What To Expect From The Markets This Week - 191020


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Nigeria: Economic Dashboard 161020    

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Editor's Pick

Source:  Cordros Weekly Economic and Market Report - October 09, 2020

Global Economy 

According to the U.S. Bureau of Labour Statistics, the U.S. consumer price index rose 0.2% m/m in September (vs. August: 0.4% m/m), the slowest pace of growth in four months, on the back of a slower rise in the prices of energy (0.8% m/m vs. August: 0.9% m/m) and shelter (0.1% m/m vs. August: 0.1% m/m). This suggests that the initial pressure on prices in the last two months, which resulted from supply constraints, is beginning to dissipate majorly due to the stalled fiscal stimulus package. While the Core Consumer Price Index slowed to 0.2% m/m (August: 0.4% m/m), we note that there was a surge in the prices of used cars and trucks (6.7% m/m vs. August: 5.4% m/m) and new vehicles (0.3% m/m vs. August: 0.0% m/m) as low inventory levels put upward pressure on prices of vehicles. With states gearing up for new containment measures to limit rising cases of COVID-19 and the uncertain fiscal stimulus, we do not see a meaningful price pickup in the short term. 

Unemployment and the number of redundancies in the United Kingdom (U.K.) continue to increase, while the employment rate continues to fall. According to the Office for National Statistics (ONS), the unemployment rate in the three months (3M) to August increased to 4.5% (vs. 4.1% in 3M-July) - the highest since the 3M to May 2017, despite the easing of some COVID-19 lockdown measures. We, however, believe that the real unemployment picture is worse given that the Claimant Count (including those working with low income or hours and those who are not working) has risen by 120.3% to 2.7 million between March and September. Hinged on (1) the imposition of fresh restrictions to mitigate rising COVID-19 infections and (2) the replacement of the USD65.2 billion furlough scheme with a less generous scheme at the end of October, we expect the unemployment rate to climb over the rest of the year, prolonging the recovery process of the economy.   

Global Markets

Global equities posted a mixed performance this week as investors remain wary of the rising number of infections particularly in U.S and U.K while keeping an eye on stimulus packages rolled out by fiscal authorities in reviving their economies. In the US, the DJIA (-0.3%) and S&P (+0.2%) were on track to end the week flat. European markets were on course for a negative close - the STOXX Europe (-1.2%) and FTSE 100 (-2.0%) were affected by negative investor sentiments due to fresh Brexit concerns and that the re-introduction of lockdown measures will dampen the recovery that ensued since the relaxation of social distancing measures in April. Asian markets were also mixed - Japanese (Nikkei 225: -0.9%) stocks recorded a weekly loss, as fears of the economic impact from the coronavirus outbreak spooked investors; Chinese (SSE: +2.0%) stocks posted a weekly gain buoyed by positive economic data and faster than anticipated recovery in the economy. Emerging market (MSCI EM: -0.2%) stocks were broadly flat, while Frontier market (MSCI FM: +0.3%) stocks posted mild gains.  




Inflationary pressures in the domestic economy gathered momentum in September, as headline inflation rose by 49bps to 13.71% (July: 12.82%), representing a 31-month high. The headline index came in above our forecast of 13.51% y/y, due to a higher than expected increase in the food basket which was the principal driver behind the uptick in inflation. On a m/m basis, headline inflation increased by 14bps - tracking significantly above the 2020 average of 1.11%. Meanwhile, food inflation rose by 66bps to 16.66% y/y, reflective of (1) the impact of weak harvest season owing to subdued activities during the planting season, (2) widening supply gap associated with the continued closure of the land borders, (3) episodes of flooding in the northern part of the country, and (4) the pass-through impact of devaluation in the local currency on imported inflation. Core inflation also trended higher, up 6bps to 10.58% y/y following upward pressures in health (+49bps to 12.58% y/y) and transport (+45bps to 11.65% y/y). With the FG not showing signs of rolling back the closure of the land borders alongside FX liquidity challenges and weak domestic capacity in bridging the supply gap due to structural barriers, we expect the food index to remain the preeminent driver of headline inflation. Against this backdrop, we look for m/m headline inflation reading of 1.51% in October, with the low base effect from 2019 translating to 50bps expansion in y/y headline inflation to 14.21%.  

In its October World Economic Outlook, the International Monetary Fund (IMF) revised Nigeria's 2020FY growth forecast to -4.3% y/y, an improvement from its June projection of -5.4% y/y and it expects the country's economic output to recover by 1.7% y/y in 2021. This revision is based on a better than expected economic contraction in Q2-20 amid low crude oil production. We note that the new growth forecast in 2021FY is 0.9 ppt less than the June growth forecast (2.6%), suggesting that macro conditions are unlikely to show significant improvement amid FX liquidity challenges. The FX constraints are expected to hamper the growth of the manufacturing sector and capital importation into the country, thus limiting the recovery process of the economy. Our growth expectation is in line with the IMF, following a stall in output and business activities in Q3-20 based on the CBN's monthly Purchasing Managers' Index (PMI) and Nigeria's improved compliance with OPEC's crude oil production cut agreement. Overall, we revise our Q3-20 growth estimate to -4.78% y/y (Previous estimate: -1.85% y/y), implying 2020FY growth of -3.32% y/y.   

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Capital Markets



Activities in the local bourse declined from the levels seen in recent weeks with the value of trades falling 35.0% w/w. The market struggled to find direction, closing broadly flat in 4 of 5 sessions during the week. However, late gains on Friday drove the market to a fourth-consecutive weekly gain.  Notably, investors' interest in ZENITHBANK (+7.8%), WAPCO (+10.9%), and UBA (+5.9%) drove the benchmark index 0.9% higher, w/w, to 28,659.45 points. The MTD and YTD return for the index grew to 6.8%. The Banking (+2.9%) index topped the sectoral charts, followed by the Oil & Gas (+2.4%), Consumer Goods (+1.9%), and Industrial Goods (+0.2%) indices. The Insurance (-0.7%) index was the sole loser.

We expect the market to 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 declined by 288bps w/w, to 2.0%, as system liquidity was supported by inflows from OMO maturities (NGN370.00 billion).

Barring any significant mopping-up activity by the CBN, we expect the OVN to remain depressed, as inflows worth a combined NGN328.70 billion come into the system from OMO maturities (NGN296.03 billion) and FGN bond coupon payments (NGN32.67 billion).

Treasury Bills

The Treasury bills secondary market ended the week on a bullish note as average yield across all instruments contracted by 23bps to 1.2%. The OMO segment remained bullish, as yields contracted by 19bps, on average, to 1.2% due to the ample liquidity in the system, and as investors looked to fill unmet demand from the PMA. In the same vein, the NTB segment was also bullish (average yield contracted by 29bps to 1.1%), as participants covered for lost bids at the PMA. At the auction, the CBN offered bills worth NGN124.89 billion with allotments of NGN12.76 billion of the 91-day, NGN4.50 billion of the 182-day and NGN107.62 billion of the 364-day - at respective stop rates of 1.00% (previously 1.10%), 1.00% (previously 1.55%), and 2.00% (previously 3.05%).

We retain our expectation for sluggish demand in the T-bills market, due to the unattractive yield in the space.


Activity in the Treasury bonds secondary market remained bullish, due to (1) the significant demand brought about by the excess liquidity in the system, and (2) market players reacting to the significantly reduced offering in the recently released DMO circular. Consequently, the average yield across instruments contracted by 125bps to 5.0%. Across the benchmark curve, yields declined at the short (-23bps), mid (-139bps) and long (-182bps) segments, as investors bought up the JAN-2022 (-56bps), JUL-2030 (-199bps) and JUL-2034 (-220bps) bonds, respectively.

Next week, we expect investors' focus to shift to Wednesday's PMA, as the DMO is set to offer instruments worth NGN30.00 billion (70.0% lower than the previous auction) through re-openings of the 12.50% MAR 2035 and 9.80% JUL 2045 bonds. Due to the limited supply from the DMO, we still expect sizeable demand at the secondary market, as investors seek investible options for liquidity, and cover for lost bids at the auction which is likely to be oversubscribed

Foreign Exchange

Nigeria's FX reserves declined by USD42.61 million w/w to USD35.67 billion, as FX outflows outpaced inflows. Across the FX windows, the naira traded flat at NGN385.83/USD against the US dollar at the I&E window, while it weakened by 1.1% to NGN462.00/USD in the parallel market. In the Forwards market, the naira weakened across the 3-month (-0.1% to NGN388.19/USD), 6-month (-0.4% to NGN391.30/USD) and 1-year (-0.7% to NGN400.25/USD) contracts, while the 1-month (NGN386.50/USD) was flat.

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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