Amid intensified efforts by both China and the US to redefine their economic relationship, the phase one deal between both nations was finally signed this week. The deal is the first step in creating a broader all-encompassing agreement that will resolve the trade imbalance between the two most powerful economies of the world. On key details from the agreement, China is expected to purchase $200bn worth of America’s goods and services (largely agricultural produce) over the next two years and also refrain from competitive currency devaluations. In exchange, the US has agreed to reduce tariffs on $120bn worth of Chinese products from 15% to 7.5%. For now, the deal is expected to bring some relief to Chinese manufacturers, who have long suffered from tariffs and also reduce the uncertainty that had clouded companies’ decisions to invest in China. Despite the first deal, we think the global economy is not completely out of the woods until the last two deals are signed.  

Elsewhere, US inflation rose by 20bps to 2.3% y/y in December, making the year-end 2019 print the fastest pace of price growth since 2011. Breakdown provided revealed that the combination of higher gasoline prices and the pick-up in foodservice costs boosted headline inflation in the period. From a month ago, inflation rose by only 0.2%, relative to 0.3% recorded in the prior month. Stripping out the volatile food and core baskets, consumer prices rose by 0.1% (November: 0.2% m/m). In our view, the softer rate of increase in consumer prices was on account of slower consumer demand occasioned by a weaker labour market. With inflation maintaining its tight grip to the Fed 2.0% target, we see no need for the committee to pursue further monetary easing policies. This is more so that the Phase One trade deal has been agreed upon, which is expected to ease external shocks to growth.

Global markets 
 
Global equities rose to record highs this week, buoyed by Chinese growth figures that suggested the Global equities rose to record highs this week, buoyed by Chinese growth figures that suggested the world’s second-biggest economy was stabilizing, along with easing trade tensions between the US and China. US stocks (DJIA: +1.6; S&P: +1.2%) edged higher to hit fresh record highs on Friday on optimism over corporate earnings and economic data. European shares (Euro Stoxx: +0.4%; FTSE 100: +1.1%) touched record highs after the EU Trade Commissioner struck a positive tone on talks with the US, soothing some concerns over a possible escalation in trade tensions between the cross-Atlantic allies. Sentiments were mixed in Asia (Nikkei 225: +0.8%; CSI 300: -0.2%) as traders in China pocketed gains following the recent rally underpinned by optimism around the Sino-US trade deal. Elsewhere, sentiments towards emerging (MSCI EM: +0.6%) and frontier (MSCI FM:+1.4%) equities improved with the easing of trade tensions and as investors bet on faster global growth amid loose monetary policy by the world’s biggest central banks.
 
Nigeria
 
Economy
 
According to the monthly oil market report released by OPEC, Nigeria’s crude oil production (excluding condensates) plummeted from a historic high of 1.79mb/d in Q3-19 to 1.67mb/d in Q4-19. This development is hardly surprising, as we had projected that Nigeria’s commitment towards complying with OPEC’s production agreement would put a cap on domestic oil production growth. Despite the decline, we believe higher condensates production, especially from the Egina oil field, will help to bridge the production gap. At crude production of 1.77mb/d and an estimated condensate production level of 0.26mb/d, we project total crude production at 2.03mb/d for Q4-19. On the impact on the economy, a 2.03mb/d production level translates to a 6.28% y/y growth in oil GDP.
 
In our November inflation note, we had argued that consumer prices would firm up, driven by the impact of (1) the sustained border closure, and (2) festive induced demand on food inflation and core inflation (coming from a low base in 2018). True to our prognosis, headline inflation increased by 11.98% y/y in December 2019, the highest since May 2018. Prices firm across both the food (+19bps to 14.67% y/y) and core (33bps to 9.32%) inflation. With festive induced demand having dissipated and the gradual fading of the impact of the border closure, we expect less pressure from food inflation going forward. Hence, we forecast a 4bps increase in food inflation to 14.70% y/y in January. Elsewhere, while exchange rate and PMS price stability should ordinarily drive core inflation downwards, we expect the low base of the corresponding period in the prior year to result in a 9.33% y/y rise. Overall, we forecast headline inflation of 12.12% y/y in January 2020.

Capital markets
 
Equities
 
Sentiments remained bullish in the Nigerian equities as investors continued to chase positive inflation adjusted returns in the face of declining fixed income yields. However, in line with our expectations, some profit taking activity capped gains, with the ASI rising by a smaller 0.7% w/w to 29,618.52 points. Investors booked profit in the newly listed BUACEMENT (-12.2%) and NB (-8.8%), however, interest in market heavyweights MTNN (+9.1%) — following the positive news surrounding the USD2bn tax claim by the AGF — and DANGCEM (+1.7%) kept the index in positive territory for the week. Year-to-date, the index is up 10.3% and remains the best performing index globally. Sectoral performance was mixed as the Banking (+2.3%) and Oil & Gas (+0.6%) indices gained while the Industrial Goods (-6.3%), Insurance (-2.6%) and Consumer Goods (-2.1%) indices declined.
 
Looking ahead, while we expect profit-taking to continue in the coming week, we still see significant legroom for a further rally as the elevated maturities from fixed income instruments hunt for investment vehicles. Nonetheless, we advise investors to cherry-pick fundamentally sound stocks

Money market and fixed income

Money market

The overnight (OVN) rate maintained an uptrend during the week before paring at the tail end of the week to settle at 3.86%. On the first trading day, the rate expanded by 329bps to 14.00% following funding for FX auction held by the CBN. Thereafter, the rate eased marginally by 58bps on the second trading day, before then increasing marginally by 75bps to 14.17% on the subsequent trading day on the back of strained liquidity. However, on the penultimate trading of the week, the rate declined by 9.1ppts to 3.57% as the system became awash with OMO and NTB maturities (NGN755.54 billion) which boosted system liquidity.
 
In the coming week, inflows worth a combined NGN475.86 billion – FGN Bond coupon payments (NGN42.10 billion) and OMO maturities (NGN433.76 billion) –  will hit the system on the 20th and 23rd respectively. This, we expect, will boost system liquidity and cause a contraction in the OVN rate.

Treasury bills
 
Trading in the Treasury bills secondary market remained bullish, as the average yield across instruments dipped by 10bps to 9.67%. Yields in the NTB secondary market declined by 75bps to 3.45% as investors covered lost bids from the PMA. Conversely, sell-offs in the OMO segment drove yields upwards by 37bps to 13.11%. At the Treasury bills PMA, instruments worth NGN225.45 billion were sold – 91DAY (Stop rate: 2.9500%; Previous stop rate: 3.5000%; Bid-to-offer: 8.92x), 182DAY (Stop rate: 3.9500%; Previous stop rate: 4.9000%; Bid-to-offer: 3.31x), 364DAY (Stop rate: 5.0900%; Previous stop rate: 5.2000%; Bid-to-offer: 1.44x).
 
We expect trading volumes to increase and yields to further pare in the NTB market, as maturities flood the market in the coming week. However, we do not expect the average yield on OMO bills to significantly pare from the level this week, as the CBN will likely mop-up maturities in the coming week, which should support secondary market levels.

Bond

The Treasury bonds secondary market was mixed, albeit with a bearish tilt, as the average yield increased by 3 bps to 10.26%. Selloffs were witnessed across the mid and long segments, with the MAR-2027 (+14bps) and JUL-2034 (+26 bps) bonds recording the largest yield expansions, respectively. The DMO will be holding the first Treasury bonds PMA for 2020 next week on the 22nd of January when NGN150.00 billion acros0073 three instruments will be offered to investors, all through re-openings – 12.75% APR 2023, 14.55% APR 2029, and 14.80% APR 2049.
 
We expect trading activities to remain strong in the Treasury bonds market, as the liquidity expected to come on board next week is channeled to next week’s PMA. We still expect the bond market to remain bullish given strong buying activity.

Foreign exchange
 
There was a momentary breather for Nigeria’s FX market as the reserve recorded its first daily accretion since July 1, 2019, especially at the twilight of the week. However, significant naira sell-off at the start of the week had forced higher intervention by the CBN, to ensure that the reserve sustained its weekly decelerating trend. Evidently, the reserve declined by NGN23.68 million WTD to NGN38.34 billion. Nonetheless, the naira strengthened at the I&E window by 0.2% WTD to NGN361.84/USD but closed flat at NGN362.00/USD at the parallel market. 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 the SMEs segment, and USD55.00 million to the Invisibles segment. Elsewhere, total turnover at the I&E window increased by 108.6% WTD to USD1.81 million, with trades consummated within the NGN357.00 – 365.00/USD band. In the Forwards market, the naira was stronger across all contracts, WTD – 1-month (+0.3% to NGN363.93/USD), 3-month (+0.5% to NGN367.94/USD), 6-month (+0.7% to NGN375.25/USD) and 1-year (+1.6% to NGN396.37/USD).
 
Despite the rate of decline in FX reserves, which has heightened fears regarding the possibility of a currency devaluation, our model suggests that the CBN has enough ammunition to sustain its naira defense through to at least H1-20.