Global Economy

Earlier this week, S&P Global published a series of Purchasing Manager Index (PMI) data for key global economies. The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index decreased to 50.1 in July 2024 from 50.9 in June 2024, hovering just above the no-change mark and indicating near-stagnation in private sector activity. Although output has increased for five consecutive months, the latest rise was the weakest in this period, marking a slow start to Q3:2024. Conversely, the S&P Global Flash US PMI Composite Output Index climbed from 54.8 in June 2024 to 55.0 in July 2024, reaching its highest level since April 2022. Output has steadily grown over the past 18 months, with the pace of expansion accelerating significantly in recent months after a slowdown in April 2024. In the UK, the headline seasonally adjusted S&P Global Flash UK PMI Composite Output Index increased from 52.3 in June 2024 to 52.7 in July 2024, indicating a strong rise in private sector activity. This marks nine consecutive months of expansion, with the index averaging 53.0 in 2024 to date. In the EU and US, services output was the primary driver of business activity, while manufacturing output led the growth in the UK.

Domestic Economy

Earlier this week, the Monetary Policy Committee convened for its 296th meeting, during which it extended its restrictive monetary policy measures for the fourth (4th) consecutive session this year. The committee decided to increase the Monetary Policy Rate (MPR) by 50bps to 26.75% and adjusted the Asymmetric Corridor to +500/-100 basis points around the MPR. Additionally, the committee retained the Cash Reserve Ratio (CRR) for commercial banks at 45% and for merchant banks at 14%, while maintaining the Liquidity Ratio at 30%. These measures reflect the committee’s ongoing efforts to manage inflation and attract Foreign Portfolio Inflows (FPIs). Notably, this is the slowest MPR increase implemented by the committee this year. Elsewhere, the federal government plans to issue USD500mn in domestic foreign currency-denominated bonds within the next three to four weeks. This initiative aims to attract foreign currency held by Nigerians abroad and other investors, supporting President Tinubu’s economic reforms. By issuing these bonds, the government seeks to bolster its foreign reserves, manage exchange rate risks, and enhance fiscal stability amidst ongoing economic challenges.

Equities and stock recommendation

Following the 50bps hike in the Monetary Policy Rate (MPR) to 26.75% at the Monetary Policy Committee (MPC) meeting held earlier this week, the Nigerian equities market closed bearish. The NGX All Share Index (NGX ASI) lost 2.33% WoW to settle at 98,201.49 points, bringing the market’s year-to-date (YtD) returns down to 31.33% (vs. last week: 34.46% YtD). All sectors under our coverage closed negative, led by the Industrial Goods sector (-5.89% WoW). The Banking (-2.94% WoW), Consumer Goods (-0.73% WoW), Oil and Gas (-0.54% WoW) and Insurance (-0.27% WoW) sectors followed behind. Specifically, DANGCEM (-9.99% WoW to NGN591.10), UBA (-7.88% WoW to NGN21.05), DANGSUGAR (-7.29% WoW to NGN37.50), ETERNA (-10.00% WoW to NGN16.20) and AXAMANSARD (-7.72% WoW to NGN4.66) spurred losses in their respective sectors. On the gainers’ chart, SOVRENINS (+14.3% WoW to NGN0.56), NEIMETH (+12.6% WoW to NGN1.96) and OANDO (+11.5% WoW to NGN20.35) led the chart. On the other hand, NSLTECH (-26.3% WoW to NGN0.42), OMATEK (-14.49% WoW to NGN0.63) and CUTIX (-14.0% WoW to NGN5.15) topped the losers’ chart. In the coming week, we expect sustained bearish sentiment in the fixed income market to impact the equities market. Furthermore, the recent directive to implement a windfall tax on banks’ 2023 foreign exchange gains could contribute to negative sentiment in the sector. However, the steady release of positive Q2:2024 earnings results could help shoulder the overall negative impact on the equities market.

Fixed Income

Earlier this week, the DMO held a bond auction, offering NGN300bn worth of instruments across the reopening of the APR-2029, FEB-2031, and MAY-2033 bonds, each with a NGN100bn offer size. Average stop rates surged by 51bps to 20.96%, compared to 20.44% at the previous auction. This increase was driven by higher rates across all instruments (APR-2029: +25bps to 19.89%, FEB-2031: +81bps to 21.00%, MAY-2033: +48bps to 21.98%). The average bid-to-cover ratio improved to 0.93x from 0.68x at the previous auction. Notably, the DMO sold NGN225.68bn worth of bonds, with a concentration on the longer-term issue. Following the recent MPC meeting, the CBN conducted a Nigerian Treasury Bills (NT-bills) auction, offering NGN277.96bn across all tenors. The average stop rates soared by 171bps to 20.03%, up from 18.33% at the previous auction. This was due to significant increases across the tenors (91-day: +220bps to 18.50%, 182-day: +206bps to 19.50%, 364-day: +86bps to 22.10%). The average bid-to-cover ratio declined to 1.35x from 1.86x previously. Demand was skewed towards the longer-tenor bill. These rate increases reflect the market’s adjustment to a higher interest rate environment. The increased demand for longer-term instruments suggests investors are seeking to lock in attractive yields. In the secondary market, the average NT-bill yield climbed 34bps WoW to 25.23%, driven by repricing in the short and mid-tenor bills. Likewise, the FGN bond witnessed negative sentiment as the average yield increased by 8bps WoW to 19.45%. This is following selloffs across the curve, particularly in the MAY-2033 (+36bps), FEB-2034 (+23bps), and MAR-2050 (+113bps) instruments. Overall, the Naira fixed income market concluded on a bearish note, with the average yield rising 21bps WoW to 22.34%. We expect yields to remain elevated in the coming week.

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