What To Expect From The Markets This Week - 140920


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Nigeria: Economic Dashboard @ 110920  

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Source:  Cordros Weekly Economic and Market Report - September 11, 2020

Global Economy 

Chinese inflation slowed in August as a slowdown in the surging price of pork tempered food costs. The Consumer Price Index (CPI) moderated to 2.4% y/y (July: 2.7% y/y), the lowest figure since May. Month-on-Month, CPI was up 0.4% (July: 0.6% m/m). Food inflation eased to 11.2% y/y (July:13.2% y/y) on the back of the moderation in pork price inflation, which slowed last month from a higher base a year ago, after prices began to surge in August 2019 as African swine fever decimated China's pig herds. Pork prices rose 52.6% in August from a year earlier, easing sharply from an 85.7% y/y jump in July. Increased food supply in markets, following the containment the country's flood crisis, also contributed to the slowdown in inflation. Elsewhere, core inflation, rose 0.5% y/y in August, unchanged from July, suggesting domestic demand remained soft. Looking ahead, we opine that headline inflation has further to fall as pork and general food supply continues to recover from the swine fever and flood outbreaks.

The European Central Bank (ECB), in its latest meeting, kept its key interest rate unchanged at 0.0%, and its EUR1.35 trillion bond-buying programme in place. The bank noted that it believes in a significant rebound of the Eurozone economy but at the same time, stresses the high level of uncertainty. On inflation, the projections for 2020 remained unchanged at 0.3%, those for 2021 were revised upwards to 1.0%, while those for 2022 remained unchanged at 1.3%, with the ECB President emphasising that 2022 projections masked an upward revision of core inflation. The key moment of the press conference was the ECB President's first mentioning of the euro exchange rate as a factor that the ECB will carefully assess in the coming months. A stronger currency weighs on prices by cutting import costs. It also undermines output by making exports less competitive.  The euro has risen 10.0% against the dollar since March but the ECB faces a dilemma as any overt action to weaken the currency might be interpreted as a violation of a de facto nonaggression pact among the world's largest economic powers.

Global Markets

Global equities were mixed during the week as US tech selloffs continued, while investors elsewhere focused on economic green shoots and COVID-19 vaccine developments. Consequently, US (DJIA: -2.1%; S&P: -2.6%) shares were on track to end the week lower while European (STOXX Europe: +1.7%; FTSE 100: +3.7%) stocks were up WTD. Asian markets were mixed - Japanese (Nikkei 225: +0.9%) stocks recorded a weekly gain as the capital city of Tokyo dropped its coronavirus alert by one notch from the highest level as COVID-19 cases continue to trend down, while Chinese (SSE: -2.8%) stocks posted their biggest weekly drop in eight weeks as Beijing's rift with Washington had investors sticking to safer assets. Emerging market (MSCI EM: -1.3%) stocks were also down on the losses in China, while Frontier market (MSCI FM: -0.3%) were lower as major selloffs in Vietnamese (-1.3%) large-cap stocks ensued.




The Nigerian president, on social media, restated his stance on local food production and asked the Central Bank of Nigeria (CBN) to stop issuing foreign exchange for all food and fertiliser imports. This follows a similar order the president issued last year that the apex bank only partly followed, with some food importers still receiving foreign exchange. Food inflation soared to 15.48% in August due to climate change, banditry in the food-producing regions, the border closure and structural problems associated with the agricultural value chain. We also note that local food production in many staples is not sufficient to meet domestic demand. For example, the United States Food and Agricultural Service put Nigeria's annual wheat production at 60,000 metric tonnes (Mt) with domestic consumption at 5.3MMt. We highlight that the country recently borrowed 5,000 metric tonnes of assorted grain from ECOWAS to support the most vulnerable due to severe shortages. For us, we believe the country is putting the cart before the horse, as there is a need to address the impediments to local food production before restricting imports. Consequently, we expect upward pressure on food prices to intensify. 

Faced with the severe impact of COVID-19 on all economic units, the government has grappled with low revenue in the face of increasing expenditure to limit the impact of the pandemic on the economy. Public debt stock statistics from the Debt Management Office (DMO) show that Nigeria's public debt profile grew by NGN2.38 trillion or 8.3% q/q to NGN31.01 trillion in Q2-20. The increase stemmed from (1) the NGN1.21 trillion (USD3.36 billion) budget support loan from the IMF, (2) new domestic borrowing to finance the revised 2020 budget (FGN Bond: NGN666.76 billion and Sukuk: NGN162.56 billion), and (3) promissory notes issued to settle claims of exporters (NGN255.42 billion). With the multilateral loans expected from the World Bank (USD1.5 billion), AfDB (USD211.5 million) and Islamic Development Bank (USD113 million), expected state (c. NGN200.00 billion) borrowing and the balance of domestic (NGN588.9 billion) borrowing, public debt stock is expected to increase by 4.8% to c. NGN32.50 trillion in Q3-20.

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Capital Markets



Nigerian shares were mixed this week as profit-taking in banking stocks for the better part of the week offset bargain buying at the end of the week. Specifically, selloffs of GUARANTY (-5.8%), UBA (-3.9%) and ZENITHBANK (-1.2%) dragged the All Share Index 0.1% lower, w/w, to 25,591.95 points. Consequently, the YTD loss increased to -4.7%. Performance across sectors within our coverage was broadly negative with the Banking (-2.7%), Oil & Gas (-1.3%), Insurance (-0.7%), and Consumer Goods (-0.3%) indices all closing lower. The Industrial Goods (+0.4%) index was the sole gainer.

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

The overnight (OVN) rate increased significantly by 14.25ppts to 16.5%, as outflows from OMO (NGN70.00 billion) and FX auction debits outweighed inflows from OMO maturities (NGN265.00 billion) and FX auction refunds.

With a combined NGN492.09 billion coming into the system from OMO maturities (NGN350.00 billion) and FGN bond coupon payments (NGN142.09 billion) next week, we expect the OVN to trend southwards, barring any CRR debits on banks. 


Treasury Bills

The Treasury bills secondary market ended the week bullish, due to the excess liquidity in the interbank market, and as market participants covered for lost bids at Wednesday's NTB PMA at the secondary market. Thus, the average yield across all instruments contracted by 33bps to 2.2%. Across the segments, the average yields contracted by 39bps and 22bps to 2.4% and 1.7% at the OMO and NTB secondary markets, respectively. At the PMA, demand continued to outweigh supply, as there was an oversubscription of 2.0x on NGN128.06 billion worth of bills on offer. The auction closed with the CBN allotting NGN4.41 billion of the 91-day, NGN14.00 billion of the 182-day and NGN109.65 billion of the 364-day - at respective stop rates of 1.10% (previously 1.15%), 1.55% (previously 1.80%), and 3.05% (previously 3.34%). At the OMO auction, the CBN fully allotted NGN70.00 billion worth of bills - NGN10.00 billion of the 75-day, NGN10.00 billion of the 180-day and NGN50.00 billion of the 355-day - at respective stop rates of 4.86% (unchanged), 7.68% (unchanged), and 8.90% (previously 8.94%).

Considering the level of inflows expected in the system, we should continue to see demand for instruments in this space.


The Treasury bonds secondary market ended its bearish run this week, as the market recovered from the sell-offs that dominated most of August, and in the first week of September. We attribute the bullish market sentiment to investors' quest to reinvest the maturities that came in during the week. Thus, average yield dipped by 39bps to 7.7%. Across the curve, investors took a keen interest in short (-99bps) end instruments, as demand was particularly heavy on the MAR-2024 (-185bps), APR-2023 (-163bps) and JAN-2022 (-119bps) bonds. Similarly, the average yield at the mid (-13bps) and long (-19bps) segments also witnessed some demand, following buying interests in the MAR-2027 (-37bps) and MAR-2036 (-39bps) instruments, respectively. 

Next week, we expect demand to remain elevated as investors seek to re-invest the excess liquidity expected next week.

Foreign Exchange

Nigeria's FX reserves recorded another week of accretion, even as the CBN continued to intervene across the various foreign exchange windows. Precisely, reserves grew by USD76.42 million w/w to USD35.78 billion. Across the FX windows, the naira was flat against the US dollar at NGN386.00/USD at the I&E window but weakened by 3.3% to NGN455.00/USD in the parallel market, as the market priced in the capacity of the CBN to meet demand as international flights resume. In the Forwards market, the rates on the 3-month (+0.1% to NGN388.30/USD), 6-month (+0.2% to NGN391.02/USD) and 1-year (+0.5% to NGN400.38/USD) contracts appreciated, while the 1-month (NGN386.74/USD) contract 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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