Expectations from the Markets this week – First Ideas Limited

Expectations from the Markets this week

Expectations from the Markets this Week – 010822
Global Economy

US enters technical recession, FOMC delivers 75bp rate hike, Nigeria’s Diasporan remittances to fall in 2022
The US economy contracted by -0.9% in Q2 2022, well below the +0.4% forecast given by analysts. The world’s largest economy recorded a -1.6% contraction last quarter. Having now recorded two consecutive quarters of negative growth, the economy is now said to be in a technical recession. Analysts believe that a US recession portends the loss of jobs, lower disposable income, and consequently lower diasporan remittances by nationals of emerging economies resident in the US. Meanwhile, the Q2 2021 contraction was chalked up to a decrease in private inventory investment, fixed investment, government spending, and higher imports.

Euro Area’s GDP grows by 0.7%, but Analysts expect slower capital flow reversals from emerging markets in H2 2022
The Eurozone registered a +0.7% real GDP growth in the second quarter of 2022 beating the +0.2% forecasts of analysts. In Q1 2022, the 19-member bloc recorded a +0.5% growth making a +0.6% GDP growth as of H1 2022. Meanwhile, Eurostat confirmed that the zone’s inflation surged to +8.9% in July, 30bp up from +8.6% in June. The official data shows that energy prices rose the swiftest at +39%, reflecting the lingering concerns about the cut in gas supplies by Russia. Given the tepid growth and rising inflation, The Analysts see the ECB pivoting in its next meeting to a 25bp hike in rates which would reduce the pressure of capital flow reversal in emerging markets.

IMF downgrades global growth forecasts, Analysts Worry over Debt service
The International Monetary Fund downgraded the global growth outlook to +3.2% in its July 2022 edition of World Economic Outlook. The negative review was attributed largely to higher inflation, lower consumer spending in the US and EU as well as the lockdowns in China. The increasing risk of a sudden cut in Russian Gas suppliers fed into a -0.9% downgrade in the case of Germany. Although the IMF retained Nigeria’s growth outlook for 2022 at +3.4%, Analysts believe that tighter global financial conditions could induce debt distress in emerging markets and developing economies.

Nigeria Economy

FAAC Distributes N802.4bn for June, and N4.12trn in the first half of 2022
The Federation Account Allocation Committee (FAAC) distributed a total of N802.41bn to the three arms of government for the month of June. Of this amount, the Federal Government received N321.86 bn, the State Governments, N245.42 bn; while Local Governments got N182.3bn. The Analysts note that the recent FAAC payment for June brings the total FAAC allocation for the first half of the year to N4.12trn, which is about +5% higher than the total FAAC allocation made over the corresponding period of last year.

Analysts Differ from Nigeria’s IMF Growth Forecast of 3.4% in 2022
The IMF in its recently released World Economic Outlook July 2022, retained Nigeria’s growth for 2022 at +3.4%. The Bretton Woods organization had reduced the global growth projection by 0.4% from its earlier forecast in April (+3.6%) to +3.2%. Emerging Market and Developing Economies also got 0.2% d from +3.8% as given in April 2022 to +3.6%. Also note that with growth projected at +3.4% and an annual population growth rate of +2.5%, the country’s per capita GDP is constrained to a +1% growth. The FG had also downwardly reviewed its forecast for 2022 from +4.2% to +3.55% reflecting rising inflation, which is expected to slow down consumer spending and Investment, as well as oil theft and vandalism which constrain general government revenue.

National Economic Council Spends from $35.37m from ECA, Analysts Raise Eyebrows
According to the Ministry of Finance, more than $30m of the Excess Crude Account was disbursed in the month of June, as payment for the procurement of new Offshore Patrol Vessels meant to address the problem of Oil theft. Nigeria loses between 200,000 and 500,000 barrels of crude oil per day to thieves and vandals. It is also noted that this is even though Defense has typically accounted for the largest budgetary spending thereby constraining spending to other critical sectors. In the 2022 budget, N2.51trn was allocated to Defense, while the allocation to other critical sectors such as Infrastructure(N1.21trn), Health (N0.82trn), and Education(N0.88tr) all combined is less than the allocation to Defense.

It has been noted that the challenge of theft must be addressed through the investigation of high-ranking security officers who have often been accused of being complicit. High-level intelligence gathering, as well as the deployment of state-of-the-art surveillance technology, are also required to end the business of oil theft.

Lagos Pursues Private Sector Participation as Analysts Assess the Gains
To encourage Private Sector investment in the state, the Lagos State government plans to host its Annual Economic Summit between the 16th and 17th of August 2022. Please note that Lagos State, which has typically contributed over 70% of investments in Nigeria, has the potential to attract further investment, create jobs, and spur economic growth through its blue economy.

To achieve this, the Lagos state government must incentivize investment in the state’s blue economy by prioritizing the management of marine and coastal assets and ensuring better waste management practices within the state.

Analysts Optimistic as the NEPC Launches Domestic Export Warehouses
According to the Nigerian Export Promotion Council (NEPC), the newly launched Domestic Export Warehouses (DEW) would help to increase Nigeria’s non-oil export proceeds. The DEW offers exporters various services, including storage, fast-track logistics, and documentation; The Analysts note that over the years, quality control issues have significantly inhibited agricultural exports. Meanwhile, the Central Bank of Nigeria’s (CBN’s) drive to generate US$200bn from non-oil export under the RT200 Programme is expected to receive a boost from the DEW. If well implemented, we predict that the initiative would further improve the Federal government’s revenues and the country’s current account balance.

Oil and Gas Sector

Sustained Bullish Oil Market Sentiments Awakens Analysts’ Interest
Oil prices retained their bullish run for the week, driven by a sustained rise in market fundamentals. Despite concerns about weaker demand in the US and fear of interest rate hikes, lower inventories data from the American Petroleum Institute (API) suggests a long bullish position evidenced in the current increase in market backwardation.

This was supported by fears of a cut in natural gas supply to Europe, strengthening demand prospects for middle distillates, and a possible switch to diesel in the winter months. On the supply side, available data suggest that the OPEC+ compliance level dropped to a record low in June while Gazprom has further lowered gas supply through the Nord Stream 1, reinforcing the fear of supply disruptions for oil and gas. Strong uptick fundamentals reflected in the market ignoring the return of Libyan oil. We expect a spike in crude oil prices at an average of $105 per barrel for the year.

EU Expresses Interest in Nigerian Gas; A Long Walk for a Short Strategy
Burdened by the need to find additional gas supplies for the European Union (EU), the Deputy Director General of the European Commission’s energy department, Matthew Baldwin, on his last visit to Nigeria, noted that the EU is seeking to double its imports of Nigeria’s LNG currently at 14% as the bloc prepares for a cut in Russian gas supply.

Based on data from the EC, Nigeria exported 36 bcm of LNG to the EU in 2018, but the export volume declined to 23 bcm in 2021, attributable to issues in the Nigeria oil and gas industry. With Russia’s invasion of Ukraine and the consequent sanctioning of Russia, there are growing fears that Russia could retaliate by cutting its gas supply to Europe, which depends on it for about 40% (155bcm) of its natural gas. Analysts expect the new NNPC and the NLNG to leverage the EU renewed interest in Nigeria gas to grow Nigeria’s exports.

Coal Production in Nigeria; Looking Back in Expectation
Despite the commitment of Western nations to a net-zero production goal, China and other coal-dependent developing countries appear to have taken a detour. The phased reduction in the use of ‘dirty fuel’ in the coming years under the COP26 agreement is undergoing revision as economic realities are forcing western countries to rethink de-carbonization timelines. The return to coal is becoming a trend for countries to bridge their energy shortages.

Nigeria is said to hold over 2.8bn metric tonnes of unproven coal reserves and 639m metric tonnes of proven reserves with significant deposits in the Enugu, Nasarawa, Gombe, and Kogi states. Analysts questioned Nigeria’s lack of coal production despite its large reserves and the scale of energy shortages for power generation, railway corporations, and cement factories, among others. Coal production in Nigeria reached its all-time high of about 900,000 tonnes before independence. It significantly declined until no production was recorded, attributable to poor government interest, weak infrastructure, and technical failure. Without prejudice to the climate change concern, it is believed the large coal deposits across the country should at least be harnessed to bridge the energy gaps of the country in the short to medium term.

Energy Firms in Triple-Digit Earnings Spike as Russia-Ukraine War Continues
Analysts observed that the sharp recovery in global demand after the COVID-19 restrictions and Russia’s invasion of Ukraine in the first half (H1) of the year has driven energy prices to record highs and drove robust earnings of major oil companies. Companies such as Repsol, Shell, TotalEnergies, Equinor, Chevron, and US ExxonMobil that have released their results recorded triple-digit growth in adjusted earnings. Analysts expect the results of the other major oil companies and local oil companies in Nigeria to mirror the robust performance of the companies that have released their results for H1 2022.

Aviation Fuel Price Uncertainty Unsettles Air Travelers as Analysts See no Respite in Sight
Nigeria’s rising cost of aviation fuel (Jet A-1) has recorded over a 330% increase year-to-date (YTD) and may reach a record high of N900-1000 per litre this year. Analysts observed that the root cause of the increase in aviation fuel includes rising crude oil prices, supply shortages, and scarcity of foreign exchange, among others. By implication, we expect the high aviation fuel cost to continue to feed into the higher operating cost for airline operators, increase airfares, more flight delays and cancellations, and more shut-down of airlines.
Brent had a weekly growth of +4.86% (see Table 1).
Metals
Gold inched up by +1.96% and Silver also inched up by +8.36% W-o-W (see Table 1).

Agriculture
Cocoa prices inched up by +1.57% W-o-W.
Corn prices inched up by +9.33% W-o-W while Sugar prices dropped by -1.68% (see Table 1).

Table 1: Commodity Prices
Commodity 29-Jul-22 22-Jul-22 31-Dec-21 Weekly Chg YTD Chg
Brent 110.03 104.93 78.54 4.86% 40.09%
Gold 1761.5 1727.7 1827.1 1.96% -3.59%
Silver 20.22 18.66 23.27 8.36% -13.11%
Cocoa 2334 2298 2546 1.57% -8.33%
Corn 623.75 570.5 595.5 9.33% 4.74%
Sugar 17.6 17.9 18.83 -1.68% -6.53%
Source: CNBC
*Data for the 29th of July 2022 is as of 05: 28 pm (Nigerian Time)

Commodities

Analysts Watch Expectantly as Gold Trading Commences on the LCFE
Gold – inversely related to the US dollar – most often is seen as a haven asset and a hedge against inflation. The Federal Government of Nigeria launched its first gold spot contract of 58 units of Eko Gold Coins valued at about £ 100 million to be traded on the newly inaugurated Lagos Commodities and Futures Exchange (LCFE) for real-time trading and stands as the only one that has the approval from the Securities and Exchange Commission (SEC) to trade Gold. The 58 coins that would be a proof of concept launched are gold-backed and can be redeemed anytime.

While it also has a dedicated electronic trading platform, trading can be done with the 40 dealer firms with 128 certified brokers to commence physical and electronic trading

Nigeria Pushes to be Highest Cocoa Producer Despite Analysts’ Scepticism
The International Cocoa Organisations (ICCO) forecasted the revenue generated from cocoa exports in Nigeria to stand at about $754.02 from 328,263 tonnes in the 2021/2022 season after a drop in prices of the cocoa bean from $2632 to 2297 per tonne in July. Earlier this year the Cocoa Farmers Association of Nigeria (CFAN) stated their effort to increase the production of cocoa beans in Nigeria to achieve a production of 500,000 tonnes by 2024, up from 300,000 tonnes.

The association also indicated that Nigeria would be the highest cocoa producer in Nigeria, which looks like a long stretch as the highest producer, Ivory Coast, currently produces about 2.03 million tonnes of cocoa beans. Analysts believe that for this jump in production to occur, fertilizer prices would be instrumental as lower prices would support farmers’ usage on their farms and would help in the production of the best quality cocoa beans.

Nigerians Should Brace up for Higher Bread Prices
High prices of wheat globally spurred by the war in Ukraine have pushed prices of wheat-dependent foods up. Nigerian bakers have been affected by the high prices and recently voiced their discontent with the collusive oligopoly experienced in the import of yeast, flour, and sugar by engaging in strike action to force the government into allowing other importers the license to import these items to increase competition, thus reducing prices. The Kogi Masters Bakers Association pulled out and decided to resume baking albeit with a 20% increase in price in a way to pass down some cost to consumers until prices of yeast, sugar and flour drastically reduces.

When this increase starts, its very likely to see it spread across the nation; already some states in the southwestern region of Nigeria are selling bread at a higher rate. Unfortunately, there are no cheaper alternatives as Yam, Potato, Rice have equally advanced in prices.

Could the Tertiary Institutions Poultry Revival Scheme be an Unsustainable Project
After noting an increase in the gap between demand and supply of eggs in Nigeria, many of which were caused by the rising cost of feed, insecurity, and an increased amount of smuggling, the CBN implemented the Tertiary Institutions Poultry revival Scheme in 2019, thus partnering with universities with the purpose to bridge the town and gown. While this seems to be a great idea, it could have been better implemented by the Ministry of Agriculture partnering with the Ministry of Education who would have the Agricultural extension workers monitor and supply the necessary inputs for the scheme.

Factors that drove farmers out of poultry farming would also need to be looked into as the scheme which depends on a subsidy from the CBN which provides a loan having an interest rate of 9% (5% in the first year) and a repayment system of six years could turn out to be unsustainable. Nigeria currently stands as the highest egg producer in Africa and the second highest chicken meat producer in Africa, second only to South Africa.

Fixed Income

CBN identified that Non-remittance from NNPC spurred FX shortage
According to CBN, the non-remittance of dollars to foreign reserves by the Nigeria national petroleum Corporation (NNPC) is solely responsible for the naira depreciation in both the official and parallel markets. Although Nigeria earns foreign earnings from four sources; oil exports, non-oil export, diaspora remittances, and foreign direct investments, the oil export accounts for more than 80% of the country’s foreign exchange (FOREX) earnings which explains the adverse effect. However, analysts believe the naira depreciation is a combination of various economic interruptions ranging from rising ways and means by CBN, low capital importation, politicians hoarding USD for election purposes, excess demand for PTA and BTA, and rising global inflation. These conditions project a prolonged naira depreciation for the remaining part of the year.

Currency Market
Naira depreciated to the lowest ever this week, reaching N710/$1 on Wednesday at the parallel market as FX scarcity bites harder. However, the official market reacted mildly, as the naira fell to N430/$1 on Wednesday.

At the Investor and Exporter FX fixings (I&E) on Friday, the naira appreciated by 23bps (W-o-W) to N429.00.

As of Thursday, Naira fell by -0.71% (W-o-W) to N426.83/$1 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
22-July-22 29-July-22 % Change
I&E FX 430.00 429.00 -0.23%
21-July-22 28-July-22
NAFEX ($/N) 423.83 426.83 +0.71%
Source: FMDQ

Money Market
As liquidity remained squeezed, the interbank rate maintained its upward momentum this week. On Friday, the Open Repo rate (OPR) closed at 15.00, indicating a +1.15% (W-o-W) rise while the overnight rate (0/N) fell by -1.67% (W-o-W) to 14.75 (see chart 3 below).

Table 3: Money Market
Money Market Rate
22-July-22 29-July-22 % Change
OPR (%) 14.83 15.00 +1.15
O/N (%) 15.00 14.75 -1.67%
Source: FMDQ

We expect interbank rates to remain at a double-digit level in the coming week

Treasury Bills Market
The Nigerian Treasury bill market was relatively tepid this week as investors’ attention was drawn to the T. bill’s primary auction. On Friday, the trading session closed bearish at both the T. bills and OMO bills.

The Average benchmark yield for Treasury bills grew by +6.50% (W-o-W) to 7.70 and OMO bills rose by +9.17% (W-o-W) to settle at 9.88 (See table 4 below).

Table 4: Treasury Bills Market
Average Benchmark Yields
22-July-22 29-July-22 % Change
T. Bills (%) 7.23 7.70 +6.50%
OMO Bills (%) 9.05 9.88 +9.17%
Source: FMDQ

We expect the bearish sentiment to wane next week

Nigerian Treasury Bill Auction
The DMO sold a total of N264.28bn worth of notes, which was the exact amount offered. The rates on the 91-day and 182-day rose by 5bps and 10bps to settle at 2.80% and 4.10% respectively while the 364-day remained unchanged at 7.00% due to the high subscription level. The bid-to-cover ratio rose to 1.21x from 1.02x at the last auction (see table 1 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 2.22 1.86 1.69 2.80 2.75
182-days 3.54 1.40 1.26 4.10 4.00
364-days 258.53 317.25 261.33 7.00 7.00
Source: Commercio papers

FGN Bond Market
Analysts noticed selloffs persisted at the long end of the curve this week.
The bond market closed bearish on Friday as selloffs dominated all tenors while the overall average benchmark yield curve pivoted outward by 53bps to close at 12.26 (See table 6 below).

Table 6: FGN Bonds Market
Average Benchmark Yields
22-July-22 29-July-22 % Change
Short Tenor 11.18 11.30 +1.07%
Mid Tenor 11.79 11.87 +0.68%
Long Tenor 12.92 12.96 +0.31%
Source: FMDQ, The Research

We expect a further rise in the average benchmark yield next week as the bearish sentiment persists.

Nigerian Capital Market
 The Nigerian bourse ended the week on a negative note as market sentiment remained red. The NGXASI closed the week with-3.10% as against -0.45% loss recorded last week. The Nigerian Exchange lost N868.03bn in naira terms.
 Year-to-date, the NGSAXI remained positive to close the week with a +17.92% gain as the market capitalization settled at N27.1trn at the end of the week.
 Sectoral performance across sectors tracked was bearish. At the close of trading on Friday, no gain was recorded in any sector while NGX- Premium recorded the highest loss for the week with -4.96%

Chart 1: Movement of NSEASI Index Points 25 July 2022- 29 July 2022

Source: NSE

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 783.05 points and with a rise of +2.10% respectively.

Dangote and Elumelu Index
Dangote Index closed the week positive with 138.20 basis points from 138.19 basis points recorded the previous week, representing a rise of +0.01% WoW NASCON recorded a rise of +0.01%. while DANGCEM, DANGSUGAR closed flat WoW

Table 6 : Gote Index W-o-W Change
Company 22-July-22 29-July-22 WoW Chg
DANGCEM 265.00 265.00 0.00%
DANGSUGAR 16.00 16.00 0.00%
NASCON 11.00 11.10 0.10%
Source: NGX

Furthermore, the Elumelu Index closed negative with 106.7 Basis points from 110.84 basis points recorded the previous week, representing a decline of -3.9% WoW UBCAP, AFRIPRUD, TRANSCORP and UBA closed the week negative with -12.6% , -2.7%, -5.9%, and -1.4% respectively and TRANSCOHOT closed the week flat WoW

Table 7 : Toni Index W-o-W Change
Company 22-July-22 29-July-22 WoW Chg
AFRIPRUD
5.65 5.50 -2.7%
TRANSCOHOT
6.25 6.25 0.0%
TRANSCORP
1.19 1.12 -5.9%
UBA
7.30 7.20 -1.4%
UBCAP 12.70 11.10 -12.6%
Source: NGX

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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