Expectations from the Markets This Week – 180722
Global Economy
US Inflation sends signals of Capital flow reversals in Emerging Markets
With US inflation speeding to 9.1% in June, a new 41-year high, Analysts express concerns about the broader implications for emerging markets. Analysts believe that the pace at which Consumer (9.1%) and Producer Prices (11.1%) are rising in the world’s largest economy, the Federal Open Market Committee is expected to raise rates by another 75bp when they meet on the 26th and 27th. Analysts argue that many African economies would record capital outflows as investors seek higher interest environments.
Chinese Economy barely Grows, Analysts Anticipate Growth
China’s economy only marginally avoided a contraction in the second quarter when it recorded a 0.4% y-o-y growth in Q2 2022, Analysts attribute the slower than expected growth to nationwide lockdowns that affected many major manufacturing hubs. Analysts anticipate a major fiscal stimulus by the Chinese government to complement existing accommodative monetary policy positions meant to turbo-charge the world’s second-largest economy
Nigeria Economy
June’s Inflation Print Comes in at 18.6%, Analysts expect a Hawkish Tone from the MPC.
Despite the Monetary Policy Committee’s (MPC’s) decision to raise rates in its last meeting, which was held in May 2022, the inflation print for June came in at 18.6% ( estimated 18.37%). The June headline inflation figure, which is the highest since January 2017, can be chalked up to a combination of factors. The Analysts note that the geopolitical tension in Ukraine has continued to send prices of food and energy soaring since February while the nationwide scarcity of fuel that started in June also impacted Transport fares.
The food price index surged on a yearly basis to breach the 20% mark for the first time since July last year, a situation analysts attribute to early shopping for the ‘Eid celebrations. The Monetary Policy Committee meets this week and despite the composite PMI figures for June inching closer to the contraction zone, our analysts expect the committee to maintain its hawkish tone with a 25bp hike in rates to curtail inflation.
Dwindling Government Revenue and Population Explosion, Nigeria’s Double Whammy.
In a recently released report by the United Nations Department of Economic and Social Affairs (UNDESA) titled: the World Population Prospects 2022, the world’s population is expected to grow from 8b in 2022 to 8.5b by 2030 and then 9.7b by 2050. According to the report, half of the projected increase in population up to 2050 will be concentrated in Nigeria and seven other countries namely: the Democratic Republic of the Congo, Egypt, Ethiopia, India, Pakistan, the Philippines, and the United Republic of Tanzania.
With Nigeria’s population projected to hit 375m, matching that of the United States as a joint third-largest country in the world, by 2050, The Analysts worry about the country’s yawning infrastructure gap which would worsen with a population explosion and already dwindling government revenue. Now, the country requires US$100bn in annual infrastructure funding, even though the entire 2022 budget is only US$30bn (a third of the amount required to close the infrastructure gap).
Downward reviews of Nigeria’s outlook
In line with the forecast of The Analysts, the African Development Bank recently projected that the Nigerian economy would slow over 2022– 23 to average +3.2%. The Analysts expect that the combination of a depreciating Naira and, higher costs of funds would continue to take a toll on private sector productivity. While households are expected to cut back spending as inflation rages. Meanwhile, the AfDB had in an earlier forecast projected Africa’s largest economy to exceed the +3.4% growth it recorded last year. But The Analysts makes a forecast of 3.1% real GDP growth on the back of crude oil underproduction and the throbbing problem of insecurity. On Inflation, the Afdb projects that the pace of price growth would remain elevated at 16.9% in 2022 saying above pre-pandemic levels in 2023, due mainly to rising food, diesel, and gas prices and persistent supply disruptions amplified by the Russia– Ukraine conflict.
Oil and Gas
Crude Oil Prices Crash, Analysts see a sustained downward pressure
The Analysts observed that the double jinx of fallen demand on Covid-19 cases in China and global recessionary pressures crashed oil prices below $100 per barrel on Tuesday and again on Thursday, shedding a large proportion of its Russia-Ukraine War premium. As of Thursday, Brent crude prices fell as low as $94.45 a barrel while WTI fell to $90.56, below its close of $92.10 before the war. Analysts believe the upside fundamentals are still dominant in the market as low output increase from OPEC and no big acceleration from Shale meet already strong demand in the market.
Analysts express Skepticisms over NNPC Ltd.
On the conversion of NNPC to NNPC Limited, Analysts have questioned the optimism expressed by some analysts that the new NNPC, to be unveiled Tuesday 19 July 2022, will “create an improved and more transparent operational framework for Nigeria’s oil and gas industry while sustaining the confidence of local and foreign investors”, arguing that as long as the company remains 100% owned by government entities, its operation will be marred by inefficiency and lack of transparency.
Higher Petrol Pump Price may be inevitable
Petrol in Abuja and some other states traded between N180/litre to N250/litre this week, above the government-approved N165/litre. Whereas the development has helped to abate the queues by motorists for petrol, commuters decried the hike in transport fares while the government keep mum on the hike in petrol price. True to The Analysts’ prognosis, the nation may need to brace up for higher petrol prices as that seems to be the near-term solution to the lingering scarcities caused by rising diesel prices and a hike in ex-depot prices.
Nigeria Underproduces Again, Analysts point to operational issues
OPEC Monthly Oil Market Report (MOMR) for June 2022 revealed that Nigeria’s crude output increased by 134,000 b/d from 1.024 mb/d in May to 1.158 mb/d in June 2022, still putting Nigeria behind Angola as the largest oil producer in Africa based on official data. Based on secondary communication, Nigeria’s crude output increased by 5,000 b/d to 1.238 mb/d. Analysts expect Nigeria’s crude output to remain low due to the lack of increase in rig count as well as the operational issues along the oil value chain in the country.
Analysts disagree with IARS on Modular Refineries
Analysts have expressed doubts over the viability and environmental impact of integrating artisanal modular refineries into the mainstream system, arguing that the crude implements used by the artisans may be difficult to integrate and it may be environmentally degrading. This note follows the prayer by the Institute for African Renaissance Studies and Realization (IARSR) on the Federal Government of Nigeria to legalize artisanal modular refineries in the country, noting that it will save costs for the country and boost revenue generation
Brent had a weekly decline of -5.47% (see Table 1).
Metals
Gold dropped by -2.34% while Silver also dropped by -3.41% W-o-W (see Table 1).
Agriculture
Cocoa prices inched up by +0.26% W-o-W.
Corn prices dropped by -3.05% W-o-W while Sugar prices inched up by +1.53% (see Table 1).
Table 1: Commodity Prices
Commodity 15-Jul-22 08-Jul-22 31-Dec-21 Weekly Chg YTD Chg
Brent 101.15 107 78.54 -5.47% 28.79%
Gold 1702.1 1742.8 1827.1 -2.34% -6.84%
Silver 18.58 19.235 23.27 -3.41% -20.15%
Cocoa 2329 2323 2546 0.26% -8.52%
Corn 596.5 615.25 595.5 -3.05% 0.17%
Sugar 19.27 18.98 18.83 1.53% 2.34%
Source: CNBC
*Data for the 15th of July 2022 is as of 05: 24 pm (Nigerian Time)
Commodities
Could Excess Corn and Soybean Harvest in Brazil Pull Down Egg Prices?
Warehouses in Brazil are still filled with soybeans which were harvested some months before their corn harvest. With higher production of soybeans this year and slower sales, warehouses have stayed filled causing open-air storage to be implemented for harvested corn. With prices of corn dropping in the international market, this new development threatens to put extra pressure on prices as Brazil stands as one of the major exporters of corn. If prices of Soybean and Corn continue dropping, we should witness a drop in feed prices as both commodities contribute a total of 63% to the production of poultry feed with corn having a larger share of 50.3%. A drop in poultry feed would result in a drop in eggs.
Nigeria would be affected positively as these conditions would make for the affordability of poultry as maintenance cost drops. While the government aims to achieve self-sufficiency in maize production this year, farmers are yet to adopt a higher-yielding variety of maize such as the TELA maize thereby hampering the possibility of achieving higher production per hectare thus reducing the country’s importation of maize
Food Price Hikes To Hurt Global Economies
Food prices worldwide have been falling for the past two months, but prices are still hovering around the highs noted in march. The FAO index hovered at 154.2 points in June, a drop from the high experienced in march at 159.7 points. Analysts note that countries like Singapore, South Korea, the Philipines, and India could likely see an increase in food prices in the second half of the year as Singapore and South Korea remain heavily reliant on food imports. While India might seem self-sufficient in most aspects of food production, the weather conditions experienced this year pose a threat to their production after suffering heat waves and a delayed monsoon.
Nigeria’s Wheat import stands as one of the highest imports and cuts from Russia and Ukraine have left the country exposed to higher wheat prices. If Canadian wheat projections don’t meet expectations, we could see that the drop in wheat prices in the international market would be short-lived. This infers that Nigeria and other countries that are dependent on food imports could be left exposed to price shocks globally
Gold Price Under Pressure from the US Dollar, Analysts See a Sustained Trend
Gold Prices have been hit by the improvement of the dollar on the back of rising interest rates. After breaching the support level of $1700 to a low of $1698.2, it closed slightly above the support level at $1700. This drop is the first in two years as the last time prices dropped below the $1700 support level was in June 2020 when it dropped to $1683. After breaking the support level at $2000 earlier this year, the bullion has been on a steady decline as the FED continues to raise rates to curb inflation. With gold prices dropping, and reports that the FED could still raise rates, investors would look for other markets to invest in in the short term. Towards the end of the year, we expect that the bullish run from the dollar would lose steam opening a path for gold to retrace. Gold price currently has a YTD of -5.97% at $1705.8/troy ounce, with strong indications of a sustained decline in prices
Fixed Income Market
Currency Market
At the close of trading on Friday, Naira depreciated by -0.60% to N430.33 at the Investors and Exporter FX fixings.
Likewise, the exchange rate at the Nigerian Autonomous Foreign Exchange Fixing (NAFEX) fell, depreciating by -0.58% week-on-week basis to N426.50 at the close of the trading session on Thursday (see chart 2 below).
Table 2: Naira/Dollar at the I&E FX Window and NAFEX Market
Average Benchmark Yields
08-July-22 15-July-22 % Change
I&E FX 427.75 430.33 -0.60%
07-July-22 14-July-22
NAFEX ($/N) 424.05 426.50 -0.58%
Source: FMDQ
Money Market
Festivities at the beginning of the week worsened the market liquidity with the funding rates hovering around 14.00 for most trading sessions.
On Friday, the interbank rates remained unchanged week-on-week basis at 13.83 for the Open Repo rate (OPR) and 14.00 at the overnight rate (0/N) (see chart 3 below).
Table 3: Money Market
Money Market Rate
08-July-22 15-July-22 % Change
OPR (%) 13.83 13.83 +0.00%
O/N (%) 14.00 14.00 +0.00%
Source: FMDQ
We expect activity in the coming week to be dictated by the market liquidity situation.
Treasury Bills Market
The bears dominated the market during the trading sessions this week despite the increased yields from the primary auction on Wednesday.
As of Friday, the market closed with multiple selloffs at both the treasury Bills and OMO bills. The average benchmark yield ticked up to 7.15 for both markets, the treasury bill market grew by +2.44% (W-o-W) and OMO bills expanded by +9.49% (W-o-W) (See table 4 below).
Table 4: Treasury Bills Market
Average Benchmark Yields
08-July-22 15-July-22 % Change
T. Bills (%) 6.98 7.15 +2.44%
OMO Bills (%) 6.35 7.15 +9.49%
Source: FMDQ
We expect the bulls to dominate the market next week on the back of improved liquidity as investors seek less risky investments.
Nigerian Treasury Bill Auction Result
The DMO offered N142.97 billion at the Nigerian Treasury bill auction on Wednesday 13th, July, which was slightly oversubscribed by 20bps to N143.26. the rate for the 91days, 182 days, and 364days rose by 35bps, 21bps, and 93bps to 2.75%, 4.00%, and 7.00% respectively. The bid-to-cover dropped to 1.02x vs 1.66x at the last auction due to the lower amount offered at this auction (see table 1 below).
Table 1: 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 4.51 4.61 4.27 2.75 2.40
182-days 1.46 1.94 1.49 4.00 3.79
364-days 137.00 138.91 137.50 7.00 6.07
Source: Commercio papers
FGN Bond Market
Friday trading session maintained a similar outcome experienced all through the week, with multiple selloffs dominating all the tenors. The average benchmark yield curve edged higher by +1.49% to settle at 11.79 (See table 6 below).
Table 6: FGN Bonds Market
Average Benchmark Yields
08-July-22 15-July-22 % Change
Short Tenor 9.70 10.12 +4.33%
Mid Tenor 11.21 11.44 +2.05%
Long Tenor 12.73 12.77 +0.31%
Source: FMDQ
We expect the bearish sentiment to continue next week as investors pivot towards short-term securities with rising inflation.
