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What To Expect From The Markets This Week - 200622

Jun 18, 2022   •   by   •   Source: Proshare   •   eye-icon 3454 views

Nigeria: Economic Dashboard @ 170622


Editor’s Pick 

Source: Proshare Research - June 18, 2022 

Nigeria Economy 

  • According to the National Bureau of Statistics (NBS), Nigeria recorded headline inflation of 17.71% in May. The rapid rise in inflation was attributed to the rising cost of energy, food, clothing footwear, and transportation. Core inflation came in at 14.9% in May while Food inflation rose to 19.5%.

 

  • Figures obtained on Monday from the Nigeria Electricity System Operator, an arm of the Transmission Company of Nigeria (TCN), showed that the national electricity grid collapsed from 3,703 megawatts to 9MW last Sunday. The National grid had collapsed on four previous occasions this year, twice in March and twice in April. Various reasons have been adduced for the collapse namely: gas constraints, water management challenges, and gas pipeline vandalism, among others.

 

  • The Defence Industries Corporation of Nigeria (DICON) has entered a Joint Venture Public-Private Partnership (PPP) with Sur Corporate Wear Nig. Ltd to produce all military uniforms in the country. The deal brokered by the Infrastructure Concession Regulatory Commission (ICRC) would see the factory commencing the production of the uniforms, from January 2023. The deal would span a concession period of 20 years.

 

  • President Muhammadu Buhari has approved the unbundling of the Transmission Company of Nigeria (TCN). Despite the power sector privatization in 2013, the TCN was left under the ownership and management of the Federal Government. Following the incessant collapse of the national power grid Industry experts and operators have called for the unbundling of the transmission company. The power minister confirmed earlier in the week, that the process has reached an advanced stage.

 

  • At the ongoing National Aviation Conference in Abuja, Minister of Aviation, Hadi Sirika, disclosed the Federal Government’s plan to concession 17 federal government-owned airports aside from the four international airports in Lagos, Abuja, Port-Harcourt, and Kano (which have concession programs in progress).   According to the Minister, the government is currently working on regulations to unlock potential in the sector.

 

  • According to the ‘2021 Subscriber/Network Data Annual Report,’ published by the Nigerian Communications Commission (NCC) shows that revenue generated by operators in the communications sector last year totaled N3.25trn. The report also states that GSM operators generated 85.42% of the total revenue in the telecoms sector while fixed wired, Internet service provision, value service added, collocation, and infrastructure sharing all accounted for roughly 15% of the sectoral revenue.

 

Global Economy 

  • On Wednesday, the Federal Reserve raised interest rates by 75 basis points the largest single increase since 1994, this came less than a week after official data showed US inflation surged 8.6% to a 41-year high in May. 

 

  • In its recently released Global Economic Outlook (GEO), Fitch Ratings downwardly reviewed its global GDP growth forecast for 2022 by 60basis points to +2.9% from the +3.5% forecast it earlier made in March 2022. The biggest revision by the rating agency was for China which is now expected to grow by +3.7% this year, down from the +4.8% forecast given in March. Fitch also lowered its forecasts for growth in the US by 60bp to +2.9% and the eurozone by 40bp to +2.6%.

 

  • The Bank of England raised interest rates by 25 basis points on Thursday, the fifth consecutive hike by the BoE MPC in a bid to contain its soaring energy and food price-induced UK inflation, which could hit 11% later this year. The BoE's main interest rate thereby rose to a 13-year high of 1.25%, from 1% previously. Six out of the nine members of the BoE's monetary policy committee voted to increase rates by 25 basis points, with the other three voting for a 50-basis point hike.

 

  • The Bank of Japan on Friday retained its monetary easing policy stance which is a -0.1% target for short-term rates. This is even as monetary authorities in other advanced economies are raising interest rates to combat inflation. The bank however stated that it would pay attention to forex markets as the yen fell to a 24-year low. 

 

  • Data from the National Bureau of Statistics (NBS) in China showed on Wednesday that Industrial output grew +0.7% in May from a year earlier, after falling by -2.9% in April. The uptick in the industrial sector was attributed to the easing of COVID curbs and strong global demand. China’s exports had grown at a double-digit pace in May, exceeding expectations as factories restarted and logistics challenges eased.

 

 

Review and Outlook 

Nigeria’s inflation rate rose to 17.71%, according to the National Bureau of Statistics. The 89-basis point increase was attributed to a spike in food (19.5%) clothing and footwear (18%) and transport fares (17%). Despite the recent 150bp hike in the Monetary Policy Rate (MPR) by the Monetary Policy Committee (MPC) in May, we project that headline inflation could still rise to 20% by December on the back of rising energy and food prices as well as a weaker Naira. The World Bank had in a recent report reviewed the country’s inflation outlook for 2022 to 15.5% up from the 13% it forecasted earlier.

 

The decision by the Federal Open Market Committee (FOMC) and the Monetary Policy Committees (MPCs) of the European Central Bank (ECB) and the Bank of England to further tighten in response to rocketing inflation would further slowdown employment in those economies while emerging markets would see larger capital flow reversals.  But next week PMIs will be released to assess Private sector productivity in the US, UK, Eurozone, Japan, and Australia. While CPI data for Hong Kong, the UK, Canada, Singapore, Japan, and Malaysia would also be released next week. 

 

 Oil and Gas


Domestic

  • OPEC Monthly Oil Market Report (MOMR) for May 2022 revealed that crude oil output increased in Saudi Arabia, UAE, Angola, Algeria, and Congo, while production declined in Nigeria, Libya, Venezuela, etc. Nigeria’s crude output fell by 195,000 b/d from 1.219 mb/d in April to 1.024 mb/d in May 2022, putting Nigeria behind Angola as the largest oil producer in Africa. Analysts expect Nigeria’s crude output to remain low due to low rig count as well as the technical and operational issues at the nation’s terminals.
  • Nigeria’s high-priced bonny light is selling at around $127 per barrel, a price that should be providing a revenue boom for Nigeria’s economy and reducing borrowing. On the contrary, a large chunk of the country’s revenue remains impeded by subsidy, oil theft, and other supply disruptions with little remittance to the Federation Account. 
  • Charles Soludo, the governor of Anambra State, has called on the Federal Government to stop deducting petrol subsidy costs from the federation account, arguing that the subsidy on petrol is a Federal Government policy that should be borne by the Federal Government alone. The minister of finance, Zainab Ahmad, and most analysts have called for a complete phased out of the subsidy regime in favor of affordable mass transit systems to address the fiscal pressure of the subsidy.
  • Oil marketers have also said the current ex-depot price of diesel is over N750 per litre while the retail price at filling stations hovers between N800 – N850 per litre. The soaring diesel price is eating into the margin of oil marketers and other businesses in Nigeria.
  • Most analysts and oil marketers have projected that diesel prices could hit N1,500 per litre in the next two weeks if there are no deliberate actions to remedy the challenges faced by oil importers.
  • To provide a respite from the soaring diesel price, President Muhammadu Buhari through the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) has approved an upward review of the freight rate for transporters of petroleum products. Analysts expect the upward review to signal the government’s commitment to constant fuel supply but noted that actual payment of such claims, which often suffer delay, could be another issue for oil marketers to contend with. 
  • The Nigerian Content Development and Monitoring Board (NCDMB) and the National Insurance Commission (NAICOM) have signed a joint insurance guideline that will compel oil and gas (O&G) companies operating in Nigeria to patronize local insurance companies. The regulation is expected to support the local content drive of the NCDMB and support the retention of insurance spending in the domestic insurance industry. 


Foreign

  • Oil prices dropped more than $2 on Monday as a flare-up in COVID-19 cases in Beijing dashed hopes for a rapid pick-up in China's fuel demand, while worries about global inflation and sluggish economic growth further depressed the market.
  • Sri Lanka’s Prime Minister, Ranil Wickremesinghe, has signaled that his country may be compelled to buy more Russian oil as the country faces shortages amid an unprecedented economic crisis.
  • According to the Energy Information Administration’s latest Drilling Productivity Report, U.S. Shale production in the seven most prolific shale basins will increase crude output by 143,000 b/d in July to 8.91 mb/d.
  • European Union, Israel, and Egypt on Wednesday signed a tripartite natural gas export deal in a bid to wane Europe of Russian gas. The deal would see Israeli gas flow via a pipeline to Egypt’s LNG terminal on the Mediterranean, where some will be liquefied and then transported on tankers to Europe. 
  • The US Department of the Treasury’s Office of Foreign Assets Control (OFAC) has imposed additional sanctions on companies based in Iran, China, and the UAE for enabling the export of Iran’s petrochemicals under the existing sanctions. 
  • Oil prices edged lower on Friday as demand concerns emerged following this week's rate hikes, although persisting supply tightness and new sanctions on Iran limited the downside.
  • Brent recorded a weekly drop of -6.81% (see Table 1).


Metals

Gold dropped by -1.80% while Silver also dropped by -1.57% W-o-W (see Table 1).

Agriculture

  • Cocoa prices climbed by +0.12% W-o-W
  • Corn prices inched up by +2.20% W-o-W while Sugar prices dipped by -1.73% (see Table 1).

 

Table 1: Commodity Prices

Commodity

17-Jun-22

10-Jun-22

31-Dec-21

Weekly Chg

YTD Chg

Brent

113.22

121.5

78.54

-6.81%

44.16%

Gold

1842.1

1875.8

1827.1

-1.80%

0.82%

Silver

21.605

21.95

23.27

-1.57%

-7.16%

Cocoa

2440

2437

2546

0.12%

-4.16%

Corn

789.25

772.25

595.5

2.20%

32.54%

Sugar

18.71

19.04

18.83

-1.73%

-0.64%

Source: CNBC, Proshare Research

*Data for the 10th of June 2022 is as of 0609 pm (Nigerian Time)


 Outlook

  • In the coming week, oil prices are expected to rise on robust summer demand against persistent tight supply.
  • Gold price is expected to stabilize in the coming week. Inflation and the Russian-Ukraine war are still a factor holding the price above $1,800 as investors look for direction from the bullion after Fed increased rates by 75 basis points.
  • Cocoa prices are expected to rise as major producers push for a $400/ ton premium price on the beans.
  • Sugar prices are expected to drop in the coming week on reports that the Brazillian cane industry continues its production after a slow start to the season.
  • Corn prices are expected to rise as harvest in Brazil falls behind expectation as they battle leafhoppers which spread viruses to their corn crops, thereby destroying some of their crops.

 

Fixed Income Market


Currency Market 

For most trading sessions this week, Naira appreciated both at the NAFEX and I & E FX windows.

However, at the close of the trading session on Friday, the Naira depreciated by -0.04% (W-o-W) basis settling at N421.33 in the Investor and Exporter FX fixing while at the Nigerian Autonomous Foreign exchange fixing (NAFEX), Naira appreciated by -0.14% (W-o-W) to N418.71 at the closing of the market on Thursday (see chart 2 below).

 

Table 2: Naira/Dollar at the I&E FX Window and NAFEX Market

Average Benchmark Yields

 

10-Jun-22

17-Jun-22

% Change

I&E FX

421.51

421.33

-0.04

 

03-Jun-22

16-Jun-22

 

NAFEX ($/N)

419.30

418.71

-0.14

Source: FMDQ, Proshare Research

 

Money Market 

The interbank rate stayed relatively high this week as the liquidity remained squeezed despite the OMO maturities inflow. 

The Open repo rate (OPR) and Overnight rate (O/N) declined by -24.87% (W-o-W) and -22.00 (W-o-W) to 10.33 and 10.92 respectively at the close of the trading session on Friday (see chart 3 below).

 

Table 3: Money Market

Money Market Rate

 

10-Jun-22

17-Jun-22

% Change

OPR (%)

13.75

10.33

-24.87%

O/N (%)

14.00

10.92

-22.00%

Source: FMDQ, Proshare Research

 

The Interbank rates should remain elevated in the coming week, with the absence of any major inflow from Apex bank.

 

 

Treasury Bills Market 

The activity in the bills market was mild this week with attention drawn to the Nigerian treasury bill auction.  

 

At end of trading on Friday, the bills market was bearish as the average yield benchmark for both bills increased. The Treasury bill and OMO bills rose by +6.88% and +4.16%, settling at 4.66 and 4.51 respectively (See table 4 below).

 

Table 4: Treasury Bills Market

Average Benchmark Yields

 

10-Jun-22

17-Jun-22

% Change

T. Bills (%)

4.36

4.66

+6.88%

OMO Bills (%)

4.33

4.51

+4.16%

Source: FMDQ, Proshare Research

 

We expect the market to sustain a similar trend next week in the absence of any major driver.

 

 Nigerian Treasury Bills Auction Result

At the Nigerian Treasury bills auction on 15th June, the DMO sold N34.88bn worth of notes matched by equivalent demand. Rates fell across all tenors due to oversubscription at mid and long tenors, 91 days rate fell by 1bp to 2.49%, 182 days fell by 5bps to 3.79%, while the 364 days dropped by 37bps to 6.44% compared to the previous auction. The bid-to-cover ratio increased to 5.12x vs 1.98x at the last auction (see table 5 below). 

 

Table 5: Nigerian Treasury Bills Auction Result Auction

Nigerian Treasury Bills Auction 

 

 Tenor

Amount offered (N’bn)

Total subscription (N’bn) 

Amount sold

 (N’bn) 

Stop Rate 

(%)

91-days

        5.91

1.64

1.44

2.49

182-days

        1.10

1.76

1.28

3.79

364-days 

        27.87

175.06

32.16

6.07

Source: Commercio papers

 

 

FGN Bond Market 

The secondary bond market was bearish, with several interests seen across all maturities.

 

At the close of the trading on Friday, market outcomes were mixed with multiple buying and selling interests across the tenors. The overall average yield benchmark moved slightly to 11.57 (See table 6 below).

 

Table 6: FGN Bonds Market

Average Benchmark Yields

 

10-Jun-22

17-Jun-22

% Change

Short Tenor

        9.45

9.54

+0.95%

Mid Tenor

        11.18

11.15

-0.27%

Long Tenor

        12.58

12.73

+1.19%

Source: FMDQ, Proshare Research 

 

We expect the secondary market to be somewhat quiet in the coming week with attention drawn to the upcoming Bond auction



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