CBN Rate Cut Buoy Investors' Sentiment Northward on Stock, FX Markets

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For the first time since the beginning of this year, the Central Bank of Nigeria (CBN) acted dovishly, cutting the benchmark interest rate to rein in inflation as investors’ appetite trended northward at the stock and foreign exchange (FX) markets.

On Tuesday, September 23, after its two-day bi-monthly Monetary Policy Committee (MPC) meeting, CBN Governor Olayemi Cardoso announced a 50 basis points rate cut to 27 per cent to lower borrowing costs, as inflation had softened for the fifth consecutive month to 20.12 per cent in August.

FX strengthens to N1,480.66 against the dollar.

A look at market performance in the week of the CBN rate cut saw bullish sentiment dominate the Nigerian FX market.

The naira is extending its winning streak across FX windows on the back of a softer United States (U.S.) dollar and stronger liquidity inflows.

At the official market, the Nigerian Foreign Exchange Market (NFEM), the naira firmed by 0.49 per cent week-on-week to close at N1,480.66/$1.

This is its first break below the ₦1,500/$1 threshold since early February this year.

At the parallel market, known as the black market, the naira appreciated by 0.13 per cent to an average of N1,510/$1.

According to the Director of the MPC Department at CBN, Victor Oboh, the rate cut by 50 basis points should have some significant impact on the Nigerian real economy.

“What we expect is that this 50 per cent cut will put a smile on economic recovery, especially in the area of lowering the borrowing costs,” Oboh said during a conversation at the TVC programme on Friday, September 26.

“On the other hand, we don’t expect the harvest of the rate cut on the strength of the naira. The reason is that this rate cut has to be delayed until this MPC meeting because of the need to ensure that we have stronger and robust macroeconomic fundamentals that will be able to withstand any harvest impact of monetary easing,” he said.

He explained that these fundamentals, including the external reserves, are quite robust to defend against any internal or external shock to the naira.

“We expect that because inflation is decelerating, the exchange rate is stable, and the aspect of weakening the currency through imported inflation will have zero effect,” Oboh maintained.

The CBN director explained further that if all these factors are put together, especially the strength of the exchange rate, the stability and the narrowing rate between the bureau de change (BDC) and the NFEM, it shows clearly that there are very good fundamentals to beat on.

He noted that the onset of the harvest season has brought some softening effect on inflation, which, of course, will mute any impact it could have on the naira.

“You know the rate at which we are now provides a lot of incentives for foreign inflows, both from the FPIs [foreign portfolio investments] and remittances. So, in that case, with a very good liquidity level at the foreign exchange market, we don’t expect this rate cut to affect the strength of the local currency, in this case, the naira,” Oboh added.

Pinnacle Daily reported on Tuesday, September 23, that Nigeria’s gross external reserves recorded a growth of over $1 billion in the last 30 days to $42.03 billion as of September 19 from $41 billion they stood at on August 19.

External reserves push higher to $42.20bn

Adding another layer of support, external reserves rose by 0.40 per cent week-on-week to $42.20 billion on Friday from $42.03 billion at the start of the week.

The build-up, fuelled by improved FX inflows and steady CBN interventions, enhances the apex bank’s firepower to manage supply-demand gaps and bolsters confidence in the naira’s near-term stability.

Oil markets had rallied during the week as supply fears resurfaced following Ukrainian strikes on Russian energy infrastructure that prompted Moscow to restrict fuel exports.

This resulted in an uptick for Brent crude, edging up 0.33 per cent to $69.65 per barrel, while the West Texas Intermediate (WTI) climbed 0.51 per cent to $65.31 a barrel, leaving both benchmarks on track for weekly gains above four per cent.

At home, the Nigerian Bonny Light outperformed the Brent crude and WTI, jumping 1.79 per cent to settle at $70.90 per barrel.

This twin boost of firmer oil prices and modest reserve accretion provides a stronger buffer against external shocks as the CBN reiterates its stand to defend the currency and safeguard macroeconomic stability.

“Looking ahead, the naira is expected to stay relatively stable across markets, supported by stronger FX inflows, reserves build-up, and sustained CBN interventions.

Higher oil prices should further strengthen external buffers and investor confidence. Still, risks from global oil price swings and persistent domestic demand pressures mean sentiment could remain cautious…” analysts at Cowry Asset Management noted in their week’s report.

Equities deliver N215.86bn to investors

In the week in review, the Nigerian equities market sustained its upward momentum with bullish sentiment dominating trading, leading the market to deliver a N215.86 billion gain to investors.

The All-Share Index (ASI) rose by 0.20 per cent to close at 142,133.02 points, while market capitalisation rose by 0.24 per cent to N89.96 trillion.

This upward movement is despite cautious profit-taking and mixed investor reactions to the continued release of half-year bank earnings.

For the past years, the Nigerian stock market has remained resilient and firmly positive despite the country’s macroeconomic headwinds.

As of Friday, September 26, the year-to-date return of equities strengthened further to 38.09 per cent.

According to market watchers, this reflects investors’ confidence underpinned by improved liquidity in the FX market, rising oil prices, and optimism around the third-quarter corporate earnings
The season begins next month.

Portfolio rebalancing continued in earnest, supported by the CBN’s 50 basis points rate cut to 27 per cent.

Another notable key metric is the stronger-than-expected second quarter gross domestic product (GDP) that grew by 4.23 per cent from 3.13 per cent in the first quarter.

On trading activity, while total stocks trading volume surged by 180.84 per cent to 7.68 billion units and market value by 479.51 per cent to N494.2 billion, total deals dipped by 8.34 per cent to 116,711.

This suggests an increased participation from institutional investors repositioning ahead of the third quarter earnings and quarter-end portfolio adjustments, analysts say.

Sectoral performance on the Nigerian Exchange Limited (NGX) saw the industrial goods index emerge strongest, gaining 1.33 per cent to close at 4,994.70 points.

The banking index followed advancing by 1.19 to 1,509.04 points, and the consumer goods index by 1.15 per cent to 3,396.93 points.

The positive sentiments were buoyed by renewed interest in fundamentally strong stocks.

On the contrary, the insurance index dropped by 0.91 per cent to 1,237.75, the oil and gas index by 1.62 per cent to 2,446.31, and the commodities index by 0.91 per cent to close at 1,101.95.

The sectors were weighed down by bouts of profit-taking and cautious repositioning from investors.

At the individual stock level, Thomas Wyatt Nigeria’s share price topped the gainers’ table, rallying by 22.7 per cent to N3.30, while Wema Bank led the laggards, slumping by 12.4 per cent to N18.00 in the review week.

“Looking into next week, the equities market is expected to retain a cautiously bullish tone, supported by attractive valuations, improving FX liquidity, and firmer oil prices, all of which should provide additional buffers for investor sentiment.

“The upcoming Q3 earnings season is set to play a decisive role, particularly in banking and consumer names, with expectations of stronger results helping to sustain momentum. Nonetheless, weak market breadth and persistent profit-taking may keep sentiment selective, ensuring that fundamentally strong stocks remain the most attractive plays in the near term…,” Cowry research analysts said.

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