Market outlook: Oil, rates, naira to drive Q3

Nigeria's financial markets are at a critical juncture, shaped by a combination of global geopolitical shifts, changing monetary policy signals, and the start of the third-quarter corporate earnings season. Analysts at Coronation Asset Management highlight that macro conditions present both opportunities and persistent inflationary pressures across various asset classes.

Trading on the Nigerian Exchange is anticipated to become more selective as investors shift focus from broad market rallies to individual corporate fundamentals. Following a brief profit-taking period that dropped the All-Share Index by 0.52%, moving to 250,808.27 points, market focus is shifting towards third-quarter balance sheets.

Portfolio managers anticipate that realignments will benefit companies exhibiting strong earnings potential to manage high operating costs. In the global energy sector, oil prices have risen, with Brent crude surpassing $100 per barrel due to escalating tensions in the Middle East and increased risks in Red Sea shipping lanes. Although emergency stock releases by G7 nations may temporarily alleviate prices, the energy market remains constrained by structural inventory declines.

For Nigeria, higher oil prices bolster fiscal revenues and foreign exchange reserves; however, persistent elevated global fuel prices may keep domestic transportation costs and inflation on an upward trajectory. The CMFC and UPDC REIT led the market's N5tn gain in the September sector. Nigeria's security and agricultural sectors have been criticized by the Presidency for an Economist report suggesting Nigerians dislike the Tinubu administration.

Foreign exchange conditions are showing signs of stability, with gross external reserves near $54.93bn. The spread between the official Nigerian Foreign Exchange Market and the parallel market has narrowed, indicating improved liquidity and reduced speculative pressures. Coronation Asset Management forecasts the Naira to remain relatively steady in the short term, backed by stronger external reserves, improved forex market conditions, and comparatively contained exchange-rate pressures.

They predict the NFEM rate to hover within the N1,300-N1,350/US$1 range, barring a significant shift in global risk sentiment, a sharp drop in oil prices, or other adverse external shocks. In the fixed-income market, short-term yields for government securities are expected to gradually decrease, reflecting strong market liquidity and increasing investor interest in locking in higher yields following recent Monetary Policy Rate changes.

Nonetheless, the Central Bank of Nigeria is expected to manage the speed of yield declines through large-scale Open Market Operations auctions to balance liquidity in the system against inflation risks. Jide, a journalist with over a dozen years of experience, covers business-related stories.