What To Expect From The Markets This Week - 240820

Global Economy 

Japan posted a record economic contraction in the second quarter as a state of emergency and lockdowns in the country's major export markets hammered consumer spending, production and exports. According to the Japanese Cabinet Office, GDP shrank by 7.8% q/q in Q2-20 following 0.6% contraction in Q1-20, marking the worst contraction for the world's third-largest economy since at least 1955. Private consumption, which accounts for 56.0% of GDP, fell by 8.2% (Q1-20: -0.8%) due to a significant decline in spending on retail and travel due to the lockdown. Exports also dropped by 18.5% (Q1-20: -5.4%) as overseas demand for Japanese goods fell amid the global pandemic. We expect to see a rebound in Japanese growth in Q3-20 given the continued easing of lockdown measures and the emergency government program put in place to combat COVID-19. Beyond that, significant challenges remain on the horizon due to the worsening US-China relations and greater reliance on the central bank to support the domestic economy.

The eurozone's recovery from its deepest economic downturn on record hit the brakes in August, particularly in services, as pent-up demand unleashed by the easing of coronavirus lockdowns dwindled. According to IHS Markit, the Services PMI fell to a much lower than expected 50.1 (July: 54.7), corresponding to a stalled recovery in services output, with the employment component of the PMI showing businesses across sectors are still laying off workers. On a brighter note, the manufacturing PMI came in at 51.7 (July: 51.8) as manufacturing production growth quickened to the fastest since April 2018, while new orders rose for a second straight month. Although we expect a rebound in Euro Area GDP growth in Q3, far more relevant will be the level of activity that will be reported. As positive effects from reopening economies are becoming smaller over the course of the quarter, doubts over a V-shaped recovery will become stronger despite the strong q/q growth.

Global Markets

Global equities were mostly mixed in the week weighed down by the U.S. Federal Reserve's sobering outlook on a post-pandemic recovery. Consequently, European (STOXX Europe: -0.3%; FTSE 100: -1.4%) stocks were set to close the week lower. In the US (DJIA: -0.7%; S&P: +0.4%), stocks were mixed with the stimulus-fuelled rally leading the S&P to new all-time highs. In Asia, Japanese (Nikkei 225: -1.6%) closed lower on negative economic data, while Chinese (SSE: +0.6%) were up on hopes that capital market reforms would boost revenues and after the central bank injected fresh funds into the country's financial system. Emerging market (MSCI EM: -1.2%) index was down following losses in South Korea (-4.3%) while the frontier markets (MSCI FM: +1.0%) index was up following gains in Kuwait (+1.8%).

Nigeria

Economy

Nigeria's headline inflation maintained its upward trend, as it expanded by 26bps in July 2020 to 12.82% y/y (June: 12.56% y/y), the highest since level since March 2018. Relative to Cordros' estimate (12.74%), the outturn was 8bps higher due to a negative surprise from food inflation. From a month ago, headline inflation increased by 4bps to 1.25%, the slowest pace of price growth since March 2020.  Food inflation rose by 30bps to 15.48% y/y in the period under review. We believe the seasonality effect typically associated with the onset of the planting season, as well as flooding in some parts of the country must have negatively influenced the food basket. Core inflation was down by 3bps and 11bps to 10.10% y/y and 0.75% m/m respectively. Pressures were most significant in the prices of Medical services, Passenger transport by road, Maintenance and repair of personal transport equipment, Paramedical services and Vehicle spare parts. We now see headline CPI at 1.23% m/m in August, with the low base in the corresponding period of 2019 cascading to a 24bps increase in y/y inflation rate to 13.09%. This is hinged on (1) continued flood cases in conjunction with the lean farming season which we expect to translate to higher food prices and (2) increase in ex-depot of PMS Price which we expect to permeate into the economy in the form of higher energy prices and transport cost.

In the CBN's recently released Monthly Economic Report for the month of April 2020, we highlight that the federally collected revenue for the month of April rose by 25.4% m/m to NGN915.28 billion, but was 30.4% below the NGN1.32 trillion target for the month. Oil revenue was up by 12.5% m/m to NGN528.43 billion while non-oil revenue was up by 48.8% to NGN386.9bn. As oil receipts usually have a three-month lag, we attribute the increase in oil revenue in April to the higher daily production in January (2.07 mb/d) vs December (1.96 mb/d), which compensated for the 2.3% m/m fall in average price. The m/m increase in non-oil revenue was driven by the settlement of outstanding corporate income tax due by the NLNG. We expect to see a precipitous decline in federally collected revenue in subsequent reports for May to July, as oil sales contracts which materialised during the period are expected to be much lower owing to the sharp decline in oil price from February to April, and Nigeria's marginally lower oil production.

Capital Markets

Equities

Despite the significantly lower trading activity in the stock market, the bourse inched higher for the fourth successive week, following a series of marginal gains over 4 trading sessions.  Specifically, interest in MTNN (+2.0%) pushed the ASI 0.1% higher, w/w, to 25,221.87 points. The YTD loss moderated to -6.0%, while the MTD gain increased to 2.1%. Performance across sectors within our coverage was mixed with the Insurance (+4.4%), Consumer Goods (+1.9%), and Banking (+0.8%) indices recording gains while the Oil & Gas (-0.9%) and Industrial Goods (-0.4%) indices declined.  

Our view continues to favour cautious trading as risks remain on the horizon due to a combination of the increasing number of COVID-19 cases in Nigeria and weak economic conditions. Thus, we continue to advise investors to seek trading opportunities in only fundamentally justified stocks.

Fixed Income and Money Market 

Money Market

Treasury Bills

Trading in the Treasury bills secondary market was bullish, as liquidity posture sustained demand for instruments in the space. Thus, the average yield across all instruments contracted by 29bps to 3.0%. Across the market segments, average yield contracted by 42bps and 4bps to 3.6% and 1.5%, at the OMO and NTB markets. At the OMO auction, the CBN offered instruments worth NGN80.00 billion with allotments of NGN7.50 billion of the 96-day, NGN15.00 billion of the 180-day and NGN50.00 billion of the 355-day - at respective stop rates of 4.90% (previously 4.92%), 7.71% (previously 7.74%), and 8.94% (previously 8.94%).

Next week, we expect the buoyant system liquidity to sustain the demand for T-bills, as maturities are likely re-invested in the market. At the NTB segment, we expect market participants to shift their focus to next week's PMA, where the CBN will be rolling over NGN197.60 billion worth of maturing bills.

Bond

The Treasury bonds secondary market ended the week bearish, due to some profit-taking by successful participants at Wednesday's PMA. Consequently, average yield expanded by 14bps to 8.0%. At the PMA, the DMO offered instruments worth NGN150.00 billion to investors through re-openings - 12.50% JAN 2026 (Bid-to-offer: 1.3x; Stop rate: 6.7%), 12.50% MAR 2035 (Bid-to-offer: 1.2x; Stop rate: 9.35%), 9.80% JUL 2045 (Bid-to-offer: 1.0x; Stop rate: 9.75%) and 12.98% MAR 2050 (Bid-to-offer: 2.9x; Stop rate: 9.90%). Despite a total subscription of NGN242.22 billion, the DMO eventually allotted instruments worth NGN116.65 billion, resulting in a bid-cover ratio of 2.1x.

We expect demand for bonds to pick-up in the coming week, as investors find alternative options for the liquidity coming into the system.

Foreign Exchange

The CBN's foreign reserves sustained its descent as FX outflows continue to outpace inflows, thus dipping by USD20.37 million w/w to USD35.60 billion. Nevertheless, the naira was flat against the US dollar w/w to NGN386.00/USD at the I&E window but depreciated by 0.4% to NGN477.00/USD at the parallel market. In the forwards market, the naira appreciated against the US dollar across the 1-month (+0.1% to NGN387.07/USD), 3-month (+0.09% to NGN389.47/USD), 6-month (+0.1% to NGN393.27/USD) and 1-year (+0.7% to NGN406.56/USD) contracts.

Despite the CBN's stronger commitment towards exchange rate unification, we still see legroom for the currency to depreciate further, 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 as the CBN funds the backlog of unmet FX demand.

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