Global Economy

Earlier this week, the Governing Council of the European Central Bank (ECB) decided to keep its monetary policy rates unchanged. While overall inflation levels have been tapering, the ECB observed that domestic price pressures remain unabated, keeping services inflation elevated. Consequently, the interest rate on the main refinancing operations, the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.50%, 4.75% and 4.00%, respectively. Elsewhere, in the US, according to the US Labor of Bureau Statistics, headline inflation increased by 3.50% YoY in March 2024, vs. 3.20% noted the previous month. Movement in core inflation, excluding food and energy prices, was flat from February 2024 at 3.80% YoY during the month. On a MoM basis, headline inflation and core inflation were unchanged at 0.40% in March 2024, compared February 2024. Finally, in China, according to its National Bureau of Statistics, the headline inflation printed at 0.10% YoY in March 2024, vs. 0.70% YoY in February 2024. On a MoM basis, headline CPI was recorded at -0.10% during the month, vs. 1.00% in February 2024.

Domestic Economy

Earlier this week, the Central Bank of Nigeria (CBN) issued a directive to all banks regarding the use of Foreign Currency (FCY) denominated collaterals for Naira loans. The directive effectively prohibits banks from granting Naira loans backed by FCY denominated collaterals, except in cases where these collaterals are Eurobonds issued by the Federal Government of Nigeria or guarantees from foreign banks, including standby Letters of Credit. Additionally, the directive state that all existing FCY-backed loans that do not meet the exceptions must be phased out within 90 days. Failure to comply will result in these loans being weighted at 150% for Capital Adequacy Ratio calculations, along with other regulatory penalties. This directive is part of a series of regulatory measures implemented by the CBN to stabilize the previously dysfunctional currency market. We believe that this move aims to reduce the overall risk exposure of banks, particularly given the volatility associated with FCY denominated assets.

Equities and stock recommendation

This week, the Nigerian Equities market  closed bearish for the fourth (4th) consecutive week, following a shortened trading period due to Eid-l-Fitr holidays. The NGX All Share Index (ASI) recorded a 1.09% WoW decline to close at 102,314.56 points. As a result, the market’s year-to-date (YtD) return decreased to 36.83%, down from 38.33% YtD last week. Across all sectors within our coverage, negative performances were observed. The Banking sector experienced the most significant loss, dropping by 7.22% WoW, following the recent directive by the CBN to restrict banks from providing Naira loans backed by FCY denominated collaterals. Other sectors such as Insurance (-2.45% WoW), Consumer Goods (-1.33% WoW), Oil and Gas (-0.28% WoW), and Industrial Goods (-0.23% WoW) also recorded losses. MORISON (+20.80% WoW to NGN2.56), OANDO (+10.60% WoW to NGN12.55), and DEAPCAP (+9.70% WoW to NGN0.68) emerged as top gainers, while GTCO (-13.8% WoW to NGN41.40), FLOURMILL (-13.6% WoW to NGN33.80), and SUNASSUR (-13.6% WoW to NGN1.18) led the list of losers. Looking ahead to the coming week, we anticipate prevailing negative sentiment as investors continue to focus on higher yielding fixed income assets.

Fixed Income

At the Nigerian Treasury bills (NT-bills) auction held today, the Central Bank of Nigeria (CBN) offered NGN149.64bn worth of treasury bills across the tenors (short-: NGN2.78bn, mid-: NGN3.02bn and long-term: NGN143.84bn). The average stop rate declined by 14bps to 17.98% from 18.12% at the previous auction, due to a fall in the long-term rate (-42bps to 20.70%) offered while short-term (16.24%) and mid-term (17.0%) rates remained unchanged. The average bid-to-cover ratio declined by 404bps to 12.19x compared to 16.23x at the previous auction reflecting weaker demand for the instruments. However, CBN sold NGN951.83bn worth of instruments, 6.36x more than the initial offer. In the secondary market, the NT-bills market closed bullish as the average yield fell by 5bps WoW to 18.86%. Similarly, the FGN bond market ended positively with the average yield declining by 12bps WoW to 19.27%. This was driven by buying interest across all segments of the curve, specifically in the FEB-2028 (-78bps), JUL-2034 (-101bps) and MAR-2035 (-115bps) instruments. Overall, the Naira fixed income market concluded on a bullish note as the average yield went down by 8bps WoW to 19.06%. This positive sentiment is likely due to the shortened trading week caused by the public holiday. Looking ahead, we anticipate a potential shift towards bearish sentiment due to the CBN mopping up activities to manage liquidity level.

Click here for the full report.