Expectations from the Markets This Week – 04072
Global Economy
• China’s factory activity snapped three months of decline in June, as authorities lifted a strict lockdown in Shanghai, buoying growth in production and new orders, while a rebound in the services sector pressed on. Official manufacturing purchasing managers’ index (PMI) rose to 50.2 in June from 49.6 in May, the National Bureau of Statistics (NBS) said on Thursday. The official non-manufacturing PMI in June improved to 54.7 from 47.8 in May. The services industry had staged an impressive rebound, the fastest in 13 months, with sectors that were hard hit by COVID curbs catching up with previously depressed demand.
• Annual inflation in the eurozone rose to a fresh record high in June, climbing to 8.6%, according to a preliminary estimate from the EU’s statistics office on Friday. The increase, which is also up from the 8.1% May reading of the currency bloc’s key consumer price index, was driven by a spike in prices of energy and food
• According to data published by Germany’s Destatis on Thursday, Unemployment Rate in EU’s largest economy rose to 5.3% in June from 5% in May. The data came in worse than the market expectation of 5%. Meanwhile, German inflation unexpectedly cooled off in June at 8.2%, following government measures to dampen high fuel prices were introduced. In a bid to counter rising energy prices, the German government has cut fuel tax and introduced a ticket allowing travel across the country for 9 euros a month.
• According to the final reading of real GDP growth for Q1 2022 published by the Bureau of Economic Analysis (BEA), Real Gross Domestic Product (GDP) of the United States contracted at an annual rate of 1.6% in the first quarter. This print came in slightly worse than the previous estimate and the market expectation for a decrease of 1.5%.
Nigeria Economy
• Federal, state and local governments shared N680.78bn for the month of May 2022. Analysts worry about the decrease in federal allocations and the possibility of states being faced with fiscal challenges. In the corresponding period of 2021, the Federation Account Allocation Committee (FAAC) disbursed the sum of N696.36bn. Nigeria earns its biggest revenue from crude oil, but it has barely taken advantage of rising crude oil prices due to Oil theft and the large expenditure under the current subsidy regime.
• The Federal Government has concessioned the Onitsha Port. Speaking with journalist on Friday, the Minister of State for Transportation said the 30-year concession would help the Federal government generate N23bn, while the concessionaire would invest N4bn on upgrading the seaport. Meanwhile, in Calabar, following the berthing of a 190m long general cargo vessel at Calabar Port, the first in three years, the Port Manager- Mr Festus Olumati,, said the port was still viable and of economic benefit to the state and to Nigeria.
• Inventory of finished but unsold manufactured products reduced by 33.4% to N384.58 bn in 2021 from N577.61 bn recorded in 2020, signaling a 2021 recovery of the manufacturing sector in the aftermath of the COVID-19 pandemic. Available data obtained from the Manufacturers Association of Nigeria (MAN) shows that Unsold inventory in the Chemical and Pharmaceutical group declined by 29.4% in the Basic Metal, unsold inventory of Iron & Steel, and Fabricated Metal group increased by 26.4%. While, unsold inventory of Plastic product, increased by 27%.
• The Association of National Accountants of Nigeria, ANAN, has said that Africa is losing more than $50bn every year in illicit financial outflows as governments and multinational companies engage in fraudulent schemes aimed at avoiding tax payments to some of the world’s poorest countries, impeding development projects and denying poor people access to crucial services.
• In a recent report published by Afrinvest, a Lagos based investment firm, titled, ‘Afrinvest Insurance Sector Update Report 2022’, NAICOM was called upon to carry out an impact assessment of the current recapitalization programme on the sector. According to the report insurance penetration in 2021 (measured by Gross Premium Written, GPW, as a percentage of GDP) remained relatively unchanged at 0.3% when however, compared to South Africa (13.6%), Brazil (4.0%), Morocco (3.9%), India (3.8%), and Kenya (2.5%), leaves so much more to be desired.
• The wider usage of smartphone and the breadth of 4G coverage has been identified as the factors responsible for the recent growth in the nation’s data usage. According to the Nigerian Communication Commission (NCC), Data consumption grew from 205,880.4TB in December 2020 to 350,165.39TB in December 2021. Meanwhile, broadband penetration is estimated to be less than 50%. The Federal Government had under the National Broadband Plan 2020 to 2025 set a target of 70% penetration.
Review and Outlook
According to the Nigerian Customs, it has, since June 1, started the implementation of the N10 per litre excise duty levied on Sugar-Sweetened Beverages as contained in the 2021 Fiscal Act. Analysts predict that General government’s fiscal position would improve slightly on account of higher tax revenue (recall that the customs also recently introduced an import tax on used imported vehicle). But after rising for four consecutive months since February, inflation is expected to surge even further under the impact of the new levies especially as one can be sure that Manufacturers would make sure to pass on the added costs to consumers
Our outlook for H2 2022, is driven basically by US quantitative tightening which began in June, expected high energy and food prices, high shipping costs and disruptions to trade. Inflation is expected to reach 20% by December on account of sustained upward pressure on energy costs and higher domestic costs of borrowing. Growth would be supported by government spending, but Private sector productivity and household spending would record pull backs on account of high inflation.
Oil and Gas
Domestic
• The Nigerian Upstream Petroleum Regulatory Commission (NUPRC) on Wednesday awarded Petroleum Prospecting Licenses (PPLs) to successful 2020 marginal oil fields awardees across 57 fields. The awardees include Ardova Plc, Matrix Energy Ltd., Sun Trust Oil Company Limited, Petrogas Energy, Island Energy Ltd., and Sigmund Oil Field Ltd, among others. Since the inception of the marginal oil field award in 1999, a total of 30 fields had been awarded and only 17 are currently producing, attributable to industry issues. Analysts expect these issues to impede the production of the new fields.
• Nigeria’s Minister of State for Petroleum, Timipre Sylva, has said the country’s crude oil production will meet the OPEC quota for August as the country tighten up security in the oil industry. Since the OPEC production cut came into effect, Nigeria’s oil production has been impeded by vandalism and theft, consistently dragging down OPEC’s production capacity. Analysts expect the country’s oil production to remain well below its production target given the complexity of oil theft and the vested interests of elites in the criminal cartel.
• The CEO of the Nigeria Upstream Petroleum Regulatory Commission (NUPRC), at an LCCI Conference, disclosed that the country’s crude oil theft is estimated at a daily average of 108,000 barrels in 2022, up from an average of 103,000 barrels in 2021. This will suggest that the country is merely losing 7.2% of its daily production value, which averaged 1.491 mb/d (including condensates) in the first five months of 2022. Analysts believe the scale of oil theft in the country is much larger given that some terminals lose up to 90% of their oil to theft, a situation that has become a menace that threatens the fiscal operations of the government.
• The federal government through the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) has issued a warning to sanction any fuel stations or depots selling above the approved/regulated price.
• The CEO of NNPC limited, Mele Kyari, has stated that the country has sold over US$1bn worth of natural gas to Portugal in 2022, stating that there has been an age-long energy partnership between the two countries where Nigeria supplies 70% of energy imports to the European nation.
• Shell Group, in a statement issued on Thursday, disclosed that it has suspended the divestment of its interest in its Nigeria subsidiary – Shell Petroleum Development Company – pending the outcome of its appeal of the 2019 judgment against it at the Supreme Court.
• Oil marketers, on Thursday, warned that the nation could face severe petrol scarcity from next week if the Federal Government fails to pay the 12 months bridging claims being owed to operators in the downstream oil sector. The group under the aegis of the Independent Petroleum Marketers Association of Nigeria (IPMAN) also denied being paid N74bn by the Federal Government as bridging claims for the transportation of petroleum products.
Foreign
• Oil prices extended gains on Monday as investors stood on guard for any moves against Russian oil and gas exports that might come out of a meeting of leaders of the Group of Seven (G7) nations meeting in Germany.
• Leaders of the Group of Seven (G7) advanced nations at the just concluded Annual G7 Summit pushed for the acknowledgment of new financing for fossil energy investments. The group also agreed to explore the potential price caps on Russian oil and gas in a bid to limit Moscow’s ability to fund its invasion of Ukraine. The Italian Prime Minister, Mario Draghi, at the summit argued for investment in gas infrastructure in developing countries.
• Iran has applied to be a member of the BRICS group (BRICS means Brazil, Russia, India, China, and South Africa) of major emerging economies, a move analysts expect is intended to secure an alternative alliance to the Western alliance.
• OPEC+ on Thursday agreed to stick to its output strategy after two days of meetings. The cartel, which includes Russia, decided to increase output by 648,000 barrels per day (b/d) in August, up from a previous plan to add 432,000 b/d.
• US president, Joe Biden, is expected to make a three-day visit to Saudi Arabia, others in July to push energy policy into the spotlight as the US and other countries battle soaring fuel prices that are driving up inflation. However, President Biden on Thursday disclosed he would not directly press Saudi Arabia to increase oil production to curb rising crude prices.
• Oil prices fell on Friday, extending the previous day’s plunge, as lingering fears of a recession weighed on sentiment, putting the benchmarks on track for their third straight weekly losses.
• Brent had a weekly decline of -0.47% (see Table 1).
Metals
Gold dropped by -1.35% while Silver also dropped by -6.58% W-o-W (see Table 1).
Agriculture
• Cocoa prices dropped by -5.56% W-o-W.
• Corn prices dropped by -9.65% W-o-W while Sugar prices dipped by -1.31% (see Table 1).
Table 1: Commodity Prices
Commodity 01-Jul-22 24-Jun-22 31-Dec-21 Weekly Chg YTD Chg
Brent 111.82 112.35 78.54 -0.47% 42.37%
Gold 1804 1828.6 1827.1 -1.35% -1.26%
Silver 19.74 21.13 23.27 -6.58% -15.17%
Cocoa 2308 2444 2546 -5.56% -9.35%
Corn 608.25 673.25 595.5 -9.65% 2.14%
Sugar 18.08 18.32 18.83 -1.31% -3.98%
Source: CNBC
*Data for the 01st of July 2022 is as of 05: 47 pm (Nigerian Time)
Outlook
• In the coming week, oil prices are expected to drop as fears of global recession linger.
• Gold price is expected to rise in the coming week as G-7 members and European Union look to include the gold ban in the sanctions package on Russia which is a major producer and exporter of the bullion.
• Cocoa prices are expected to drop as major producers witness favorable weather conditions which could boost yield, thereby putting pressure on the price.
• Sugar prices are expected to drop in the coming week on reports as the highest producer, India, considers allowing exports of raw sugar.
• Corn prices are expected to drop as harvest in Brazil continues backing up the harvest of Wheat from the United States.
Fixed Income Market
Currency Market
In the currency market this week, Naira depreciated at both the Investor & Exporter FX and NAFEX windows for most of the trading sessions.
At the close of the week, Naira depreciated against the dollar by +1.16% (W-o-W) to N425.00 at the Investor and Exporter FX fixing.
Similarly, Naira depreciated by +0.51% (W-o-W) to N421.29 at the Nigerian Autonomous Foreign Exchange Fixing (NAFEX) at the end of the trading session on Thursday (see chart 2 below).
Table 2: Naira/Dollar at the I&E FX Window and NAFEX Market
Average Benchmark Yields
24-Jun-22 1-July-22 % Change
I&E FX 420.13 425.00 +1.16
03-Jun-22 30-Jun-22
NAFEX ($/N) 419.17 421.29 +0.51
Source: FMDQ
Money Market
The Funding rates sustained their double-digit trend this week as liquidity stayed depressed.
At the close of the trading session on Friday, the Open repo rate (OPR) and Overnight rate (O/N) remained unchanged at 14.00 (see chart 3 below).
Table 3: Money Market
Money Market Rate
24-Jun-22 01-July-22 % Change
OPR (%) 14.00 14.00 +0.00%
O/N (%) 14.00 14.00 +0.00%
Source: FMDQ
We expect the Funding rates to decline to a single digit in the coming week at the back of expected FAAC inflow.
Treasury Bills Market
The Nigerian Treasury bills market was mostly bearish during the trading sessions this week with investors’ attention skewed to the NTB auction.
At end of trading on Friday, the treasury bills and OMO bills market closed bearish with the average yield benchmark settling at 5.35. It grew by +14.81% (W-o-W) and +4.09% (W-o-W) respectively (See table 4 below).
Table 4: Treasury Bills Market
Average Benchmark Yields
24-Jun-22 01-July-22 % Change
T. Bills (%) 4.66 5.35 +14.81%
OMO Bills (%) 5.14 5.35 +4.09%
Source: FMDQ
We expect activity next week to be dictated by the market liquidity situation
Nigerian Treasury Bills Auction Result
On 29th, June 2022, the Debt Management Office (DMO) sold N197.65bn as against the N174.08 bn offered, indicating a 13.5% oversubscription. The rate on the 91-day, 182- day and 364-day were allotted at 2.40%, 3.79%, and 6.07 respectively. Comparing the rates to the previous auction, the rates on the 91-day declined by 9bps while the rate for 182-day and 364-day stayed unchanged. The bid-to-cover ratio measures dropped sharply to 1.66x compared to 5.12x at the last auction due to a higher amount offered at this auction (see table 5 below).
Table 5: Nigerian Treasury Bills Auction Result
Nigerian Treasury Bills Auction
Tenor Amount offered (N’bn) Total subscription (N’bn) Amount sold
(N’bn) Stop Rate
(%) Previous rate (%)
91-days 13.88 13.13 12.28 2.40 2.49
182-days 2.16 17.36 17.16 3.79 3.79
364-days 158.04 297.96 168.21 6.07 6.07
Source: Commercio papers
FGN Bond Market
The bond market traded relatively quiet this week with attention drawn to the NTB auction.
However, the bond market closed bearish at the close of the trading session on Friday with multiple selloffs across all tenors. The average benchmark yield grew by 41bps to 11.54 (See table 6 below).
Table 6: FGN Bonds Market
Average Benchmark Yields
24-Jun-22 01-July-22 % Change
Short Tenor 9.45 9.46 +0.11%
Mid Tenor 11.13 11.18 +0.45%
Long Tenor 12.63 12.68 +0.40%
Source: FMDQ
We expect activity to improve next week subject to any major inflow from Apex bank.
