March 9, 2018/Cordros Report
Global Economy
The US trade deficit, according to the Commerce Department, expanded sharply to USD56.6 billion in January – the biggest trade gap since October 2008 – from USD53.9 billion in the previous month, and above polled expectation of USD55.1 billion. Imports of goods and services into the US was unchanged at USD257.5 billion (an all-time high), while exports fell by 1.3% to USD200.9 billion during the period. Meanwhile, the politically sensitive trade deficit with china surged 16.7% to USD36.0 billion – the largest since September 2015 — despite efforts by Trump to curb expansion in the trade deficits. While the newly introduced tariffs by Trump are likely to curb imports (particularly for steel and aluminum), recent backlash from key trading partners such as Canada and Europe poses a threat.
The Japanese economy in the fourth quarter of 2017, recorded a faster growth than was initially estimated.The Asian giant grew by 1.6% y/y, much higher than the initial 0.5% y/y estimate, and polled estimate of 0.9% y/y. On a quarter-on-quarter basis, the GDP expanded by 0.4%, stronger than the initial 0.1% estimate, and following 0.6% q/q recorded in the previous quarter. This was the eighth straight quarter of growth, buoyed by accelerated capital spending (following improved global economic outlook), strong private consumption and an upward revision of business spending and inventories. Outlook for Japanese economy growth remains positive, supported by continued monetary stimulus and broadly synchronizing global economic growth.
Global markets
Activities in global markets turned broadly positive this week, with all indices within our coverage recording gains – as opposed to last week’s bearish performance. The defining factors were; easing trade-war fears, dovish monetary stance, solid job report, and economic data. The European markets (EuroStoxx50:+3.07%, FTSE100:+1.79%)recorded the largest gain, while risky assets in Asia (CSI300:+2.30%,Nikkei225:+1.36%) and US equities (S&P500:+1.77%, DJIA:+1.46%) followed suit. The MSCI EM (+1.12%) index closed positive, as gains in China overshadowed losses in Brazil (-0.06%). Gains in Nigeria (+0.68%) and Kenya (+0.01%) offset negative returns in Ghana (-1.41%), causing the MSCI FM (+0.65%) index to close higher.
Nigeria
Economy
According to the NNPC Monthly Financial and Operations report for the month of December 2017, average crude oil and condensates production increased by 0.62% in the month of November to 1.96mb/d vs. 1.94mb/d in October; while average daily gas production declined by 4.41% to 7,551.09mmscfd in December, from 7,899.01mmscfd in November. Meanwhile, refining capacity utilization increased to 26.99% against 5.92% in November, attributable to the increase in crude processed by PHRC & KRPC. Increasing crude oil production (amid higher prices), combined with the recent reported reduction in the cost of production of a barrel of crude (to USD20 from USD23 in Aug. 2017), suggests improved budget out turns.
The Central Bank of Nigeria (CBN) released its Financial Stability Report for H1-2017. It showed that the asset quality of commercial banks declined in H1-2017, with the ratio of NPLs to gross loans increasing by 220 bps and 430bps to 15.0%, compared with the levels in H2-2016 (12.8%) and H1-2016 (10.7%) respectively. Increasing crude oil prices, in addition to strong recovery of the oil sector over H2-17, suggest moderating NPLs, considering the oil sector accounts for the most of bad loans in the banking system.
Equities
Gains extended on the domestic bourse, with the ASI advancing by 0.68% w/w to 43,167.86 points, on the back of still-positive macroeconomic fundamentals and expected positive corporate earnings. The week recorded four sessions of gains, which were trimmed by month-high loss of 1.51% mid-week. Among sectors, the Oil & Gas (+5.58%) index recorded the largest gain, followed by the Consumer Goods and Industrial Goods indices — posting 1.70% gain apiece –and the Banking (+0.49%) index. On the flip side, the Insurance index closed lower by 0.74%. JAPAULOIL (+53.97%) remained investors toast, while REGALINS (-27.08%) was the top loser.
As investor sentiment remains buoyed by optimism around (1) positive macroeconomic fundamentals, and (2) expected positive Q4-2017 corporate releases, our outlook for the equities market remains positive.
Fixed Income and Money Market
Money Market
The overnight lending rate fell to 9.17%, representing an 86 bps w/w contraction and the fourth consecutive w/w contraction since 16 February 2018.There were inflows totaling NGN152.93 from matured OMO bills and outflows totaling USD210 million and NGN307.70 billion via FX sales and OMO auctions, respectively.
While maturing OMO bills, valued at NGN261.86billion, are likely to support system liquidity in the coming week, it is likely outflows (OMO and FX sales) will outweigh inflows, ultimately pressuring the overnight lending rate.
Treasury Bills
Activities in the treasury bills market were mixed, albeit with a bearish tilt, as average yield rose marginally (1 bp w/w)to close the week at 15.05%. Investor sentiment was negative across the short (+17 bps) and long (+3 bps) ends of the curve, amid selloffs of the 20D (+119bps) and 342D (+55 bps) bills respectively. Conversely, yields contracted at the mid (-13 bps) segment, driven by demand for the 104D (-49 bps) bill.
Yields are expected to rise in the meantime, supported by expected low system liquidity. At the NTB auction scheduled for next week, the CBN will offer NGNG191.44 billion – N25.14billion of the 182-day and NGN166.30billion of the 364-day bills – to the market.
Bonds
Trading in the bond market was also bearish this week, as average yield expanded by 1 bp to close at 13.66%. Investors sold off at the short (+3bps) and mid (+2bps) ends of the curve, with the JUL 2021 (+19bps) and MAR 2024 (+5bps) bonds recording significant expansions. Yields at the long (-1 bps) end saw a marginal contraction, led by the APR-2037 (-5bps) bond.
We reiterate our expectation for lower yields in the short to medium term, reflecting (1) falling inflation rate, (2) strengthening expectation of monetary easing, and (3) the FGN’s new debt management strategy.
Foreign exchange
The USD/NGN remained flat at NGN362 in the parallel market (as it did throughout the week), while it weakened by 0.06% to NGN360.32 in the I&E FX window. Total turnover in the I&E FX window dropped sharply by 60.97% to USD539.90 million, with bulk of trades still within the NGN360-NGN369 band. Meanwhile, the apex bank injected USD210 million into the FX market during the week, comprising USD100 million, USD55 million, and USD55 million disbursements to the wholesale, SMEs, and invisibles windows, respectively. It is worth stating that, the foreign reserves crossed the USD43 billion-mark this week, closing at USD43.62 billion– highest since December 2013.
Our outlook for the FX market remains stability, as oil revenues – supported by stable oil prices and production – continue to shore up the foreign reserves.