August 30, 2019/Cordros Report

Global Economy

The US recently released its Q2-19 GDP reading (expenditure approach), which showed that the economy grew by 2.0% y/y, relative to 3.1% y/y reported in the prior quarter. The breakdown provided, showed a significant decline in business investment (-0.6% y/y), which we surmise is a fall out from declining business confidence given heightened trade protectionism. Equally, gross private domestic investment (-6.1% y/y), exports of goods (-5.8% y/y) and exports of services (-6.3% y/y) were disappointing in the period. Despite the foregoing, consumer expenditure, which accounts for over 60.0% of the GDP, widened by 4.7% – the fastest growth since 2014. That together with the marginal growth in imports (+0.1% y/y) kept overall GDP afloat. Looking ahead, we expect the U.S economic growth to remain pressured, given the unrelenting US-China trade war.

According to the Statistics Bureau of Japan, CPI for August declined by 2 bps to 0.5% y/y, in line with the consensus estimate. We believe that the impact of the slower increases in Energy (+1.1% y/y; July: +2.5% y/y), Food (+0.3% y/y; July +1.2%) and Fuel & Utilities (+1.7% y/y; July: +2.3% y/y) prices drove the moderation in the inflation in the review period. Clearly, the data suggests that the Bank of Japan’s (BOJ) 2.0% inflation target remains elusive. However, the planned sales tax hike of 2.0% expected in October could potentially drive inflation slightly higher.

Global Markets

Even as the key recession signal continues to flash in the U.S, Beijing’s renewed commitment to resolve the year-long trade war seems to sit well with equity investors, as appetite for risk assets recovered from last week. Pertinently, the U.S (DJIA: +2.9%, S&P: +2.7%) and Euro Area (FTSE: +1.7%, Euro Stoxx: +3.1%) equity markets look set to close the week on a positive note, at the time of writing. Although proceedings were mixed in the Asian markets (CSI 300: -0.6%; Nikkei: +0.0%), both the Emerging Markets (MSCI EM: +1.8%) and Frontier Markets (MSCI FM: +0.8%) closed negative, given the market performance in Argentina (-9.8%) – given fiscal crises – and trade war concerns in China (-0.6%).

Nigeria

Economy

According to the Monthly Financial and Operations Report by NNPC, the total crude oil production for May rose by 4bps m/m to average 1.94 mb/d. This was 15.7% below the budgeted crude oil production benchmark of 2.30mb/d. The NNPC reported that production was disrupted by unrelenting technical challenges across Trans Forcados, Bonny NCTL, Agbami, and Qua Ibom terminals respectively. Notably, pipeline vandalisms also rose markedly by c.77.0% m/m to 106.0 points. We expect production (including condensates) to rise by 6.5% y/y (average 1.96 m/bd) in Q2-19, which should drive a stout rebound in the Oil GDP +7.0%y/y.

The CBN recently released the Purchasing Managers’ Index report for August 2019, which showed an extension of positive trend into the third quarter of the year. The index rose by 0.4 points to 58.35 points, representing the twenty-ninth consecutive month of expansion. Digging into the sub-components, we observed that expansion in inventory levels, supply delivery times and business activities across both the manufacturing PMI (+0.3 points to 57.9) and non-manufacturing PMI (+0.1 point to 58.8).  Despite the impressive reading, we note that weaker domestic demand dampened growth in new orders levels (-0.1 points to 57.1), which had a negative pass-through effect on production levels (-0.2 points to 58.7) and employment levels (-0.2 points to 57.1). For the next few months, we expect the composite PMI to maintain its upward trajectory amidst FX stability and moderating input prices, the impact of which should drive positive business sentiments.

Capital Market

Equities

Profit-taking on index heavyweights ensured that Nigeria’s equity market gave up gains posted from the prior week. Evidently, the benchmark index dipped by 1.0% w/w to 27,525.81. Although the ASI gained marginally on Wednesday and Friday, the negative out-turns over the other trading days in the week dragged the overall index. Thus, MtD and YtD losses increased to 0.7% and 12.4%, respectively. Analysing by sectors, losses in the Oil & Gas (-10.76%), Banking (-3.46%), and Consumer Goods (-0.64%) indices offset gains in the Insurance (+1.15%) and Industrial Goods (+0.34%) indices and dragged the market to the negative weekly performance.

We reiterate our view that the blend of a compelling valuation story and positive macroeconomic environment should propel the market in the medium term. However, we advise investors to tread the cautious trading path in the short term.

Money Market

As expected, the OVN rate trended downward through most of the week as liquidity levels became more buoyant after OMO maturities worth NGN639.64 billion hit the system. Consequently, the rate settled at 10.5%; representing a decline of 8.39 percentage points. On the first trading day, the rate settled 5.3% lower from the previous week’s close of 18.89%. Thereafter, the OVN rate declined by 1.1% to 12.4% before marginally rising by 0.4% on the next trading day. However, on the penultimate trading day of the week, as maturities worth NGN563.82 billion hit the system, the rate declined by 5.4 percentage points to settle at 7.4%.

In the coming week, maturities worth NGN553.84 billion are expected to hit the system on the 5th of September, which should keep the OVN rate tethered in the single-digit territory.

Treasury Bills 

Activities in the Treasury bills secondary market were seemingly bullish as yields pared by 131 bps to settle at 13.8%. Also, during the week, the CBN held one primary market auction and two OMO auctions. At the PMA on the 28th, instruments worth NGN208.60 billion were issued – 91DAY (Stop rate: 11.1000%; Allotment: 24.37 billion), 182DAY (Stop rate: 11.5878%; Allotment: NGN38.75 billion), and 364DAY (Stop rate: 12.8900%; Allotment: NGN145.48 billion). The first OMO auction on the 29th, instruments worth NGN48.05 billion were issued – 91DAY (Stop rate: 11.5900%; Allotment: 1.00 billion), 189DAY (Stop rate: 11.7900%; Allotment: NGN1.38 billion), and 364DAY (Stop rate: 13.0000%; Allotment: NGN45.67 billion) –, however given the weak allotment levels, another auction was called on the 30th. At the second OMO auction, rates firmed up at the long-end as instruments worth NGN222.12 billion were issued – 91DAY (Stop rate: 11.5900%; Allotment: 2.89 billion), 189DAY (Stop rate: 11.7900%; Allotment: NGN2.48 billion), and 364DAY (Stop rate: 13.5000%; Allotment: NGN216.75 billion).

As expected in the prior week, yields pared as system liquidity level became elevated during the week. In the coming week, further OMO maturities are expected which should keep demand levels elevated and result in the yields in the secondary market further paring. However, the trend in the stop rate rises in OMO auctions leads us to surmise that the CBN is firming up rates in the face of substantial capital flow reversals given increasing global risks. 

Bond 

Similarly, trading in the Treasury bonds market was seemingly bullish as the average yield across instruments settled 24 bps lower at 14.1%. There were yield declines recorded across most trading instruments save for the JAN-2026 (+6 bps), MAR-2027 (+8 bps), and Mar-2036 (+10 bps) instruments. Also, the largest decline in yield was recorded on the FEB-2020 bond which pared by 1.7 ppts to settle at 13.6%, as the bond reverts to par. 

We expect the trend in the Treasury bonds market to persist into the coming week as investors look to re-invest maturities in high-yielding instruments.

Foreign Exchange

Nigeria’s FX reserves declined by USD27.47 million WTD to USD44.73 billion (August 28, 2019). Meanwhile, the CBN sustained its weekly FX interventions, selling USD210.00 million across the different segments of the FX market – USD100.00 million to the Wholesale segment, USD55.00 million to SMEs segment, and USD55.00 million to the Invisibles segment. Nonethless, the naira depreciated by 0.06% w/w to NGN362.93/USD at the I&E window but closed flat at NGN360.00/USD at the parallel market. Elsewhere, total turnover at the I&E window decreased by 51.73% WTD to USD956.34 million, with trades executed within the NGN357.50-364.00/USD band. In the Forwards market, the FX rate declined across the 1-month (-0.2% to NGN367.07/USD), 2-month (-0.4% to NGN370.83/USD), 6-month (-0.6% to NGN385.91/USD) and 1-year (-0.60% to NGN410.22/USD) contracts.

Looking ahead, while we acknowledge there might be continuous depletion of reserves amidst sell-offs from foreign investors, we still expect the naira to remain resilient in the short to medium term, as a rebound in the crude oil price (USD60.24/barrel) underpins higher oil receipts, thereby supporting the CBN’s continued intervention.

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