Global economy
 
China’s exports unexpectedly contracted in August, as the trade war with the US continued to hit the world’s second-largest economy. According to China’s General Administration of Customs, exports decreased 1.0% in US Dollar terms from a year earlier, while imports declined by 5.6%, to leave a trade surplus of USD34.84 billion. China’s exports to the US in August dropped by 16.0% to USD37.3 billion; a steeper decline from the 6.5% decrease in July. Imports, meanwhile, dropped by 22.3% to USD10.35 billion having decreased by 19.1% in July. Overall, China now has a trade surplus of USD26.95 billion with the US. The contraction in exports came despite a persistent weakening of the yuan and is evidence that exporters are not “front-loading” sales to try to beat oncoming higher tariffs. Weak exports add pressure on China’s already-slowing economy and point to an increased need for its policymakers to beef up stimulus measures.
 
The European Central Bank (ECB) cut its target interest rate on Thursday and controversially resumed its “quantitative easing” (QE) program amid gloomier predictions for economic growth. The Eurozone’s central bank reduced baseline interest rates to a record low of -0.5% in its first cut since 2016. It’ll also start buying EUR20 billion worth of European government and company bonds every month starting from November, reviving a program it only ended last December in a bid to encourage more economy-boosting borrowing and spending. In our view, with the Bank simultaneously lowering its forecasts for Eurozone economic growth and inflation yet again, keeping interest rates lower for longer than expected might be necessary. This is further supported by separate data on Thursday which showed European industrial production shrinking more than anticipated.
 
Global markets
 
Global equities climbed to a six-week high on Friday, as markets cheered signs of progress in US-China trade talks and another powerful slug of stimulus from the European Central Bank. Consequently, US (DJIA: +1.4%; S&P:+1.0%) and European  (FTSE: +0.6%, Euro Stoxx: +1.4%)  equities were on track to close the week in the green. Asian (CSI 300: +0.6%; Nikkei: +3.7%) indices recorded substantial gains, with the Japanese index recording its biggest gain in eight months. The general positive sentiment filtered through to the Emerging Markets (MSCI EM: +1.4%) with the markets in China and South Korea (+2.0%) closing higher ahead of public holidays. Conversely, negative sentiments were sustained in Frontier Markets (MSCI FM: -1.4%), with FM index heavyweights Kuwait (-4.5%) and Morocco (-0.2%) declining.
 
Nigeria
 
Economy
 
After long speculation surrounding the Value Added Tax (VAT) hike, the Federal Executive Council (FEC) approved a 220bps increase in VAT from 5.0% to 7.2%, with implementation subject to amendment of the extant VAT law which could occur in 2020. The government stated the increase was being proposed to help the states and local governments fund the new minimum wage. Whist we recognize that the magnitude of this VAT hike will not significantly boost FGN revenue, we, however, see a strengthened revenue base for the local and state governments, as 85% of total VAT collected is allocated to them. On inflation, we expect the hike to impact the processed foods and imported foods — 15.3% of the total CPI and 38.2% of core inflation). However, due to VAT exemption on basic materials and foods, we expect the overall impact on inflation to be moderate. 

Nigeria posted its smallest trade surplus since Q2-17 as the growth in imports continued to outpace exports. According to the National Bureau of Statistics, the foreign trade balance declined by 29.2% q/q and 71.7% y/y to NGN588.78 billion in Q2-19. Imports grew 65.2% y/y and 8.2% q/q, following a 231.4% y/y increase in Boilers, machinery, and appliances; parts thereof (26.5% of total imports). Exports grew by a slower 2.1% y/y and 1.3% q/q, as increases in Vehicles, aircraft (+143.3% y/y) and Mineral products (+1.6% y/y) offset declines in vegetable products (-23.9% y/y). We expect further deterioration in the trade surplus in the near term, on the back of weaker oil crude oil exports (oil accounts for 85.6% of total exports). This is underpinned by our outlook for weak oil prices and Nigeria’s recent pledge, to OPEC, to cut oil production by 57 kb/d.
 
Capital markets
 
Equities
 
The Nigerian equities market rebounded from the loss in the previous week amidst significant bargain-hunting by investors. Although the benchmark index opened the week in the red, positive out-turns from midweek, following interest in bellwethers – AIRTELAFRI (+8.2%), GUARANTY (+5.4%) and FBNH (+24.1%) – buoyed the overall index. Consequently, the ASI rose by 2.33% w/w to 27,779.00 points, with the YTD loss moderating to 11.62%. Analysing by sectors, the Oil & Gas (+7.2%), Banking (+5.1%), and Consumer Goods (+0.6%) indices recorded gains, while the Insurance (-2.1%) and Industrial Goods (-0.4%) declined.
 
Our view continues to favour cautious trading owing to the fact the gains recorded this week were not broad-based. Nonetheless, we note that valuations remain attractive while price deterioration has resulted in expected dividend yields on some stocks rising significantly to levels on par with yields on Treasury bills. Hence, we advise that long-term investors consider appropriately timed investments.

Money market & fixed income
 
Money market

The OVN rate undulated during the week, after increasing significantly over the first few trading days of the week. However, as system liquidity tightened at the tail-end of the week, the rate increased significantly to settle at 24.71% from 3.86% in the preceding week. On the first trading day, the rate settled 8.31% as system liquidity became strained. Thereafter, the rate increased over the next to trading days, settling at 12.93% and 19.50% on the 10th and 11th respectively. However, on the penultimate trading day of the week, as maturities worth NGN529.25 billion hit the system, the rate declined by 7.21ppts to settle at 12.29%.

In the coming week, maturities worth NGN627.24billion are expected to hit the system on the 17th (NGN49.55 billion from 17-MAR-2027 bond coupon), 18th (NGN41.42 billion from 18-MAR-2036 bond coupon), 19th (NGN536.25 billion – NGN356.51 billion from OMO maturities; NGN179.75 billion from PMA maturities), 20th (NGN18.95 million). Given the frequency and magnitude of maturities through the week, we expect the OVN rate to remain moderate through the week.
 
Treasury bills 

Activities in the Treasury bills market were seemingly bearish as the average yield increased by 6 bps to settle at 13.39%. Also, as expected the CBN held multiple auctions during the week to manage system liquidity – PMA and OMO on the 9th and 11th respectively. At the PMA, the CBN sold instruments worth NGN158.65 billion – NGN15.00 billion of the 91DTM bill, NGN14.00 billion of the 182DTM bill, and NGN129.65 billion of the 364DTM bill – at respective stop rates of 11.10% (previously 11.10%), 11.80% (previously 11.59%) and 13.29% (previously 12.89%) Similarly, as the OMO auction, the CBN sold instruments worth NGN183.64billion – 80DTM bill (NGN0.15 billion), 185DTM bill (NGN2.13billion), and 364DTM bill (NGN181.36 billion) – at respective stop rates of 11.59%, 11.79%, and 13.50%. 

Given the magnitude of maturities expected in the coming week, we expect the CBN to hold multiple auctions, similar to the current week, to manage system liquidity. Consequently, we do not expect significant pressure on secondary market rates.

Bond 

Similarly, trading in the Treasury bonds was seemingly bearish as the average yield increased by 5bps to 14.2%. There were yield expansions across the curve save for on six instruments which recorded yield declines – 7.00 23-OCT-2019 (-10bps), 15.54 13-FEB-2020 (-25bps), and 12.75 27-APR-2023 (-17bps), 14.20 14-MAR-2024 (-6bps), 13.98 23-FEB-2028 (-1bps), 16.2499 18-APR-2037 (-7bps).

In the coming week, we expect this trend to persist as investors re-invest maturities in the T-Bills market. Consequently, we expect the average yield to advance marginally week-on-week.

Foreign exchange

Nigeria’s FX reserves declined by USD46.64 million WTD to USD42.91 billion (September 9, 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. Consequently, the naira appreciated by 0.01% w/w to NGN362.04/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 38.9% WTD to USD747.97 million, with trades executed within the NGN350.00-363.86/USD band. In the Forwards market, the naira contracted across the 1-month (-0.1% to NGN365.23/USD), 3-month (-0.2% to NGN371.94/USD), 6- month (-0.5% to 382.78/USD) and 1-year (-0.1% to 411.76/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.