Global Economy
According to S&P Global, the United States (US) Composite PMI expanded to 54.3 points in October (September: 54.0 points), primarily reflecting the resilient growth in the services sector, while the manufacturing sector remained subdued. Precisely, the Services PMI (55.3 points vs. September: 55.2 points) rose marginally as the higher domestic demand spurred growth in new businesses despite the downturn in export orders.
Elsewhere, while the Manufacturing PMI (47.8 points vs September: 47.3 points) improved due to the reduced pace of deceleration in new orders, the figure remained below the 50-point benchmark for the fourth consecutive month, indicating continued deterioration in business conditions. We anticipate that overall private sector activities in the US will remain in the expansionary territory over the short term. Our view is premised on the expectation of stronger domestic demand driven by further rate cuts by the US Fed and a more favourable post-election environment. Precisely, we observe that companies are increasingly confident that the current slowdown in production and sales will reverse as political uncertainty eases.
According to the Hamburg Commercial Bank (HCOB), the Euro Area’s Manufacturing PMI (45.9 points vs September: 45.0 points) settled at a 5-month high in October, albeit still below the 50-point psychological threshold. We attribute the subdued factory activity to the slowdowns across production, new orders, employment, and procurement activity. At the same time, while the Services PMI (51.2 points vs September: 51.4 points) remained robust due to the sustained growth in services output, the outturn dropped to an eight-month low on the back of a significant decline in new orders. Overall, the Composite PMI settled at 49.7 points in October (September: 49.6 points), reflecting weak business activities, especially in Germany and France. Looking ahead, we anticipate the lingering headwinds arising from tepid demand, unfavourable business conditions, and waning optimism will continue hindering private sector activity in the Eurozone. As a result, we believe the European Central Bank (ECB) will ease the key interest rates further in the December monetary policy meeting.
Global Equities
Global stocks faced pressure this week as a shift in the outlook for US interest rates, disappointing corporate earnings, and increased uncertainty surrounding the upcoming elections in the United States and Japan among others weighed on risk sentiment. Accordingly, US equities (DJIA: -2.1%; S&P 500: -0.9%) were on track to close lower as risk appetite waned due to (1) rising Treasury yields earlier in the week, (2) concerns that the Federal Reserve may take a more cautious approach to rate cuts, and (3) election-related uncertainties. Likewise, European equities (STOXX Europe: -1.4%; FTSE 100: -1.1%) were headed for a weekly loss, following weaker earnings from auto-related stocks like Mercedes-Benz and Valeo, and regional growth concerns. In Asia, Japanese equities (Nikkei 225: -2.7%) settled lower for another week as investors assessed the upcoming national elections and earnings reports. Meanwhile, Chinese equities (SSE: +1.2%) were a bright spot as recent government measures and a recovery in property sales fueled optimism for growth. The Emerging Market (MSCI EM: -1.8%) and Frontier Market (MSCI FM: -0.3%) indices dipped following bearish sentiments in India (-2.3%) and Vietnam (-2.6%), respectively.
Nigeria: Domestic Economy
According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions in the local bourse rose to a six-month high, increasing by 29.9% m/m to NGN493.01 billion in September (August: NGN379.52 billion). The performance was primarily driven by the higher participation from domestic investors (91.6% of gross transactions) despite the weaker participation from foreign investors (8.4% of gross transactions). Analyzing the breakdown, domestic investors inflows surged by 40.2% m/m to NGN451.60 billion (August: NGN322.05 billion) due to increases in collections from retail and institutional investors by 59.4% m/m and 15.7% m/m, respectively. However, inflows from foreign investors dropped for the fourth consecutive month, declining by 27.9% m/m to NGN41.41 billion in September (August: NGN57.47 billion), partly due to the exchange rate risk associated with the increased volatility of the naira. While we expect domestic investors to continue to contribute the most to total transaction value, we think buying activities will be constrained by elevated yields in the fixed-income market. Also, we expect the sustained volatility of the naira to constrain foreign investors participation in the equities market.
The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in October (from the total revenue generated in September) increased by 7.9% m/m to NGN1.30 trillion (August: NGN1.20trillion). We attribute the significant increase to higher receipts from Oil & Gas Royalties, Excise Duties, Electronic Money Transfer levies (EMTL), and Customs External Tariff levies (CET). On the other hand, receipts from Companies Income Tax (CIT), and Value Added Tax (VAT) declined. From the breakdown provided, we estimate that the amount disbursed is 56.5% of the total gross revenue (NGN2.30 trillion) generated in the month, with the remaining balance allocated for transfer, intervention & refunds (NGN878.95 billion), and the cost of collection (NGN80.99 billion). Notably, the FGN received 32.7% or NGN424.87 billion (August: NGN374.93 billion), State Governments received NGN544.14 billion (August: NGN522.34 billion), while the Local Governments received NGN329.86 billion (August: NGN306.53 billion). While gains from the exchange rate differential may continue to support government revenue from foreign sources in naira terms, we expect the below-target oil production levels (Budget: 1.78 mb/d vs. Cordros forecast: 1.52 mb/d) and challenging macroeconomic conditions to tether the growth in revenue distributed to the three tiers of government.
Capital Markets: Equities
The domestic stock market opened the week on a positive note, sustaining the same momentum throughout the week, as investors responded favourably to third-quarter (Q3) earnings releases, especially in the banking sector. Accordingly, the All-Share Index advanced by 1.4% w/w to 99,448.91 points, following strong investors’ interest in SEPLAT (+9.3%) after the Federal Government approved Seplat Energy Plc’s acquisition of Mobil’s assets, and bargain-hunting in UBA (+18.5%), OANDO (+16.4%), and FBNH (+10.6%). As a result, the Month-to-Date and Year-to-Date returns improved to +0.9% and +33.0%, respectively. Trading activity followed the broader market trend, with total volume and value increasing by 48.8% w/w and 16.8% w/w, respectively. Sectoral performance was largely positive, with gains recorded in the Banking (+7.9%), Oil & Gas (+4.0%), Insurance (+4.0%), and Industrial Goods (+0.1%) indices. The Consumer Goods (-0.1%) index was the sole loser for the week.
We expect the direction of market performance to be shaped by the ongoing Q3 earnings season as investors cherry-pick fundamentally sound stocks.
Money Market and Fixed Income
In line with our expectations, the overnight (OVN) rate declined by 242bps w/w to 30.2% as inflows from FAAC disbursements (NGN873.13 billion) and net CRR credits (c. NGN154.00 billion) outweighed debits for the FGN bond PMA (NGN289.60 billion), thus supporting system liquidity. Accordingly, the average liquidity for the week improved, to settle at a net short position of NGN437.00 billion (previous: net short position of NGN1.51 trillion).
Barring any liquidity management measures by the CBN next week, we expect the inflows from OMO maturities (NGN379.20 billion) and FGN bond coupon inflows (NGN238.90 billion) will further boost system liquidity, causing the OVN rate to temper from current levels.
Treasury Bills
The Treasury bills secondary market was bearish this week as the average yield across all instruments expanded by 6bps to 24.9%. Across the market segments, the average yield increased by 2bps to 24.2% in the NTB segment and rose by 18bps to 26.1% in the OMO segment. At this week’s NTB auction, the DMO offered instruments worth NGN374.70 billion to investors – NGN13.14 billion for the 91-day, NGN11.59 billion for the 182-day, and NGN349.54 billion for the 364-day bills. Aggregate subscription settled higher at NGN489.84 billion (previous: NGN271.87 billion), with a bid-to-offer ratio of 1.3x. The auction closed with the DMO allotting exactly what was offered at respective stop rates of 17.00% (unchanged), 17.50% (unchanged), and 20.65% (previous: 19.86%).
We anticipate that the liquidity influx into the system next week will likely drive demand for instruments, causing a decline in yields in the secondary market.
Bonds
The FGN bond secondary market saw minimal activity this week as players primarily focused on the bond auction. Thus, the average yield inched higher by 1bp to 19.3%. Across the benchmark curve, the average yield expanded at the short (+5bps) and long (+4bps) ends as investors sold off the JAN-2026 (+10bps) and JUN-2053 (+32bps) bonds, respectively. However, the average yield contracted at the mid (-22bps) segment following interests in the FEB-2031 (-67bps) bond. At Monday’s PMA, the DMO offered instruments worth NGN180.00 billion to investors through re-openings of the 19.30% FGN APR 2029 (Bid-to-offer: 0.3x; Stop rate: 20.75%) and 18.50% FGN FEB 2031 (Bid-to-offer: 3.7x; Stop rate: 21.74%) bonds. Total subscription level settled at NGN389.24 billion (previous: 414.89 billion), with a bid-to-offer ratio of 2.2x (previous: 2.8x). Eventually, the DMO allotted instruments worth NGN289.60 billion across the two tenors, resulting in a bid-to-cover ratio of 1.3x.
Given the demand trend witnessed in the FGN bond secondary market in the past weeks, we envisage a sustained rise in yields in the near term due to (1) tight policy stance adopted by monetary authorities and (2) sustained imbalance in the demand and supply dynamics, even as investors remain on the sidelines due to the depressed liquidity in the financial system.
Foreign Exchange
The naira appreciated this week by 5bps w/w to NGN1,600.00/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM) following the CBN intervention at the official window, selling c. USD95.00 million to authorized dealers. Notably, the country’s FX reserves recorded accretion this week, as the gross reserves level grew by USD302.83 million w/w to USD39.30 billion (23 October), marking the 8th consecutive week of growth. Total turnover at the NAFEM as of 24 October decreased by 33.8% WTD to USD1.14 billion, with trades consummated within the NGN1,581.16/USD – NGN1,696.00/USD band. In the forwards market, the naira rates increased across the 1-month (+1.2% to NGN1,679.55/USD) and the 3-month (+0.9% to NGN1,754.42/USD) contracts but decreased across the 6-month (-0.2% to NGN1,867.42/USD) and 1-year (-0.9% to NGN2,085.58/USD) contracts.
While the CBN has continued to intermittently support the market, continuous currency depreciation points to a demand and supply imbalance. In our view, this is likely to remain the case over the short term until there are sufficient inflows in the market to support the CBN’s interventions.
Cordros
