What To Expect From The Markets This Week - 051020


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Nigeria: Economic Dashboard @ 021020  

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Source:  Cordros Weekly Economic and Market Report - October 02, 2020

Global Economy 

Factory activities in China maintained its recovery momentum, as the country continues to advance the policies of balancing both pandemic control and economic development. According to the National Bureau of Statistics, manufacturing PMI for the month of September rose to 51.5 points (August: 51.0 points) - the highest reading in six months. This was supported by export orders (50.8 points vs. August: 49.1 points), following the easing of global restrictions in movement, and output (54.0 points vs. August: 53.5 points) as factories ramped up production before the Golden Week holidays. Non-Manufacturing PMI also increased to 55.9 points (August: 55.2 points) - the largest growth in the service activities since November 2013. We expect the momentum in growth to be sustained in the coming months given the resilient nature of the country's export sector and the sustained fiscal stimulus targeted at boosting consumption.

We highlighted in our Weekly Economic Review (4th September 2020) that we expected unemployment in the Euro Area to continue its upward trend, albeit slowly, as short-time work schemes continue to be extended. In line with our expectation, data released by the Eurostat showed that unemployment in the Euro Area increased for the fifth consecutive month to 8.1% compared to the revised rate of 8.0% in July. Although this is the highest rate since July 2018 (8.2%), we note that the rate is still widely held down by short-time work schemes. We also note that a significant portion of those who had registered in unemployment agencies abandoned their job searches and left the active population.  Barring renewed containment measures to limit the rate of renewed COVID-19 infections, we do not expect a significant rise in the unemployment rate given that the short-time work schemes have been extended in most of the countries in the region.

Global Markets

Global equity markets were mixed as investors moved into the shares of beaten-down sectors on the heels of a sharp stock market sell-off the week before. However, stocks tumbled on Friday after President Donald Trump tested positive for COVID-19. Consequently, US (DJIA: +2.4%; S&P: +2.5%) stocks were up at the time of writing, while European (STOXX Europe: +1.1%; FTSE 100: -0.1%) shares were mixed. In Asia, Japanese (Nikkei 225: -0.8%) shares closed lower, as cautious traders watched the US Presidential debate, Chinese (SSE: 0.0%) shares closed flat in the holiday-shortened week as losses in real estate and materials stocks outweighed optimism from upbeat factory activity surveys. In Emerging markets (MSCI EM: +2.4%), the benchmark index was up following a rise in South Korea (+2.2%). Conversely, Frontier market (MSCI FM: -1.1%) stocks were on track to end the week lower as Kuwaiti stocks plunged 3.2% following the death of the ruling Emir.




The Federal Executive Council (FEC) recently approved the NGN13.08 trillion budget proposal for the 2021 fiscal year, representing a 24.6% increase from the 2020 revised budget. With projected revenue of NGN8.60 trillion, the FEC expects the total deficit for the 2021 fiscal year to print NGN4.48 trillion, translating to 3.6% of the projected GDP. Key assumptions of the proposed budget include an oil price benchmark of USD40.00/barrel, oil production of 1.86mb/d, an exchange rate of NGN379/USD, and an inflation target of 11.95%. Although the proposed revenue is greater than the NGN6.15 trillion stated in the MTEF, we suspect that the variance stems from the upward adjustment in the exchange rate assumption (MTEF: NGN360/USD) which translates to higher estimates naira receipts from oil sales. In our view, the FGNs revenue expectations are rather optimistic, given that (1) aggregate revenue has averaged NGN3.94 trillion between 2017 and 2019 and (2) revenue performance from Jan-July 2020 revenue performance was only 68.0% despite the exchange rate devaluation. Given the structural weakness in tax revenue, we expect the projected revenue to underperform, implying a larger than projected deficit.

Fitch Ratings revised Nigeria's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable, from Negative, and affirmed it at 'B'. This was based on the stability in oil prices (USD40/barrel-USD45/barrel), support from multilateral agencies, and easing of restrictions in movement. Fitch also noted that the FX demand backlog and persistence in external vulnerability are adequately captured by the 'B' rating. Significant intensification of external liquidity pressures or a renewed downturn in oil prices and a sharp rise in general government debt to revenue ratio are the main factors that that could lead to a downgrade in the next action. The rating is likely to be maintained in our view, given the expected stability in the oil price around the current level and CBN's capital flow management measures. We, however, see further legroom for an increase in general government debt over 2021 based on the government's need to spend its way out of recession amid structural weakness in revenue-generating capacity.

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Capital Markets



The bulls continued to dominate in the equities market as the NSE All-Share Index erased its year-to-date losses on Friday, following investors' rejuvenated risk-on attitude amidst declining real returns across fixed-income assets.  Notably, investors' interest in large caps MTNN (+4.8%), BUACEMENT (+8.3%), DANGCEM (+3.6%), and GUARANTY (+7.4%) drove the benchmark index 2.5% higher, w/w, to 26,982.60 points. The YTD return for the index moved into positive territory, settling at 0.5%. The Banking (+4.2%) index topped the sectoral charts, followed by the Industrial Goods (+3.2%), Oil & Gas (+1.8%), and Insurance (+0.6%) indices. The Consumer Goods (-0.7%) index was the sole loser following profit-taking in NB (-6.8%).

We expect the market might continue to benefit as domestic investors seek alpha-yielding opportunities in the face of increasingly negative real returns in the fixed income market. However, we advise investors to trade in only fundamentally justified stocks as the weak macro environment remains a significant headwind for listed companies.

Fixed Income and Money Market 

Money Market

The overnight (OVN) rate contracted by 9.92ppts to 1.6%, following inflows to the system from FGN bond coupon payments (NGN45.45 billion) and OMO maturities (NGN140.00 billion).

In the coming week, we expect the OVN rate to remain depressed, as system liquidity is supported by inflows from OMO maturities (NGN567.69 billion). 


Treasury Bills

Trading in the Treasury bills secondary market was bearish, on the back of reduction in system liquidity, sell-offs in both market segments and market participants at the NTB segment focusing on the primary market. Consequently, the average yield across all instruments expanded by 13bps to 1.9%. Across the segments, the average yield expanded by 9bps and 19bps to 1.9% and 1.9%, at the OMO and NTB secondary markets, respectively. At the NTB PMA, the CBN rolled over NGN133.97 billion worth of instruments, with allotments of NGN10.0 billion of the 91-day, NGN17.60 billion of the 182-day and NGN106.37 billion of the 364-day - at respective stop rates of 1.08% (previously 1.09%), 1.49% (previously 1.50%), and 2.80% (previously 3.05%).

Next week, we expect sustained investors' apathy for yields at current levels. Nonetheless, we expect improved trading volumes in the market, on the back of expected inflows to the system.


The Treasury bonds secondary market ended the week bullish, as investors re-invested coupon payments and maturities. Thus, the average yield across instruments contracted by 24bps to 6.8%. Across the benchmark curve, demand was heavy at the short (-47bps) and mid (-40bps) segments, as investors bought up the JAN-2022 (-132bps) and JUL-2030 (-114bps) bonds, respectively. Conversely, sell-off of the JUL-2034 (+51bps) bond, caused the expansion witnessed at the long (+12bps) end.

We expect trading in the Treasury bonds secondary market to remain in bullish, as a significant portion of expected maturities is re-invested in the bonds market.

Foreign Exchange

Nigeria's FX reserves declined by USD22.00 million w/w to USD35.72 billion, as FX outflows outpaced inflows. Across the FX windows, the naira strengthened against the US dollar by 0.1% and 0.4% to NGN386.00/USD and NGN465.00/USD, at the I&E window and parallel market, respectively. In the Forwards market, the naira depreciated at the 3-month (-0.1% to NGN387.91/USD) and 6-month (-0.3% to NGN390.80/USD) contracts, while it was flat at the 1-month (NGN386.49/USD) and 1-year (NGN399.58/USD) contracts.

Despite the CBN's stronger commitment towards exchange rate unification, we still see legroom for the currency to depreciate further in the medium-to-long term, at least towards its REER derived fair value. Our prognosis is hinged on (1) the widening current account (CA) position, (2) currency mispricing, which could induce speculative attacks on the naira, and (3) the resumption of FX sales to the BDC segment of the market which should place an additional layer of pressure on the reserves.

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