Global economy
 
This week, the third reading of the U.S’ Q2-19 GDP was released. Although the economic growth number was unrevised at 2.0% y/y, business investment (-1.0% y/y) contracted deeper than previous estimates (-0.6% y/y). It is instructive to highlight that the contraction in business spending was the sharpest since Q4-15. In our view, the business sector has sustained its reservation towards expansion, given the trade war-induced decline in exports demand. Beyond that, the negative impact of the prolonged trade war has also significantly weighed on the manufacturing sector, thereby exacerbating the fear of an impending economic recession. Looking ahead, while consumer spending is expected to remain sturdy, thanks to the strong labour market, we highlight the slowing business and manufacturing sectors as key downside risks to the growth outlook.
 
Elsewhere, the U.S’ manufacturing PMI touched the highest level in 5 months, following the improved pace of activities across the board, save for the external sector. Pointedly, PMI data printed at 51.0 index points in September, relative to 50.3 points recorded in the prior month. While we highlight both sturdy new orders growth and improved production as the key drivers of the performance in the period, export orders continued to underperform, on account of the sustained Sino-US trade war which continues to weigh on the US external sector. Clearly, at 51.0 points, the PMI outturn remains among the slowest readings in 4 years, underscoring the view that the US manufacturing sector is far from being out of the woods. Barring a trade resolution with Beijing, the prospect for growth in the sector is limited, in our view.
 
Global markets
 
Global equities markets, across our coverage universe, recorded mixed performances, albeit with a bearish tilt. This was due to concerns about U.S. political developments – following the commencement of an impeachment inquiry into the US president –, which stoked fears of heightened political uncertainty and dented optimism about an easing of U.S.-China trade tensions. Consequently, US (DJIA: -0.2%; S&P: -0.5%) and Asian (CSI 300: -2.1%; Nikkei: -0.9%) equities markets were on track to close the week in negative territory. European (FTSE: +1.0%, Euro Stoxx: -0.8%) indices were also mixed, as lingering fears of a no-deal ‘Brexit’ pressured performances. Also, sentiments in Emerging Markets (MSCI EM: -1.0%) remained weak, following losses across China and South Korea (-2.0%). However, the Frontier Markets (MSCI FM: +1.3%) index looked set to record its first weekly gain in over a month, following gains across Middle & East & North African indices – Kuwait (+3.5%), Morocco (+0.1%), and Bahrain (+2.1%).
 
Nigeria
 
Economy
 
Activities in the manufacturing and non-manufacturing sector softened in September, as the composite PMI grew slower at 57.85 points (August: 58.35). Digging into the sub-components, we highlight that the impact of slower growth in production level (-2.0 points), new export orders (-9.0 points), and inventory levels (-6.0 points), which had a negative pass-through to the manufacturing PMI (-2.0 points to 57.7 index point). Elsewhere, the non-manufacturing PMI (-0.8 points to 58.0 points), printed at the lowest point since October 2018, following declining business activities (-1.0 points), new orders (-1.2 points) and new export orders (-1.7 points). Similarly, we noted the re-emergence of upticks in input and output prices, after two consecutive months of declines. We highlight the border closure in August as a possible driver of the upward pressure. Looking ahead, we expect festive induced spending, to improve business performance and sentiment in the last quarter of the year, with the most impact expected in November and December.
 
According to the business confidence survey by CBN, business sentiments in September waned significantly. For evidence, the overall business outlook on the macroeconomy dipped by -1.9 points to 26.7 index points – the weakest since January 2019. Similarly, business confidence across all sectors declined, as confidence across the Industrial (-1.9), Construction (-5.0), Trade (-2.3) and Services (-2.7) sectors all declined month-on-month. In our view, the weakened optimism is due to challenges hovering around insufficient power supply, high-interest rates, an unfavourable economic climate, unclear economic laws, and an unfavourable political climate. For the rest of the year, despite the highlighted challenges, we expect the CBN’s pursuit of higher credit extension to the private sector to spur improved business activities.
 
Capital markets
 
Equities
 
Sentiments remained weak in the Nigerian equities market, as the All-Share Index (-0.1% to 27,675.04) closed marginally lower week-on-week, following sell-offs of bellwether stocks including MTNN (-2.9%) and DANGCEM (-2.8%). Consequently, the MTD and YTD return of the market moderated to 0.5% and 11.9% respectively. Analysing by sectors, the Oil & Gas (+11.6%), Consumer Goods (+5.0%), and Insurance (+3.0%) indices recorded gains, while the Industrial Goods (-1.8%) and Banking (-1.6%) indices closed in the red.
 
Over the coming week, we expect the market to remain pressured given global risk-off sentiments and weak domestic participation. 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 marketIn line with our expectations, the overnight (OVN) rate moderated significantly (-8.79 ppts to 9.29%) during the week as the liquidity in the system improved. While we expected a spike at the start of the week before the rate trended downwards over the final few days of the week, the downtrend started on the first trading day before moderating to settle at 7.4% relative to 18.1% at the end of the prior week. On the first trading day, the rate settled 13.4ppts lower at 4.7% as maturities flowed into the system. Similarly, the rate settled pared by 0.1ppts apiece over the next two trading days, before settling at 4.5% on Wednesday. However, on the penultimate trading day of the week, the rate increased by 2.93ppts at 7.4% as PMA Treasury bond and OMO auctions strained system liquidity.In the coming week, PMA and OMO maturities worth NGN596.34 billion are expected to hit the system on the 3rd of October (PMA – NGN123.97 billion; OMO – NGN472.37 billion) Consequently, we expect the OVN rate to settle lower week on week.

Treasury bills 

Activities in the Treasury bills market were seemingly bullish with the average yield paring by 34bps to settle at 13.3%, as investors reinvested OMO maturities during the week. The CBN held an OMO auction during the week, on the 26th, to mop-up liquidity. The auction was for instruments worth NGN302.42 billion – 84DTM bill (NGN0.30 billion), 184DTM bill (NGN2.12 billion), and 364DTM bill (NGN300.00 billion) –, which were sold at respective stop rates of 11.59% (same as previous auction), 11.79% (same as previous) and 13.48% (previously 13.50%).

The yield on the long tenor OMO bill ended lower at the auction during the week, which may be a signal of subsiding pressure on the CBN. This would be in line with our expectation that the yield environment in developed markets would result in increased interest in the country’s assets, resulting in yields moderating by the end of Q4-19. However, we still note that the maturity profile in Q4-19 and concerns over the persisting US-China trade war – which could result in weak capital inflows from FPIs as investors flock to safe-haven territories and assets – present significant upside risks.

Bond 

Activities in the Treasury bonds market were seemingly bearish as the average yield across instruments increased by 5bps to 14.2%. There were yield increases recorded across the market, save for on five instruments, which recorded yield declines. The 14.50% JUL-2021 instrument recorded the largest decline (-9bps), while the 16.2499% APR-2037 bond recorded the largest increase (+20bps). The DMO held a Treasury bonds PMA auction during the week, on the 25th, when three instruments were auctioned to investors, all through re-openings. There were over subscriptions recorded on the 14.55% APR-2029 (Bid-to-offer: 1.66x, Stop rate: 14.39%), and 14.80% APR 2049 (Bid-to-offer: 1.16x, Stop rate: 14.39%) instruments, while the 12.75% APR-2023 (Bid-to-offer: 0.32x, Stop rate: 14.39%) instrument recorded an under subscription.

We expect trading to be bearish in the coming week as investors position in the Treasury bills market to lock in yields in the event that rates soften.

Foreign exchange

Following unrelenting naira assets sell-offs by offshore investors, Nigeria’s FX reserves declined by USD250.00 million WTD to USD42.11 billion (September 25, 2019) – a 10-month low. Meanwhile, despite the absence of CBN’s weekly FX interventions, the naira appreciated by 0.10% w/w to NGN362.02/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 increased marginally by 5.56% WTD to USD725.71 million, with trades executed within the NGN357.50-364.00/USD band. In the Forwards market, the naira contracted on the 1-month (-0.1% to NGN365.90/USD) and 3-month (-0.1% to NGN372.93/USD) contracts. Conversely, the 6- month (-0.1% to 383.76/USD) and 1-year (-0.1% to NGN410.86/USD) contracts recorded appreciations.

Despite the continuous depletion of reserves amidst sell-offs by off-shore investors, our estimate suggests no naira devaluation in 2019, as we believe the CBN has more than enough ammunition to sustain its naira defense. Hence, we expect the naira to remain resilient in the short to medium-term.