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Global Economy

In a coordinated stand against inflation, both the UK’s Bank of England (BOE) and the US Federal Reserve (Fed) held their key interest rates steady this week. While economic data showed some positive signs, the central banks emphasized their commitment to taming inflation pressures. The Fed opted to keep its federal funds rate target range at 5.25% to 5.50%. This decision came despite a solid economic performance, with strong job growth and a low unemployment rate. However, inflation, while easing, remains elevated. The Fed acknowledged an improving balance of risks regarding its employment and inflation goals but cautioned about the uncertain economic outlook. They remain resolute in their commitment to bringing inflation back down to 2%. The BOE’s Monetary Policy Committee (MPC) voted 6-3 to maintain the Bank Rate at 5.25%. Although two members favored a hike and one a cut, the committee ultimately opted for stability. Global factors like subdued GDP growth and falling energy prices influenced the decision. While the labor market remains tight, the MPC expects a gradual rise in GDP growth. Inflation is projected to dip to 2% temporarily in Q2 2024 before rebounding. Despite some positive signs, the BOE remains vigilant about the potential for inflation to become embedded and reiterates its commitment to achieving the 2% target.

Domestic Economy

During the week, the Central Bank of Nigeria (CBN) issued two significant circulars. The first circular addressed concerns about the increasing foreign currency exposure of banks. It imposed a 20% short or 0% long limit on Net Open Position (NOP) relative to shareholders’ funds, aiming to mitigate risks associated with excessive long foreign currency positions. Banks exceeding these limits are required to comply by February 1, 2024. The circular also mandated daily and monthly NOP calculations using provided templates. Additionally, banks must maintain liquid foreign assets to cover obligations and establish foreign exchange contingency funding arrangements with other financial institutions. In another circular, the CBN lifted the previously imposed ceiling on exchange rates for International Money Transfer Operators (IMTOs). Initially, IMTOs were required to quote rates within a range of -2.5% to +2.5% around the previous day’s closing rate of the Nigerian Foreign Exchange Market (NAFEM). The removal of this cap allows IMTOs to freely quote exchange rates for Naira payouts, responding to market demand and operating on a willing buyer, willing seller basis.

Equities and stock recommendation

For the fifth (5th) consecutive week this year, the Nigerian Equities market closed in the green zone. This week, the NGX All Share Index (ASI) gained 1.97% WoW to settle at 104,421.23 points, pushing the market’s year-to-date returns up to 39.65% (vs. 36.95% YtD last week). The market recorded two (2) consecutive trading sessions of losses on the 30th and 31st of January 2024, spurred by incessant sell-offs in the market particularly in the banking tickers, following the announcement of new CBN guidelines on banks’ Net Open Position (NOP). Consequently, the Banking sector (-4.52% WoW) registered the highest losses this week, followed closely by the Insurance (-4.07% WoW) and Oil and Gas (-2.47% WoW) sectors. On the other hand, the Industrial Goods sector (+6.36% WoW) sustained its positive run for the third (3rd) straight week, followed by the Consumer Goods sector (+1.30% WoW). The top gainers for this week were MEYER (+2.8% WoW to NGN4.30), CORNERST (+20.3% WoW to NGN1.90) and GEREGU (+14.7% WoW to NGN568.00). On the other hand, we saw DAARCOMM (-22.2% WoW to NGN0.70), ETERNA (-19.5% WoW to NGN22.10) and SUNUASSUR (-19.1% WoW to NGN1.82) take the lead on the losers’ chart. We expect the mixed sentiment in the equities market in the coming week as investors take cognizance of the release of the 2023FY earnings results.

Fixed Income

At the January 2024 secondary FGN Bond auction, the Debt Management Office (DMO) offered NGN360bn worth of instruments across the reopening of four (4) instruments (MAR-2027, APR- 2029, JUN-2033, and JUN-2038) worth NGN90bn each and a total of NGN418.20bn worth of instruments were sold at the auction across the four (4) reopened instruments (MAR-2027:NGN86.19bn, APR-2029:NGN21.94bn, JUN-2033:NGN43.35bn, and JUN-2038:NGN266.73bn). The average bid-to-cover ratio declined to 1.68x from 2.46x at the previous month’s auction, indicating a decrease in demand, particularly for the JUN-2038 instrument (-259bps to 3.47x from 6.06x at the last auction). The average stop rate also decreased by 32bps to 15.75% (vs 16.29% at the previous auction). Additionally, at the OMO auction held on Monday, the average stop rates declined by 17bps to 13.50%, down from 13.67% at the preceding auction. Likewise, the average bid-to-cover ratio fell by 21bps to 1.53x (vs 1.73x at the previous auction), indicating weaker demand for the instruments. The Nigerian Treasury Bills market closed the week on a bearish note with the average yield increasing significantly by 293bps WoW to 9.66%. Furthermore, the FGN Bond market witnessed similar sentiment, with the average yield rising by 97bps WoW to close at 14.77%. This was driven by sell-offs across the yield curve. Overall, the Naira Fixed Income market ended the week negative, with the average yield rising by 195bps WoW to close at 12.21%. We expect yields to remain elevated due to investor concerns over the upcoming MPC meeting and potential interest rate hikes amidst CBN’s liquidity tightening.


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