What To Expect From The Markets This Week- 030220


Saturday, February 01, 2020 08:00 AM / Proshare Content

Nigeria: Economic Dashboard @ 310120 

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Source:  Cordros Weekly Economic and Market Report -January 31, 2019


Global economy

Faced with trade war related headwinds in 2019, the US economy only grew by 2.1% y/y in Q4-19 (Q3-19: 2.1%), bringing the country's 2019FY GDP to 2.3% y/y, the slowest since the current administration took office. Consumer expenditure, which accounts for c.68% of the economy, grew at a slower pace of 1.8% (Q3-19: 3.2%), despite a decline in the unemployment rate (Q4 19: 3.5% y/y | Q3-19: 3.6% y/y). Also, real disposable income grew by 1.5% y/y (Q3-19: 2.9%), while gross private investment contracted by 6.1% y/y - the third consecutive quarter of declines. At the moment, in our view, the downside risks to economic growth outweigh the possible upsides. For 2020, growth direction is largely dependent on if the tenets in the Phase One trade deal between the US and China are adhered to.


China's industrial activities seemingly tempered slightly in January, as the country's Manufacturing PMI printed 50.0 points (Dec 2019: 50.2 points). Analysis of the PMI report showed that the dual impact of weaker output (51.3 vs. Dec-2019: 53.2) and contraction in new export orders (48.7 vs. Dec-2019: 50.3) dampened the overall index's performance. Nonetheless, new orders expanded by 51.6 (Dec: 51.3) for the third consecutive month - the fastest rate since April 2019. Also, non-manufacturing PMI - a gauge of sentiment in the services and construction sectors - strengthened to 54.1 points from 53.5. The positive signal from China's non-manufacturing PMI in January does not reflect the current reality - the economy will take a hit in the near term from the coronavirus outbreak, and policy is likely to shift to intensive cyclical support for growth.


Global markets

In what has been the most turbulent and costly week for many markets since August, global equities were battered amid growing fears over the spread of the deadly coronavirus from China. Consequently, US (DJIA: -0.4%; S&P: -0.4%) and Asian (Nikkei 225: -2.6%; CSI 300: 0.0%) markets were down, w/w, at the time of writing. European (Euro Stoxx: -2.2%; FTSE 100: -2.9%) shares, weighed by a slate of disappointing earnings updates, were also on track to close the week in the red. For emerging (MSCI EM: -4.2%) and frontier (MSCI FM: -1.7%) markets, virus fears took center stage, as optimism around faster global growth faded.





In its latest report, Nigeria's Debt Management Office (DMO) reported that the country's debt stock stood at NGN26.21 trillion (USD85.39 billion) in Q3-19; representing a 1.8% increase over the prior quarter. The slight uptick stemmed from higher domestic debt (+3.0% q/q), which offset the decline in external borrowings (-0.81% q/q). Consequently, the ratio of domestic and external debt as proportions of total debt settled at 68.5% and 31.6%, respectively, which is still a long way off the DMO's target debt ratio of 60:40. We continue to hold a negative view towards the widening debt profile given the still weak revenue-generating capacity of the government.


The Internally Generated Revenue (IGR) of Nigeria's sub-national governments improved slightly by 16.8% y/y to NGN986.29 billion over 9M-19. In Q3-19 standalone, IGR rose by 11.1% y/y to NGN293.80 billion. Despite the marked improvement in IGR, we highlight that the public finances of the federating units remain in a largely dire state. For clarity, when annualised, total IGR is equal to only 16.0% of the cumulative budget of all states. Thus, the states are still faced with the hurdle of raising more than NGN5.0 trillion in a bid to plug the fiscal deficit shortfall. On balance, we continue to hold the view that the state governments will need to ramp up IGR faster in other to reduce the impact of volatile oil earnings on fiscal performances.


Capital markets



The Nigerian equities market suffered its first weekly loss of 2020 as the impact of the CBN's hike in the Cash Reserve Ratio (CRR) by 500bps to 27.5% resulted in selloffs of banking stocks. The All-Share Index plummeted by 2.7% - largest weekly loss since the week ended April 5, 2019 (-4.6%) - bringing the YTD return to +7.5%. Analysing by sectors, the Banking (-5.2%) index recorded its largest decline since the week ended August 9, 2019 (-6.1%), with the Industrial Goods (-2.8%), and Oil & Gas (-1.1%) indices following suit. Conversely, the Insurance (+0.9%) and Industrial Goods (+0.1%) indices were the only indices to post positive performances.


In our view, the trend witnessed this week is likely to persist, as the dual impacts of the weakening sentiment and mixed earnings performances during earnings season are expected to pressure market return. Nonetheless, we advise investors to focus on taking positions in fundamentally justified stocks.


Money market and fixed income


Money market

The overnight (OVN) rate undulated during the week before closing 11ppts higher, w/w, at 15.3%, on lower system liquidity. The average liquidity level for the week settled at NGN306.23 billion (vs. NGN575.80 billion in the previous week) as outflows from the OMO auction (NGN210.29 billion), CRR debits (c.NGN120 billion) and FX auctions outweighed inflows from OMO maturities (NGN514.05 billion).


In the coming week, inflows from OMO maturities from instruments worth NGN327.56 billion are expected on the 4th and 6th of February. This should boost system liquidity towards the end of the week and result in the OVN rate trending southwards week-on-week.


Treasury bills

Activities in the Treasury bills market were bearish, as banks sold off assets to provide funding for CRR debits. Consequently, the average yield across instruments expanded by 60bps to 10.15%. In the NTB segment of the market, the average yield expanded by 21bps to 3.7%, similarly, the average yield in the OMO segment of the market also expanded by 36bps to 13.2%. At Wednesday's NTB primary auction, the CBN fully allotted NGN229.63 billion worth of bills - NGN49.84billion of the 91-day, NGN54.59 billion of the 182-day and NGN 125.20 billion of the 364-day - at respective stop rates of 3.5000% (previously 2.9500%), 4.5000% (previously 3.9500%), and 6.5000% (previously 5.0900%).


As the cloud of uncertainty over the CRR adjustment gradually fades, we expect trading volumes to increase and yields to further trim in the NTB market, especially given that OMO maturities are expected to flood the market in the coming week.



The Treasury bonds secondary market continued to see sustained demand as investors hunted for relatively attractive yields. Consequently, the average yield across instruments fell by 26bps to close at 9.59%. Buying interest was witnessed across all segments of the curve, with the JAN-2026 (-61bps), APR-2033 (-30bps), and APR-2049 (-23bps) bonds recording the largest yield contractions. On the other hand, the JUL-2021 (+3bps) was the only bond that expanded.


We expect trading activity in the Treasury bonds market to remain high, supported by next week's OMO maturities, and the still favourable yields in the Treasury bonds market.


Foreign exchange

Nigeria's FX reserves declined by USD114.38 million WTD to USD38.10 billion (29th Jan 2019) as the CBN maintained its support for the currency through its weekly FX interventions, through which USD210.00 million were sold across the different segments of the FX market - USD100.00 million to the Wholesale segment, USD55.00 million to the SMEs segment, and USD55.00 million to the Invisibles segment. Despite this, the naira weakened by 0.3% w/w at the I&E window to NGN363.97/USD but strengthened by 0.5% to NGN360.00/USD in the parallel market. Also, in the forwards market, the naira weakened across the 1-month (-0.3% to NGN366.91/USD) and 3- month (0.1% to NGN371.49/USD) contracts, while the rates on the 6-month (+0.4% to NGN378.34/USD) and 1-year (+2.1% to NGN396.47/USD) contracts appreciated.


Despite the rate of decline in FX reserves, which has heightened fears regarding the possibility of a currency devaluation, we estimate that the CBN will be able to sustain its naira defense through H1-20, at least.

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Monday, February 03, 2020

The CFA Institute Research Challenge - Closing Gong Ceremony will hold this day at the Nigeria Stock Exchange, while the Finance Act 2020 Workshop will hold on the same day at the Stock Exchange.



Tuesday, February 04, 2020

The GTR West Africa 2020 will hold on this day at 19A, Sinari Daranijo Street, Off Ajose Adeogun Street, Victoria Island, Lagos.



Thursday, February 06, 2020

The 17TH CVL Annual Lecture & International Leadership Symposium with the theme: Intra African Trade: Growth and Economic Development at Shell Hall, Muson Centre, Onikan Lagos.



Saturday, February 08, 2020

The Money Conference Lagos will on this day hold with the theme: Building Income Resilience in a Volatile Economy at Sheraton Lagos Hotel 50 Mobolaji Bank Anthony Way Ikeja while the Access Bank Lagos City Marathon 2020 will hold on the same day in Lagos Nigeria.


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Check out our Events Calendar for event details and follow us on Web, TV, APP and Social Media for updates as the week unfolds. Yours to Serve!



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