Expectations from the markets this week – First Ideas Limited

Expectations from the markets this week

Expectations from the Markets This Week – 11072
Global Economy
• Statistics Canada reported on Friday that Canada’s unemployment rate fell to a record low, as wage gains accelerated all under the impact of policy tightening. The economy lost 43,200 jobs in June; an unexpected negative reading compared to the 22,500-gain anticipated by economists. Analysts however believe that the drop reflects the voluntary exit of workers from the labor force.

• Data from the Bureau of Labor Statistics released on Friday showed that the US economy added 372,000 jobs in June. Non-farm payrolls fell more gently than expected while the jobless rate held steady at 3.6%. Strong labour demand ensured another month of jobs gains, giving the Federal Reserve more reasons to continue raising interest rates to address inflation. Economists had projected a non-farm payroll of 265,000.

• The International Monetary Fund (IMF) visited Ghana earlier in the week to negotiate the possibility of a bailout loan. The West African country has been experiencing declining reserves and a Balance of Payment crisis, a situation which officials have attributed to a grim global economy. Statistics indicate the country’s debt-to-GDP ratio was 80.1% at the end of last year, and fuel prices have shot up as a result of the Russia-Ukraine war. The visit, which will run till July 13th, would see Ghana request for a $1.5bn loan from the multi-lateral organization.

• GlobalData, a leading data, and analytics company, revised down its 2022 growth forecast for the Asia-Pacific (APAC) regional economy from +4.7% in February to +3.9% in June. The downward review is associated with China’s slowing economic growth rate which is expected to decline from 7.8% in 2021 to 4.1% in 2022. According to Global Data’s June 2022 forecast, India (6.8%) will be the fastest-growing economy in the APAC region, followed by the Philippines (6.7%) Malaysia (6.5%), and Indonesia (5.3%) in 2022. Also, Thailand, Taiwan, South Korea, and Japan’s economies are set to witness a slow growth rate of 3.4%, 3.3%, 2.7%, and 1.7%, respectively.

Nigeria Economy
• In line with the revised National Integrated Infrastructure Master Plan, the Federal Government is looking to increase capital stock as a proportion of GDP from 30-35% (as of 2020) to 70% by 2043. According to the Minister of State for Budget and National Planning, the country requires $150bn yearly to close its yawning infrastructure gap.

• According to Head of Public Communications, BPE, Ibeh Chidi the process of privatizing five National Integrated Power Projects has reached the pre-qualification stage. The National Integrated Power Projects include Geregu, Omotosho, Olorunsogo, Calabar, and Benin-Ihovbor. Following the just concluded pre-bid conference there would be the evaluation of tenders and afterward negotiation with the top-ranked bidder.

• Following serial default on the part of Kano, Benin, and Kaduna Distribution companies, a consortium of lenders including AFREXIM, Keystone, StanbicIBTC, and Fidelity Banks have decided to invoke the collateralized shares held in the Discos, thereby taking over the boards of the three companies. In a Press release made available on its website, the Bureau of Public Enterprises (BPE) has also nominated Directors to represent the Government’s 40% stake in the DISCOs.

• Recent data from the National Bureau of Statistics (NBS) shows that Revenue generated from Company Income Tax (CIT) rose by 35.6% Y-o-Y to N532.48 billion in the first quarter from N392.7 bn in Q1 2021. This has been attributed to post-Covid economic recovery as well as efforts by the federal government to increase tax revenue from the non-oil sector after the signing of the Finance Act 2021 in December 2022.

• U.S. Ambassador to Nigeria Mary Beth Leonard on Monday disclosed the European Union’s (EU) plan to provide Nigeria with 1.29 bn euros ($1.3 bn) to help the country diversify its exports away from oil. A document from the EU showed that the funding will be provided until 2027. The deal would be focused on enhancing access to renewable energy and boosting the development of the agricultural sector.

Review and Outlook
Nigeria’s electricity value chain came into focus during the week, following the decision of a consortium of lenders to take over the board of 3 Distribution companies in whom they had held collateralized shares. While the regulator has expressed readiness to restructure the other DISCOs to forestall insolvency, this episode once again brings to fore the faults in the privatization process that produced the current operators in the distribution link of the electricity value chain. Since privatization, illiquidity has been a throbbing headache plaguing the Discos, threatening the entire sector and often requiring the intervention of the Central Bank. Future privatization processes must select reputable companies with the financial grit to invest in the sector.

On the global scene, the resignation of Rishi Sunak former Chancellor of the UK Exchequer, a precursor to the eventual resignation of Boris Johnson UK Prime Minister, generated a lot of comments on the state of the UK economy. With the fears of recession being rife and inflation expected to reach double figures by autumn, the former Chancellor is adjudged by many to have failed. Next week, GDP data for the UK would be released giving further insight into the state of the world’s fifth-largest economy. Also, next week, the GDP figures of China and Singapore would be released. Industrial production data for Japan, Eurozone, India, China, and the UK will also be available as a leading indicator of growth.

Oil and Gas

Domestic
• The federal government through the Minister of Information, Lai Mohammed, has said it is not right for Nigeria to remove the costly petrol subsidy now, arguing that many nations have introduced measures to help citizens cope with high energy prices. Analysts believe that whereas the removal of subsidies on petrol would provide modest support for the economy, the commonplace lack of transparency and accountability on the part of the government in the use of public funds would create a much bigger problem.
• Oil marketers under the aegis of the Independent Petroleum Marketers Association of Nigeria (IPMAN) South-West Branch have asked the NNPC and private depots to retain petrol price at the approved ex-depot price of N148 per litre for oil marketers to maintain the pump price at N165 per litre. Analysts envisaged that the inactions of the regulator in providing a lasting solution to the concerns of operators around the hike in ex-depot prices will foster frequent hikes in pump prices above the regulated price and severe scarcity in some extreme sakes.
• The Nigerian National Petroleum Company Limited (NNPC) and WAGL Energy Limited have expressed their intent to develop and construct jetties across West Africa to increase the supply and penetration of LPG (cooking gas) in the region. Analysts questions the viability of such a project without resolving the existential challenges in the industry such as pipeline vandalism, theft, and lack of value-addition infrastructure.
• The Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) said it has licensed about 88 Liquefied Petroleum Gas (LPG) plants and skids in Kaduna State, a move to deepen the use of cooking gas in the country.
• The GMD of NNPC, Mele Kyari, has disclosed that the decline in funding for oil investments has led to a halt in the drilling of crude oil by other operators in the industry. The NNPC boss noted that reduced funding coupled with other challenges in the industry such as insecurity, theft, and vandalism has impacted the oil and gas sector severely. Analysts attributed the reduced funding in the industry to the partial implementation of the petroleum industry act (PIA 2021) and the global energy transition.
• The Nigeria Governors’ Forum (NGF) has also lamented the subsidy on petrol, arguing that it is threatening the payment of salaries and placing a huge financial burden on state governments. The NNPC remittances to the Federation Account Allocation Committee (FAAC) have continued to decline as the corporation records significant under-recovery from crude oil sales revenue despite the soaring crude oil prices.
• The Minister of State for Petroleum Resources has said the ministry is setting up an Oil and Gas Investment Centre – a one-stop oil and gas investment hub to attract foreign direct investment into the country. Analysts believe the full implementation of the PIA will achieve the same result as setting up an investment centre.
• The Nigerian Labour Congress (NLC) has said that it favoured the school of thought that believes that the actual volume of petrol imported into the country by the NNPC is much lower than the reported volume of imported PMS, suggesting that the NNPC is either over-invoicing or engaging in some other unfair practices.
• Petroleum marketers under the aegis of the Natural Oil and Gas Suppliers Association of Nigeria (NOGASA) have pleaded with President Muhammadu Buhari to direct the CBN to make dollars available at the official rate to oil marketers to import diesel, resolve petrol scarcity, and eventually save the Nigerian economy from sinking.

Foreign
• Oil prices reversed losses and edged up on Monday as concerns of tight supply amid lower OPEC output, unrest in Libya and sanctions on Russia outweighed fears of a global recession.
• A Reuters survey reveals that output from the 10 members of the Organization of the Petroleum Exporting Countries (OPEC) in June fell by 100,000 b/d to 28.52 mb/d, off their pledged increase of about 275,000 b/d in June.
• Brent oil prices dipped below $100 per barrel on Tuesday, reversing earlier gains of $1, as concerns of a possible global recession curtailing fuel demand outweighed supply disruption fears, highlighted by a potential production cut in Norway.
• Former President of Russia, Dmitry Medvedev, has warned that a reported proposal from Japan to cap the price of Russian oil at around half its current level will reduce global oil supply and push oil prices above $300-$400 a barrel.
• The Late OPEC Secretary-General, Mohammad Barkindo, on Tuesday, said the oil and gas industry is under siege as years of underinvestment in oil and gas on the global scale caused the current shortages in crude oil supply.
• The US Treasury Department on Wednesday imposed additional sanctions on a network of Chinese, Emirati, and other companies that it accused of helping to deliver and sell Iranian petroleum and petrochemical products to East Asia, essentially pressuring Tehran as it seeks to revive the 2015 Iran nuclear deal.
• A lawmaker in Russia has said the Russian government is set to take over the Sakhalin-1 oil and gas project – a project under Production Sharing Agreement with ExxonMobil, Japan’s SODECO and India’s ONGC. This is coming a week after Russia took over the neighbouring Sakhalin-2 project.
• Oil prices edged slightly higher in volatile Asian trade on Friday, reversing earlier losses as the market weighed up the tight global supply concerns against recession fears.
• Brent had a weekly decline of -4.31% (see Table 1).

Metals
Gold dropped by -3.39% while Silver also dropped by -2.56% W-o-W (see Table 1).

Agriculture
• Cocoa prices inched up by +0.65% W-o-W.
• Corn prices inched up by +1.15% W-o-W while Sugar prices dipped by +4.98% (see Table 1).

Table 1: Commodity Prices
Commodity 08-Jul-22 01-Jul-22 31-Dec-21 Weekly Chg YTD Chg
Brent 107 111.82 78.54 -4.31% 36.24%
Gold 1742.8 1804 1827.1 -3.39% -4.61%
Silver 19.235 19.74 23.27 -2.56% -17.34%
Cocoa 2323 2308 2546 0.65% -8.76%
Corn 615.25 608.25 595.5 1.15% 3.32%
Sugar 18.98 18.08 18.83 4.98% 0.80%
Source: CNBC
*Data for the 08th of July 2022 is as of 05: 33 pm (Nigerian Time)

Outlook
• In the coming week, oil prices are expected to rise on the back of concerns of a tight global supply.
• Gold price is expected to drop in the coming week as investors expect the Federal Reserve to continue to aggressively raise interest rates to cool down rising inflation pressures.
• Cocoa prices are expected to rise as Ghana and Ivory Coast decide to push for better living conditions for cocoa farmers by increasing prices of cocoa bean.
• Sugar prices are expected to drop in the coming week on reports as the highest producer, India, extends deadline exports of raw sugar by 2 weeks.
• Corn prices are expected to drop as physical shipments of corn were more than what’s needed to meet projections for the current marketing year in the United States
Fixed Income Market

Currency Market
At the close of market this week, the naira sustained its depreciating trend against dollar at both the I & E FX fixing and NAFEX fixing.

Naira closed at the Friday trading session to N427.75, indicating a week-on-week depreciation of +0.65% at the Investor and Exporter FX fixing.

At the end of the trading session on Thursday, Naira depreciated to N424.05 by -0.66% (W-o-W) at the Nigerian Autonomous Foreign Exchange Fixing (NAFEX) (see chart 2 below).

Table 2: Naira/Dollar at the I&E FX Window and NAFEX Market
Average Benchmark Yields
1-July-22 08-July-22 % Change
I&E FX 425.00 427.75 -0.65
30-Jun-22 07-July-22
NAFEX ($/N) 421.29 424.05 -0.66
Source: FMDQ

Money Market
System liquidity was depressed all through the week in the absence of any significant inflows. In that regard, the funding rates remained elevated hovering around 14.00.

At the close of market on Friday, the Open repo rate (OPR) declined marginally to 13.83 by -1.21% (W-o-W) while Overnight rate (O/N) remained unchanged at 14.00 (see chart 3 below).

Table 3: Money Market
Money Market Rate
01-July-22 08-July-22 % Change
OPR (%) 14.00 13.83 -1.21%
O/N (%) 14.00 14.00 +0.00%
Source: FMDQ

Funding rates should to continue their double digits trend in the coming week in the absence of any maturity.
Treasury Bills Market
At the trading sessions this week, the Nigerian treasury bill market traded bearish with multiple selloffs across the tenors.

On Friday, the Nigerian Treasury bill market closed bearish with the average yield benchmark for T-bills increasing to 6.98 by +30.47 (W-o-W) while the OMO bills also inched up to 6.53 by +22.06% (W-o-W) (See table 4 below).

Table 4: Treasury Bills Market
Average Benchmark Yields
01-July-22 08-July-22 % Change
T. Bills (%) 5.35 6.98 +30.47%
OMO Bills (%) 5.35 6.53 +22.06%
Source: FMDQ

Analysts expect yields in the TB market to expand in the coming week in the absence of major inflows.

FGN Bond Market
The secondary bond market traded tepid for most trading session this week with attention drawn to the FGN bond savings auction.

At the close of trading on Friday, the bond market closed bearish as selling interest spread across the tenors. The average yield curve pivoted outward by 68bps to settle at 11.62 (See table 6 below).

Table 6: FGN Bonds Market
Average Benchmark Yields
01-July-22 08-July-22 % Change
Short Tenor 9.46 9.70 +2.54%
Mid Tenor 11.18 11.21 +0.27%
Long Tenor 12.68 12.73 +0.39%
Source: FMDQ

Analysts expect the benchmark average yield curve to further expand next week subject to system liquidity.

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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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