In a season where Central Banks worldwide have begun to signal easing after an elongated period of tightening to address global inflation, analysts have never been more perplexed about the outlook of Nigeria’s markets and economy at large. While some optimists bank on strategic moves made thus far as they foresee better days ahead, others wonder how the government will juggle the myriad of intertwined factors that are bedevilling the nation. From Nigeria’s staggering inflation (33.95%) to its minimum wage challenges (which remain yet to be concluded), through to the unfavourable exchange rate (+/- $/N1,500), the high interest rates and the high debt service to revenue ratio (73.5%) to name a few, it is clear that Nigeria is faced with a peculiar mix of challenges that must be addressed with delicate providence. It is our hope that the newly inaugurated Presidential Economic Coordination Council (PECC) will revive key sectors of the economy as a matter of urgency. Nigeria’s markets were bearish, particularly at the end of the week, as market liquidity remained short and both exchange and interest rates remained elevated.
The interbank money market opened July in very illiquid circumstances, with banks having to borrow from the lender of last resort throughout the first week of the month. At the end of week one, the market liquidity deficit was in excess of N1.4trn. In line with this, OPR (Open Repo) and O/N (Overnight) rates closed the week at 32.06% and 32.53% respectively.
The fixed-income markets also felt the impact of the tight liquidity as T-bill rates inched up throughout the week. Sizeable offers were noted across the short end of the yield curve with weak demand, which resulted in a corresponding uptick in yields within the week. Bond yields were not left out as offers were rife, particularly on the longest auction offered bond. The 2033s, which had traded as low as 21.1% in the previous week, bounced closer to auctioned levels to trade as high as 21.4% at the close. Suffice it to say that the fixed-income markets were predominantly bearish throughout the week.
The market capitalization of the All-Share Index was relatively flat throughout the week. It opened on Monday at 100,020.83 pts. and peaked for the week at 100,299.48 pts. but closed at 100, 022.03 pts. The NAFEM (Nigerian Autonomous Foreign Exchange Market) closed at $/N1,509.67, while the street market for foreign exchange closed at $/N1,521.50.
At the beginning of the week, oil markets carefully gauged reactions to the Biden/Trump debate forecasting how US gasoline prices would impact voter behaviour. Although the week was a day short due to the US Independence holiday, oil markets were quite bullish due to optimism about potential interest rate cuts, lower US inventories and uncertainty about the balance of global power in view of the sustained Russia/Ukraine and Middle Eastern conflicts. Brent opened at 84.90, sold as high as 87.64 and closed at 87.28, while the WTI opened at 81.45, sold as high as 84.38 and closed at 83.36.
On Friday, 5th July 2024, the MT Gox trustee announced that they had made Bitcoin and Bitcoin cash repayments to some of their rehabilitation creditors. The trustee moved hundreds of millions of dollars worth of tokens very early on the same day. Whales who have followed the MT Gox situation closely enough or maybe even got insider information for years would have been able to benefit from the situation by shorting (betting against) the market in the last ten days.
Mt. Gox was a Bitcoin centralized exchange based in Tokyo, Japan, launched in 2010 by Jed McCaleb. It quickly grew to become one of the largest cryptocurrency exchanges in the world, handling a significant percentage of Bitcoin transactions. However, in 2014, Mt. Gox filed for bankruptcy protection after revealing that it had lost approximately 850,000 bitcoins belonging to its customers and 100,000 of its own bitcoins due to security breaches following being hacked. This incident was one of the largest cryptocurrency heists in history at the time, leading to significant financial losses for many users and a tarnished reputation for the exchange industry.
The MT Gox situation is a contributing reason why Bitcoin and nearly every other cryptocurrency has observed a steep downturn in the last week. Whilst many have witnessed their crypto portfolio’s drastically drop in value, the opportunists are taking advantage of the situation. The duration of this downward spiral cannot be predicted at this time.
Those with the funds are currently DCAing (Dollar-cost Averaging) into the market to reduce their losses and make some sharp profits. Dollar-cost averaging (DCA) is an investment approach where an investor spreads their total investment amount across regular purchases of a chosen asset, such as cryptocurrencies. Instead of investing a large sum at once, DCA involves investing fixed amounts at set intervals, like monthly or quarterly. This strategy aims to mitigate the impact of market volatility; when asset prices are high, the fixed investment buys fewer units, and when prices are low, it buys more. Over time, this can potentially lower the average cost per unit of the asset. DCA encourages disciplined investing by removing the pressure to time the market perfectly. It is often viewed as a long-term strategy suited for assets expected to grow over time despite short-term fluctuations. It is important to note that while DCA can help smooth out investment costs, it doesn’t guarantee profits or shield against losses in a declining market. Additionally, investors should consider transaction fees and other costs associated with each purchase.
Time and chance happen to everyone in the crypto market at some point, and DCAing can be very advantageous, but when done wrongly, one may risk catching the falling knives of the market.
As we approach the July Bond auction, discourse is active across the market about how high bond yields can go. With a major surprise at the June auction where participants did not by any chance foresee a 21.50% stop rate, many wonder whether there will be yet another Northward surprise this month. A brief survey of the bond yield curve is reflective of 2033’s being an extreme outlier. While many expect yields on instruments around the 2033’s to adjust upward, we think a yield normalisation is more likely on that bond. At the NTB auction scheduled this week, it will be interesting to see if stop rates will close in tandem with secondary market hiked yields.
We opine that monetary policy has been aggressively tightened, month-on-month inflation is decelerating, and the currency is relatively stable. It is, therefore, imperative to attract FDIs (Foreign Direct Investors) wholeheartedly while keeping the FPIs (Foreign Portfolio Investors) happy. To this end, a maintained monetary policy stance is expected at the MPC with efforts to keep short-term interest rates attractive enough for offshore injections. We expect Nigeria’s yield curve to be humped with a negative skew for the foreseeable future.
