Expectations from the market for the week ending – First Ideas Limited

Expectations from the market for the week ending

EXPECTATIONS FROM THE MARKET FOR THE WEEK -090522

Global Economy 

  • According to the US Department of Labor 428,000 jobs were added to the labor market during the month of April. The number of jobs added last month is the same as the revised figure for March, with the unemployment rate also remaining at 3.6%. Expectedly, average hourly pay was up 5.5% compared to a year before.  
  • The Federal Reserve raised the benchmark rate by a half-percentage point on Wednesday and signaling further large rate hikes to come. The increase in the Fed´s key short-term rate raised it to a range of 0.75% to 1%, the highest point since the pandemic struck two years ago. The Fed also announced that it will start reducing its huge $9 trillion balance sheet, made up mainly of Treasury and mortgage bonds.  
  • In a surprise move, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Wednesday unanimously decided to increase the repo rate by 40 basis points (bps). This was followed by a 50bps hike in the cash reserve ratio to 4.5%. This is the first repo rate hike since August 2018. The increase in the repo rate will lead to lending rates getting pushed up because 40% of the loans of commercial banks are linked to it.  
  • According to the National Statistical Office (NSO), the unemployment rate for Indians aged 15 years and above in urban areas slipped to 8.7% in October-December 2021 from 10.3% in the corresponding quarter, of last year. Joblessness was high in October-December in 2020 mainly due to the staggering impact of the lockdown restrictions in the country, which were imposed to curb the spread of the deadly coronavirus. The unemployment rate for persons of age 15 years and above in July-September 2021 was 9.8% in urban areas.

Nigeria Economy

  • Nigerian airline operators on Thursday issued a notice communicating the planned shutdown of operations with effect from Monday, 9th May, due to the high cost of aviation fuel which has hit N700 per liter. According to the Airline Operators, the unit cost per seat for a one-hour flight in Nigeria today is N120,000 on average.
  • According to data obtained from the Nigeria Inter-Bank Settlement System Plc portal, Nigerians made use of Point-of-Sale terminals 3.03 million times daily to process payments in the first two months of 2022 while the use of cheques dropped to a six-year low. The data shows that Nigerians used PoS services 178.99 million times in the first two months of 2022, a 25.59% increase from the 142.51 million times it was used in the corresponding period of 2021. 
  • The Federal Government through the Nigerian Electricity Regulatory Commission on Thursday officially released documents indicating the approved power tariff increase. The commission stated that the tariff hike was based on the extraordinary review of the Multi-Year Tariff Order, as it explained that the order took effect from January 1, 2022. 
  • Key players in the steel sector are worried about the level of steel imports into the country despite the planned refurbishment of the Ajaokuta Steel Company and the Aluminum Smelter Company, located in Akwa Ibom State. According to the National Bureau of Statistics, Nigeria still brought in large volumes of basic metals, iron, and steel products 6000mm in width, rolled, painted, varnished, and coated with plastics within the six-month period.
  • During a meeting between officials of the Ministry of Transportation and Council for the Regulation of Freight Forwarders and terminal operators in Lagos, the ministry issued a stern warning to APM terminals and other operators over non-compliance with trade policy. According to the officials, since the introduction of the policy on February 24, 2021, some terminal operators have failed to comply with the agreement reached, which has resulted in a loss of revenue to the country.

Review and Outlook 

The threatened shutdown of travels by the Airline Operators of Nigeria owing to rising cost of aviation fuel reflects the inflationary environment within which local businesses now have to operate. With rising prices, there is only so much of the hit that such airline operators can and would be willing to absorb. When they so decide to shift the inflation tax burden to customers, such operators record a slump in the number of passengers effectively making travels unprofitable. 

With the US federal funds rate up by 50basis points and more aggressive rate hikes in the works, the world’s largest economy may be headed for a Volker shock. The last time such aggressive rate hikes were conducted in the 1970s, the result was a decade-long depression. Next week, Inflation data will come in sharp focus, with April inflation figures from both the US and China due for release. Chinese trade data would also be released, while UK’s March GDP data and eurozone industrial production figures are also lined up for release next week.

Oil and Gas 

Domestic

  • Data released by the Nigerian National Petroleum Company Limited (NNPC) shows that Nigeria’s gas revenue outperformed its revenue from crude oil in the first quarter (Q1) of 2022, largely reflecting the huge crude oil theft and vandalism in the oil-producing regions than a rally in the gas market. Crude oil fetched the nation $177.86 million while revenue from gas feedstock to NLNG Limited stood at $387.72 million in the period. 
  • Operators in the Liquified Petroleum Gas (LPG) Industry have stated that NIGERIA needs investment in transportation and retailing infrastructure for LPG (popularly called cooking gas) worth $750m to achieve the target of five million metric tonnes of annual consumption. Analysts consider the investment justifiable only when the existing pipeline vandalism and sabotage are resolved. 
  • The Nigeria Upstream Petroleum Regulatory Commission (NUPRC) said it has set a June timeline for the issuance of Petroleum Prospecting Licenses (PPL) to the operators of the 54 marginal oil fields conducted in 2020. However, the regulator has not addressed the costs-related concerns raised by the operators. 
  • The Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) has reaffirmed its position that the Euro 4 Premium Motor Spirit (tagged 2017 Specification) will continue to be the benchmark for Nigeria’s PMS standard. Analysts believe such positions underscore the country’s reliance on foreign specialties. 
  • The Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC oil ministers, on Thursday, raised Nigeria’s oil quota to 1.772 mb/d for June from 1.753 mb/d for May 2022. This will further widen the crude oil underproduction gap in Nigeria.
  • A new World Bank report reveals that Nigeria and nine other countries accounted for 75% of global gas flaring in 2021, reflecting yet a relatively substantial volume of gas flaring in the country.

Foreign

  • Oil prices reversed course to settle in positive territory on Monday on a rally in the diesel market and fears that supply might be crimped by a potential European Union ban on Russian crude.
  • The European Commission President, Ursula von der Leyen, on Wednesday, announced some sanctions proposal that includes phasing out supplies of Russian crude in six months and refined products by the end of 2022. The proposal also intends to ban all shipping, brokerage, insurance, and financing services offered by EU companies for the transportation of Russian oil in a month. While the implementation of the proposal could further raise oil prices, it would need unanimous backing by the 27 EU countries to take effect.
  • The latest financial reports of International Oil Companies (IOCs) such as BP, ExxonMobil, Chevron, Total Energies, and Shell have shown robust earnings due largely to the soaring oil and natural gas prices. This will reassure investors of stable value from the fossil fuels markets in the near term. 
  • A U.S. Senate committee passed a bill on Thursday that could expose the Organization of the Petroleum Exporting Countries and partners (OPEC+) to lawsuits for coordinating supply cuts that boost crude oil prices.
  • OPEC has reaffirmed its decision for upward adjustment of the monthly crude oil production by 0.432 mb/d for June 2022. The slow output growth from OPEC will keep the oil market tight into June 2022.  
  • Oil prices climbed for a third straight session on Friday, shrugging off concerns about global economic growth as worries about tightening supplies underpinned prices ahead of an impending European Union embargo on Russian oil.
  • Brent had a weekly growth of +2.97% (see Table 1).

Metals

Gold dropped by -1.06% while Silver dipped by -2.65% W-o-W 

Agriculture

  • Cocoa prices dropped up by -3.30% W-o-W. 
  • Corn prices dipped by -4.38% W-o-W while Sugar prices inched up by +0.05% 

Outlook

  • In the coming week, oil prices are expected to grow as supply disruptions continues to push the prices up.
  • Gold price is expected to drop in the coming week after FED raised rates to curb inflation.
  • Cocoa prices are expected to drop as supply from Africa increases.
  • Sugar prices are expected to rise in the coming week as major exporter, Brazil, experiences drop in sugar cane crushing.
  • Corn prices are expected to rise as demand still outpaces supply.

Fixed Income Market

Currency Market 

At the close of the market this week, the naira traded in a mixed direction at the I & E FX window and the NAFEX window.   

The Naira ended the Friday trading session at N417/USD at the I & E FX window, indicating a week-on-week (W-on-W) depreciation of +0.48%, and closed at N417.42/USD at the Nigerian Autonomous Foreign Exchange Fixing (NAFEX) window, appreciating by -0.09% 

Money Market 

The Interbank rates edged higher this week supported by the system liquidity.  At the close of trading on Friday, the open repo rate (OPR) fell to 4.75% while the overnight rates (O/N) settled at 4.92%, indicating a W-o-W decline of -60.64% and -61.22% 

We expect the funding rates to trade in single digits in the coming week on the expected liquidity situation in the system. 

Treasury Bills Market

The bills market sustained its mixed performance this week, with the yield in treasury bills rising while the average benchmark yields for OMO bills fell at the close of trading on Friday.

At the close of trading on Friday, the average benchmark yield for T-bills edged up by +3.33% W-o-W to 3.72 while the OMO bills saw buying interest this week as yield fell by -3.68% W-o-W to 3.93.

We expect yields in the TB market to trade down in the coming week on the expected system liquidity.

FGN Bond Market

The local bond market was relatively bearish this week with selling interest seen at the mid to long end of the curve. 

At the close of trading on Friday, the overall average benchmark yield closed at 11.61%, rising by +0.69%.

Nigerian Capital Market

  • The Nigerian bourse ended the week on a positive note as market sentiment remained green.  The NGXASI closed the week with +2.61% as against +2.43% gain recorded last week. The Nigerian Exchange gained N698.74bn in naira terms. 
  • Year-to-date, the NGSAXI remained positive to close the week with+19.24% gain as the market capitalization settled at N27.46trn at the end of the week.
  • Sectoral performance across sectors tracked was bullish. At the close of trading on Thursday, NGX-Consumer Goods recorded the highest gain for the week with +7.21% as NGX-AFRHDYI, NGX-MERIGRW and NGX-LII also grew by +5.19%, +8.97%, +3.27% respectively while NGX-Growth recorded the highest loss for the week with -6.52%

NASD OTC

The NASD OTC Security Index (NSI) and Market Capitalization closed the trading week on a positive note.  The NSI and Market capitalization closed the week at 702.64 points and N923.88bn with growth of +1.33%   each respectively.

Dangote And Elumelu Index 

Dangote Index closed the week negative with 152.0 basis points from 152.03 basis points recorded the previous week, representing a decline of -0.02%

DANGSUGAR, DANGCEM closed flat WOW while NASCON recorded a decline of -3.08%

Furthermore, the Elumelu Index closed negative with 115.40 Basis points from 117.95 basis points recorded the previous week, representing a decline of -2.16% WoW

TRANSCOHOT, and  UBA closed the week negative with -9.09%, -2.42%   UBCAP  closed the week positive with +0.37% respectively while AFRIPRUD, TRANSCORP closed flat WoW.

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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