Weekly Market Review: Vol. 94
Prologue
Over the last two weeks, the Naira has devalued considerably, contrasting its strong, appreciable performance in March 2024 when it was lauded as the best-performing currency in the world by Goldman Sachs.
Last week, the exchange rate for customs duty collection rose to $/₦1,441.58, exceeding the NAFEM rate, which closed at $/₦1,400.40. It is noteworthy to mention, however, that the NAFEM rate trended as high as $/₦1,435 on Friday. In the parallel market, rates also inched up to close at $/₦1,400 at the end of the week.
Oil prices continued their downward trend. According to the weekly inventory report of the AmericanPetroleum Institute, there was a 4.9-million-barrel increase in crude oil stocks in the week ending April 26, 2024. In addition, the anticipation of a ceasefire between Hamas and Israel contributed to the support for lower prices.
Nigerian Financial Market
In April 2024, the money market experienced a liquidity drought driven largely by the regulatory tightening stance. This saw the interbank market with a short position that dipped into the negative ₦1.3 trillion territory. The market saw a different turn of events on Friday, with a net surplus of merely ₦19.6 million in circulation compared to the deep deficit.
Many stakeholders argue that when liquidity remains short continuously over a period, it often signifies a constrained market environment wrought with limited funds for investment or trading purposes. Such short liquidity further amplifies market volatility and increases the risk of sharp price movements due to the imbalance between supply and demand.
Bond dipped last week as rumours about a change in offered bonds at the auction filtered into the market. The DMO will introduce a new 9-year issue, the May 2033 bond, replacing the anticipated reopening of the February 2034 bond from the last auction. Some have taken this to reflect a policy shift in support of lower interest rates, but we opine that the focus is on more strategic and efficient borrowing than on lower interest rates.
The Nigerian Exchange Group(NGX) commenced the month of May 2024 in a bullish manner, as the All-ShareIndex rose by 0.55%, an increase of 537.15 points to settle at 98,762.78points. Although experiencing a decline of 6.06% in the previous month, which resulted in equities losing ₦3.57 trillion in market capitalisation, the positive sentiment witnessed in the market is perceived as a refreshing change. Some analysts attribute the positive equity market performance to improved liquidity conditions and a perception that interest rates may have peaked.
Although the transition from liquidity dearth to an insignificant surplus may give some stakeholders succour, we think the liquidity improvement is not worth speaking of and may be short-lived as regulators are likely to stay the course and tackle inflation.Whilst the Naira is seen by some to be losing recent gains at the moment, we are of the opinion that for the markets to trade effectively, there must be fluctuations in pricing reflective equilibrium albeit within defined bands.
Alternative Assets
The cryptocurrency markets have witnessed substantial profit-taking recently, with retail investors driving most of the sell-off. A broad array of factors have started to influence crypto investment behaviours and consequently, crypto outlook. From the Russia/Ukraine crisis, to Middle-East tensions revolving around Israel’s actions and inactions, it has become possible to draw some correlation between the trend in oil prices and crypto valuations.
Commodities
At its meeting on Thursday, the Federal Open Market Committee (FOMC) maintained rates between the5.25%-5.50% range and in addition, employment figures came lower than expected at 3.90%. The markets expect at least another rate cut by the Fed and this is welcome news for the commodity markets, especially Gold and Silver.
Crude oil prices took a hit following the latest reports from the U.S. Energy Information Administration, revealing a significant increase in inventory by 7.3 million barrels for the week ending April 26 2024. A sharp contrast with the previous week’s notable draw of 6.4 million barrels, which had briefly driven prices higher.
What Lies Ahead
We have witnessed a slight dip in interest rates and partial devaluation of the currency. We expect a corrective retracement in fixed income yields and further local currency revaluation as offshore interest is sustained in the markets. In the equity space, we foresee some FDI traction on value stocks particularly as banks are set to recapitalize.
The markets anxiously await the NTB auction this week.
