Expectations from the Markets this Week – 190922
Lower US Inflation and layoff numbers signal an Aggressive rate hike
US CPI Inflation dropped to 8.3% Y-o-Y in August on the back of a decline in gasoline prices. Meanwhile, the index rose by 0.1% M-o-M in August after being unchanged in July. The September 13 data released by the Bureau of Labor Statistics was anticipated by analysts, who still see the Federal Open Market Committee (FOMC) undertaking a jumbo-sized rate hike as jobless claims reduced to 213,000 last week and inflation continues to exceed the Feds target of 2%. Meanwhile, wholesale prices (measured by the PPI) grew by 8.7% down from the 9.8% growth in PPI in August.
UK Inflation to relapse after moderating to 9.9% in August, Unemployment drops to 49-year low
U.K. inflation slowed in August on the back of a fall in fuel prices, though food prices continued to rise as the country’s cost-of-living crisis persists. The consumer price index rose 9.9% annually, according to estimates published Wednesday by the Office for National Statistics, fractionally below a consensus forecast of 10.2% among economists polled It was also down from July’s figure of 10.1%. Despite intense pressure on households from soaring inflation, unemployment in Britain fell in the three months to July to the lowest rate since July 1974. At 3.6%, down from a rate of 3.8% in the three months to June, the proportion of people out of work has not been lower for almost 50 years. Meanwhile, Analysts believe that the situation with the UK’s cost of living crisis may suffer a relapse except the wage bill freeze kicks in early enough.
China’s retail sales, and industrial production beat expectations in August
China reported a 5.4% growth in retail sales in August Y-o-Y, the fastest since the January-February period this year, according to figures released by the National Bureau of Statistics. August retail sales topped forecast for 3.5% growth. Among the overall encouraging data, retail sales posted the biggest surprise, boosted by passenger car sales and helped by comparison to low growth last August. Retail sales had risen by 2.5% year-on-year in August 2021.
Analysts worry as Inflation Spikes To 17-Year High.
Nigeria’s inflation rate surged to 20.52% Y-o-Y in August tallying with analysts’ forecasts. Food inflation came in at 23.12% reflecting a rise in the prices of bread, cereals, and tubers. On a month-on-month basis, however, the overall index rose by +1.77% in August which is lower than the 1.82% monthly inflation recorded in June and July. Analysts attribute the country’s high inflation rate to rising energy, and food prices as well as the depreciation of the Naira. Moreso, the Nigerian economy relies heavily on imports. To stem the rising tide of inflation, Analysts say the management of the country’s foreign exchange policy must be reviewed to attract foreign exchange inflows and reduce the pass-through effect of a devalued Naira on domestic inflation.
Budget office suggests the suspension of salary increments and fuel subsidies, to avert debt crises
The Federal Budget Office has advised Nigeria’s government to suspend salary increments for government agencies and eliminate the fuel subsidy to avert a debt crisis and ensure Nigeria’s debt sustainability.
Director General, Budget Office of the Federation, Ben Akabueze made the statement after Nigeria’s debt service cost surpassed its revenue in the first four months of the year pushing the country’s debt service cost to N1.94trn between January and April 2022, against a retained revenue of N1.63trn. expenditure and blocking leakages.
High Layoffs lead to RSA Withdrawals
Recent data from the National Pension Commission, PenCom, shows that the number of withdrawals made by recently laid-off workers surged by 17.5% to N6.65 bn in Q2 2022, up from the N5.66bn which was recorded in the corresponding period of 2021. Analysts note that the development indicates a deteriorating economy and a worsening labour market. The Pension Reform Act 2014 permits the payment of 25% of pension contribution to Retirement Savings Account (RSA), to holders under the age of 50 years, who are disengaged and fail to secure another job within four months. The inflationary trend has forced many employers of labour to downsize.
Nigeria’s Aviation Sector in Crisis as NCAA withholds Azman Air’s license over N1.2bn debt
Nigeria Civil Aviation Authority (NCAA) has confirmed that it is withholding the Air Transport License (ATL) of local operator Azman Air till a time when the carrier provides the required documentation for the renewal of its operational license and signs a Memorandum of Understanding (MoU) on how it would remit its N1.2bn legacy debt accrued from the collection of Ticket Service Charge (PSC). Analysts note that Azman Air is one of several Airline operators faced with difficulty in meeting their obligations. Following their inability to repatriate their revenue valued at over $465m, Foreign airlines now readjusted their fares. An economy ticket of N300,000 ow sells for N1.5m, N3m, and up to N4m. Analysts believe that the government must engage stakeholders to avert a crisis.
Oil and Gas Sector
From Africa’s Largest Oil Producer to Third Biggest Producer
The latest Monthly Oil Market Report (MOMR) of the Organization of Petroleum Exporting Countries (OPEC) revealed that Nigeria had lost its position as Africa’s biggest crude oil producer, coming third behind Angola, which produced 1.18mb/d, and Libya, which made 1.12mb/d in August 2022. In August, Nigeria made 1.1mb/d based on secondary sources and 972,394 b/d (down from 1.08mb/d in July) based on direct communication. The decline in August production volume reflects the perennial challenges of crude oil theft, vandalism, production shut-in, and low investment flow in Nigeria’s oil and gas sector. Analysts believe there are quick and dirty fixes and long-term fixes to the challenges in the industry
Observers Optimistic About Nigeria-Morocco Gas Pipeline Project
The Group Chief Executive Officer (CEO) of the Nigerian National Petroleum Company Ltd (NNPCL), Mele Kyari, at the signing ceremony of the Memoranda of Understanding (MOU) for the construction of the Nigeria-Morocco Gas Pipeline Project, said the project would create wealth and improve the standard of living of countries within the African region. The 5,600km project is projected to provide gas from Nigeria to 11 other West African countries, Morocco, and subsequently to Europe. While the project will help Nigeria monetize its gas, Morocco intends to leverage the project to reduce its dependency on Algerian gas for electricity production, given the tensions between the neighbouring countries. Analysts believe Nigeria needs to carefully assess the geopolitics of admitting foreign support for the project, given that Russia and some European countries had once offered to invest in the project.
Internal Dynamics of Crude Oil Theft and Illegal Refining
The Nigeria Customs Service (NCS) intercepted two tankers loaded with over 80,000 litres of dirty diesel in Ijebu-Ode, Ogun State. The agency said it verified the products with the Nigeria Midstream and Downstream Petroleum Regulatory Agency (NMDPRA) and discovered that they were substandard with forged documents. The discovery stresses that illegal refining and distribution of poor standard fuel is a thriving business in Nigeria. Analysts have raised concerns around the internal dynamics of crude oil theft and illegal refining in remote creeks of the Niger Delta. Some analysts who are privy to activities in the Niger Delta believe a large proportion of fuels supplied by some filling stations within the region is from illegal refiners.
Promoting Open and Accountable Management of Extractive Industry
The Executive Secretary of the Nigeria Extractive Industries Transparency Initiative (NEITI), Orji Ogbonnaya Orji, has stated that the NEITI will soon launch a portal with a national database of real owners of oil and gas companies. The portal would also contain data from other extractive industry sectors to promote transparency and curb illegal financing. The initiative called Beneficial Ownership (BO) is part of the requirements of the global Extractive Industries Transparency Initiative (EITI), of which Nigeria is a signatory. As the world transition to cleaner energy, analysts expect an initiative such as the EITI in Nigeria to secure the supply of oil and gas in the country by providing clarity on ownership, capacities, and operations in the industry. Additionally, the initiative should block the loopholes in governance and supply chain vulnerabilities across extractive industries in the country. However, its effectiveness depends on frameworks validating the data and what is permissible to do with it.
Oil Price Sees a Brief Upward Reversal as Demand Expectation Falls
Oil prices rose on Friday but were down for most of the week, partly on the strong US dollar, which made oil expensive for holders of other currencies, and partly on fears of sharp interest rate hikes that would slow global growth and knock fuel demand. The downtrend in oil prices was also partly on the International Energy Agency (IEA) Outlook of almost zero growth in oil demand for Q4 2022 due to a weak demand outlook for China. On the supply side, concern over tight supply due to the proposed oil and gas cut by Russia and dwindling expectations on the return of Iranian crude was outweighed by demand-side factors.
Brent had a weekly growth of +0.10% (see Table 1).
Gold dropped by -2.55% while Silver also inched up by +3.64% W-o-W (see Table 1).
Cocoa prices dropped by -0.17% W-o-W.
Corn prices dropped by -0.37% W-o-W and Sugar prices dropped by -1.54% (see Table 1).
Table 1: Commodity Prices
|Commodity||16-Sep-22||09-Sep-22||31-Dec-21||Weekly Chg||YTD Chg|
*Data for the 16th of September 2022 is as of 05: 27 pm (Nigerian Time)
Silver Mirrors Gold as Prices Drop after Release of Inflation Numbers
Gold price dropped in the last trading session, closing below a major support level of $1,700 per ounce after falling below the previous support level of $1,800 first in July before testing the $1,800 mark again in August. Since then, gold prices have traded just above the $1,700 support. While gold is majorly seen as a hedge against inflation, recent interest rate hikes from the FED has put pressure on the bullion. Generally, Gold has an inverse relationship with the dollar and positive price elasticity, meaning when the dollar goes down, gold goes up and vice-versa; and when there is increased demand, gold price rises. As FED increases the interest rate, more investors pivot towards the Dollar and away from Gold. After the release of inflation data, the gold price dropped to the $1,677.3 mark, supporting analysts’ theory that gold price also reacts to expectations of rate hikes. Silver Price movement also mirrors gold price movement more often than not as the same factors affect both precious metals, hence a drop was witnessed in response to the release of inflation data.
United Nations’ Proposal to Russia a Step in the Right Direction Say, Observers
The United Nations is trying to broker a deal with Russia to see Russian ammonia exported through Ukraine. In the proposal, the United Nations posited that ammonia gas owned by Russian fertilizer producer Uralchem be brought via pipeline to the Russia-Ukraine border, then purchased by U.S.-headquartered commodities trader Trammo. Ammonia is a significant ingredient in nitrate fertilizer production, and its export would help facilitate farming globally. The absence of ammonia from the market formerly shipped through Ukraine has caused significant hardship in countries dependent on that product as crop yields are expected to be reduced.
Analysts believe this deal would keep Russia at the table after Putin earlier threatened to pull out of the grain deal, saying the deal only benefitted Ukraine and the EU. This ammonia export would help stabilize fertilizer prices worldwide when several countries are experiencing extreme weather conditions.
Corn Prices Down but Could Reverse.
Corn Prices dipped as traders chose to pocket profits from recent gains as they expected tight supply from the United States. This tight supply speculation is spurred by U.S. freight railroad workers closing in on strike action against rail companies, claiming that gruelling schedules and poor working conditions have been driving employees out of the industry over the past several years. If the strike were to take place, it could have severe consequences on commodities like coal, chemical, and grains, the most common commodities transported by rail, accounting for 40% of U.S long-distance freight volume, more than any other form of transportation. While traders are taking profits, the global market could witness an uptick in prices of corn as a significant supplier experience logistic issue.
Cocoa Prices Could Move Up as World’s Second-Largest Exporter Faces a 4-Pronged Problem.
Ghanaian farmers have called on the federal government to increase cocoa prices for the new season, ahead of this year’s Cocoa Day (October 1, 2022), which marks the beginning of the cocoa year. Although the government is yet to make any public statement on the matter, some in the country do not expect an increment from the government. As the world’s second-largest exporter of cocoa faces a four-headed problem (drought, cocoa swollen shoot virus disease, illegal mining, and poor commodity prices), farmers claim the industry is under serious threat.
A Cocobod audit in 2017 revealed that more than three hundred thousand hectares (300,000ha) of cocoa farms had been infected by the disease which renders cocoa trees unproductive. While studies by Cocobod and other stakeholders have established that an irrigation intervention could improve the situation of climate change-induced drought, Solutions have not been found for the devastation caused by the illegal gold miners. This comes after the central bank of Ghana stated that the bank will add about 217,000 ounces of gold from local mines by the end of the year.
With farmers claiming they could sell their farmland to these illegal miners in a bit to engage themselves in other things as they question if the government is ready to help farmers sustain the industry, the effect of reduced production from the world’s second-largest exporter would see cocoa prices go up.
UN and the United States Dispel Russia’s Claim on Grain Deal, Analysts Stay Sombre
July 22, 2022, brought about relief to rising grain prices. Wheat, corn, and other food products had been rising for months after Russia launched an assault on Ukraine. Grain prices began to recede when the United States began the wheat harvest, but no news was as good as Ukraine and Russia agreeing at a parley to allow Ukraine to export its grains stuck in the country due to the war. One month and two weeks after the grain deal was signed, Putin accused the countries benefiting from the deal, pointing fingers at Ukraine and other EU countries.
The UN claimed that Putin’s claims were unfounded as data showed that 30% of the grain and other foodstuffs left Ukraine under the deal had gone to low or lower-middle-income countries. The United States also added Russia’s claim that the disruption to Russia’s food and fertilizer export was not merited as the ‘fertilizer is still reaching markets at the same rate as it always has.’ A meeting was set up in Geneva on Wednesday to discuss the complaints. The US claimed they would issue a notification to ensure every commercial player knows they are allowed to purchase Russian food and fertilizer.
Naira appreciated on Thursday at the I & E fixing but was down for most of the week, dipping to 708 to a dollar at the parallel market as the US dollar continue to soar in expectation of Fed raising rate.
At the I&E FX window on Friday, the Naira settled at N436.25/$1, showing a week-on-week appreciation of -0.02%.
On Thursday, Naira closed at N435.64/US$1 staying unchanged on a week-on-week basis at the NAFEX fixing (spot market) (see table 2 below).
Table 2: Naira/Dollar at the I&E FX Window and NAFEX Market
|Average Benchmark Yields|
Following the inflow of FGN bond coupons at the beginning of the week, the interbank rates slumped to a single digit as liquidity improved. However, on Friday the Overnight rate rose to a double-digit of 10.17% while Open Repo Rate inched up to 9.67. On a week-on-week basis, it dipped by +13.76%and +13.00% respectively (see table 3 below).
Table 3: Money Market
|Money Market Rate|
We expect the interbank rate to increase in the coming week as the FGN Bond PMA will mop out liquidity
Treasury Bills Market
The Nigerian Treasury bill market remained quiet all week as multiple primary auctions intercepted the market activity.
On Friday the average benchmark yield for NTB and OMO bills settled at 7.45 and 11.11, declining by -4.61% and -0.27% respectively on a week-on-week basis (See table 4 below).
Table 4: Treasury Bills Market
|Average Benchmark Yields|
|T. Bills (%)||7.81||7.45||-4.61%|
|OMO Bills (%)||11.15||11.11||-0.27%|
Analysts expect a bearish outcome next week as the recently released inflation figures weigh on investor’s decision
Nigerian Treasury Bill Primary Auction Result
For the NTB primary auction on September 14th, 2022, the Debt Management Office sold an exact amount of N159.60 billion worth of notes offered; where the 364-day bill was oversubscribed by +210% while the 91-day and 182-day had less subscription of -1.4% and -79.8% respectively. The rates reacted differently at yesterday’s auction following the consistent rise at the last two auctions, the 91-day, 182-day, and 364 rates were allotted at 5.50%, 6.00%, and 9.75% respectively. Compared to the previous auction, the rate on the 91-day remained unchanged, 182-day rose by 15bps while the 364-day fell by 25bps. The bid-to-cover across the three maturities were 0.99x, 0.20x, and 3.10x accordingly (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
|Previous rate (%)
Source: Commercio papers
FGN Bond Market
The bond market traded bullish for most trading sessions as buying interest dominated the short end of the curve. On a week-on-week basis, it closed bullish with the average benchmark yield curve contracting by 53bps (W-o-W) to settle at 13.13% (See table 6 below).
Table 6: FGN Bonds Market
|Average Benchmark Yields|
Analysts expect a tepid market next week as attention will be diverted to the FGN monthly bond primary auction. (See table 7 below)
Nigerian FGN Savings Bond Primary Auction Result
Table 7: FGN Bonds Market
|FGN Savings Bond Auction|
|Tenor||Amount Alloted (N’m)||Total subscription (N’bn)||Coupon
Source: Commercio papers
Chinese Yuan to appreciate as VTB bank launch a new payment system to China, Analyst Predict
VTB bank, a Russian bank has launched a money transfer to China in Yuan without using the international messaging system SWIFT that underpins financial transactions globally. The bank decided to develop a new payment system as an alternative to SWIFT after it was disconnected in March due to the Russian invasion of Ukraine. According to VTB CEO, Andrei Kostin, the launch will lead to a massive rejection of the use of the dollar and the euro in international payment. Considering that one of the major exchanges in Russia has previously banned the use of the dollar as collateral to underwrite transactions, analysts expect the launch of the yuan transfer system to increase the demand for Yuan in Russia and support its appreciation.
The Japanese Yen rose as the Bank of Japan Expects Currency Intervention
Following the clamour for an intervention to rescue the falling Japanese Yen, the Bank of Japan has conducted a rate check in preparation for currency intervention. The rate check is when the central bank officials call dealers and ask for the price of buying and selling yen. In reaction to that news, the currency gained +0.7% to 143.53 per dollar, reversing some of its losses and edging away from the weakest low of 144.99 since August 1998. The surging dollar has battered the currency as Fed maintained a hawkish stand to combat soaring inflation. Analysts expect the currency intervention to temporarily strengthen the Yen, with the country’s ultra-monetary policy constraining a strong appreciation. Also, the currency is highly susceptible to interest rate differentials, and with the Fed focused on fighting inflation, the Yen is subject to more depreciation.
Pound Sterling tumbled to its lowest against the US dollar and Euro
Pound sterling dipped to $1.135 on Friday, a 37-year low against the US dollar after the release of the weaker-than-expected retail sales figures. It also fell to a 17-month low against the euro. Some FX strategists attributed the drop to the country’s massive external deficits and the new Prime Minister’s policies especially the recent announcement of a two-year cap on soaring consumer energy bills in a bid to cushion the economic shocks. there are fears that the policy will increase the country’s total debt and has raised doubts over Britain’s ability to repay its debt. Analysts expect a further drop in Pound Sterling as investors divert to the dollar considering its recent record-breaking appreciation.
FMDQ Lists Lagos Free Zone Bond on Platform
FMDQ Exchange listed the LFZC Funding SPV PLC N25.00 billion Series 2 Fixed Rate Bond under its N50bn bond issuance programmme on the Exchange platform. The LFZV SPV is a special purpose set up by Lagos Free Zone company to raise finance to boost its business expansion exercise and restructure the company’s debt. The bond was issued at a 13.25% interest rate for a 20-year tenor which is the longest tenor in the history of Nigerian debt markets with 139 subscriptions from various participants from pension funds. Analysts believe the listing will enhance secondary trading of the debt security for investors who might not hold the asset till term.
CBN Likely to Interfere in FX as Naira Dips at Parallel Market
The Central bank of Nigeria has spent a total of US$7.6bn to defend the value of the naira for the first five months. According to the report, the apex bank intervened in the markets with $1.65bn, $ 1.39bn, and $1.82bn in January, February, and March, and a lesser amount of $1.56bn and $1.18bn in April and May respectively. The report shows that foreign exchange sales at the investors and Exporter and interbank/invisible windows decreased by 37.9% and 0.7% to $0.16bn, below their respective levels in the preceding month. Analysts observed that despite the intervention, the currency depreciated by 0.7% to N415 a dollar in the official market. Considering the current naira depreciation in the parallel market, reaching a record low of 715 to a dollar in August, Analysts expect the apex bank to spend more in subsequent months to redeem the falling currency.
Analysts Worry Over Rising Debt as the country’s revenue shrinks.
According to the monthly report of CBN and DMO, Nigeria’s debts have risen by about N4 trillion to N45.25 trillion in the past five months. From the document, the Federal Government has raised a total of N3.34 trn through its monthly domestic debt instruments between April and August. The report specified that the naira depreciation has caused an increase in the country’s external debt stocks. Analysts are worried about its debt sustainability as the persistent oil theft has robbed the country’s ability to benefit from the rising oil price to boost revenue.
- The Nigerian bourse ended the week on a negative note as market sentiment turned negative. The NGXASI closed the week with -0.44%loss as against -0.70% loss recorded last week. The Nigerian Exchange recorded N118.4bn loss in naira terms.
- Year-to-date, the NGSAXI maintained its positive position to close the week with a gain +15.82%as the market capitalization settled at N26.99trn.
- Sectoral performance across sectors was broadly negative. At the close of trading on Friday, zero sectors closed positive while fifteen (15) sector closed negative and on (2) sector closed Flat. No sector closed positive WoW while the NGXMERIVAL Index topped the loser’s chart with a loss of -3.63%WoW (See Chart 1 below)
Chart1: Movement of NGXASI Index Points 1 SEP 2022- 16 SEP. 2022
NASD OTC Exchange – Unlisted Equities
The NASD OTC Security Index (NSI) and Market Capitalization closed the trading week on a negative note. The NSI and Market capitalization closed the week at 741.08 points and 975.57 with a decline of -2.03% respectively (see table 8 below).
Table 8: NASD W-o-W Change
|MKT Capitalization (Bn)||995.78||975.57||-2.03%|
|Value Traded (000)||23,002,909.90||333,068,678.44||1347.94%|
Dangote Index closed the week negative at 128.26 basis points from 128.44 basis points recorded the previous week, representing an decrease of +0.14% WoW DANGCEM, NASCON remained flat while DANGSUGAR recorded loss to close with -3.12% WoW. (see table 9 below).
Table 9: Dangote Index W-o-W Change
Furthermore, the Elumelu Index closed negative at 106.43 basis points from 110.47 basis points recorded the previous week, representing a decrease of -3.66% W-o-W UBA and TRANSCORP closed the week negative with -5.96% and -1.87% respectively while, UBCAP and AFRIPRUD closed the week positive with a +0.42% and +0.91% respectively while TRANSCOHOT closed the week flat W-o-W (see table 10 below).
Table 10: Elumelu Index W-o-W Change