97% and +3.18% respectively.
  • Sectoral performance across sectors tracked was broadly positive this week as the NGX Insurance was the highest gainer for the week with +1.06% while NGX Consumer Goods closed negative with -0.43%. NGX Banking and NGX Oil & Gas closed with +0.08% respectively while NGX-IND declined by -0.19%.
  • Market breadth for the week closed flat with 35 gainers led by UPDC and MORISON as against 29 losers led by ABCTRANS and UNILEVER


Chart 1
: Movement of NSEASI Index Points 20 Aug. 2021 – 27 Aug. 2021

Proshare Nigeria Pvt. Ltd.

Source: NSE

NASD OTC  

The NASD OTC Security Index (NSI) and Market Capitalization closed the trading week with a positive movement in Market capitalization and NSI. The NSI and Market capitalization closed the week at 736.38 points and N736.07 with a growth of +0.04% and +0.04% respectively.

Dangote and Toni Index   

Dangote Index closed the week negative with 131.42 basis points from 131.46 basis points recorded the previous week, representing a decline of -0.03%.

 DANGCEM and DANGSUGAR closed flat W-o-W. NASCON  recorded a decline of -3.41%.

Table 1: Dangote Index W-o-W Change

Company20-Aug-2127-Aug-21WoW Chg
DANGCEM249.60249.600.00%
DANGSUGAR17.8517.850.00%
NASCON14.6514.15-3.40%
Source: NGX,  

Furthermore, the Toni Index closed positive with 98.53 basis points from 97.48 basis points recorded the previous week, a W-o-W growth of +1.08%.

AFRIPRUD, TRANSCOHOT, and UBCAP closed the week positive with +1.65%, +19.90%, and +4.06% respectively while TRANSCORP and UBA  closed negative with -5.15% and -0.66% respectively.

Table 2: Toni Index W-o-W Change

Company13-Aug-2120-Aug-21WoW Change
AFRIPRUD6.056.151.65%
TRANSCOHOT3.924.7019.90%
TRANSCORP0.970.92-5.15%
UBA7.557.50-0.66%
UBCAP6.897.174.06%
Source: NGX

Outlook 

In the coming week, we expect the market to remain relatively bullish given the attractive pricing of several stocks albeit with some profit taking. However, other macroeconomic developments are likely to impact investors’ decisions. Furthermore, we expect investors to monitor the movement of yields in the fixed income market.

About the Author

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First Ideas Limited is an investment and financial advisory company established in 1994 to provide advisory services to high net worth individuals, trust funds, financial institutions and medium sized companies in growth sectors.

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