US equities decline, bonds yields rise as investors evaluate US-China tension

US stocks finished lower on Tuesday, second day in a row, as investors analysed close talk from a pair of senior Fed Reserve officials and parsed the implications of House Speaker Nancy Pelosi’s historic trip to Taiwan. Subsequently, Dow Jones declined 1.2% to finish at 32,396.17. S&P 500 declined 0.7% to finish at 4,091.19 while Nasdaq 100 declined 2% to finish at 12,348.76. The 10-year yield Treasury increased 14 basis points to 2.74%. Gold price increased by $8.20 to $1,795.90 while WTI crude oil increased 0.6% to close at $94.42. Meanwhile, OPEC+ meeting on output comes up on Wednesday.

Ukraine began a mandatory evacuation of its citizens from Donetsk following President Zelenskiy’s call on civilians to leave the Eastern region for their own safety. At the same time, a Russian supply line connecting Kherson with Crimea is likely to have been destroyed by a Ukrainian strike according to British defence chiefs. In response to an ongoing military assault by Russia’s on Ukraine, US has imposed more economic sanctions and visa restrictions on a number of Russian tycoons, including Andrey Guryev, founder of chemical producer PhosAgro and Andrey Melnichenko, co-founder of fertilizer producer Eurochem. After two days of declines Russian stocks started gaining this morning with both IMOEX and RTSI up approximately 0.8% to 2,154 and 1,125 respectively. As investors wait to see if OPEC+ would listen to a US call to boost supply, Russian energy giants Gazprom and Lukoil gained along with Sberbank and Yandex. The shares of steel and iron producer, MMK, dropped as much as 14% due to US forbidding its companies and citizens dealing with the company. Narrowing trade balance, potential currency purchases by the Finance Ministry and ruble payments to Eurobond holders, have started weakening Russian ruble with a trend expected to continue into the second half of the year. Both USDRUB and EURRUB are flat this morning and trade at 60.32 and 61.26 respectively. 10-year benchmark ruble bond yields are little changed at 8.25%. In economic news, Russian Services PMI rose to 54.7 in July versus 51.7 in June being the highest reading since June 2021, signalling a second consecutive month of expansion.

Bunds open weaker retracing trend from yesterday. The 10Y touched a high of 0.87% before dropping to 0.86%, 1bp down day-on-day. Peripherals mirrored the move on bunds with a relatively weak open;10Y BTPs yields went as high as 2.92% before retreating to 2.91%, 1 basis point firmer intraday. Stocks declined as investors gauged evidence of strong Q2 earnings and observed US-China relations considering Nancy Pelosi’s recent visit to Taiwan. Consequently, the Stoxx 600, opened slightly lower at 435.31 compared to previous session’s closing of 436.07.

A somewhat lacklustre start to the space this morning as we saw the likes of NGERIA & ANGOL witnessing more of the sell-off yesterday. ANGOL felt more of the brunt at the long end while NGERIA’s sell-off was more concentrated across the belly. Zambia seems to have moved a step closer to its restructuring program with the IMF (as reported by S&P) which boded well for the space as we have seen an average +1.25 jump in prices on the curve between yesterday and this morning.

Activity in the Nigerian local Secondary Market for Bonds was calm amid a persisting weak system liquidity. We saw improved offers across the curve as Banks adjusted their rates upward. Intraday, average yields were higher by 5bps across board.  Consequently, FGN 27s closed at an offer rate of 11.75%,5 basis points up from previous level of 11.70% while 42s closed at an offer rate of 13.71%, 1 basis point up from previous level of 13.70%. Activity in the Secondary Market for Treasury bills was tepid with few trades done as frailty in money market liquidity lingered. Consequently, discount rates on 3rd of October 2022 SPEB & 14th of February 2023 OMO were at 12.10% and 9.90% respectively.  Finally, the exchange rate between the naira and the US dollar closed at N427.17/$1 at NAFEX compared to previous session’s level of N426.20/$1, a depreciation of circa 0.23%.