Global Economy
 
Japan’s industrial production slipped for the fourth consecutive month, as output contracted by 2.5% y/y in January 2020. We highlight that weakened global trade sentiment continues to take a toll on the country’s external sector, as shipments pared by 3.7% y/y. Also, with projections that the impact of the sale tax hike on consumption will start to fade, producers appeared optimistic, as inventories – the largest subcomponent – expanded by 3.8% y/y. From a month ago, output expanded by 0.8%. For February, we expect the trend to remain unchanged as the impact of the fast-rising spread of coronavirus portends a downside to growth and trading activities. Nevertheless, we expect the low base of the corresponding period in the prior year to drive a marginal growth.
 
According to the Federal Labour Office, German unemployment unexpectedly fell for a second month, highlighting the resilience of the labour market to a manufacturing slump and new threats from the coronavirus outbreak. The number of people out of work dropped by 10,000 in February to 2.26 million, defying economist predictions for a 4,500 increase. The jobless rate held at 5.0%, near a record low.  The labour market is expected to remain resilient as some support could be on the way to protect the economy against further external shocks. If the constitutional mechanism that restricts the country’s debt levels is temporarily suspended, an avenue for additional fiscal stimulus could be opened up. Extra spending could add to more than EUR160 billion already allocated through 2023 in areas such as infrastructure and transportation to keep the economy competitive.
 
Global markets
 
Coronavirus panic sent global equities markets crashing, compounding their worst week since the 2008 global financial crisis. US (DJIA: -11.1%; S&P: -10.8%) and European (Euro Stoxx: -11.6%; FTSE 100: -10.8%) shares tumbled into correction territory, as investor fears heightened over just how much damage the fast-spreading COVID-19 virus will wreak on the global economy. In Asia, Japanese (Nikkei 225: -9.6%) stocks suffered their largest weekly decline in four years, while Chinese (CSI 300: -5.0%) stocks suffered their largest weekly fall since last April. Emerging markets (MSCI EM: -4.9%) and Frontier markets (MSCI FM: -2.6%) were not immune to the selloffs, with significant losses in China (-5.0%) and Vietnam (-5.5%) weighing down the respective indices.
 
Nigeria
 
Economy
 
The National Bureau of Statistics (NBS) published GDP data, showing that Nigeria’s economic growth momentum remained broadly positive in Q4-2019, as GDP grew by 2.6% y/y (vs. 2.3% y/y in Q3-19), the highest quarterly figure since Q3-2015. For 2019FY, economic activities expanded by 2.3% y/y (vs. 1.2% y/y in 2018FY). While the non-oil sector (2.3%y/y vs. 1.9% y/y in Q3-19) continued to show resilience, the oil sector expanded, albeit at a slower pace of (+6.4% y/y) when compared to the prior quarter (+6.5% y/y). For Q1-20, we project a marginal growth in the oil sector, on account of (1) high base from the corresponding period in the prior year and (2) our expectation of compliance with OPEC’s production allocation to Nigeria. Thus, we project crude oil production at 2.03mb/d, which translates to a growth estimate of 0.8% y/y. The non-oil sector growth is expected to remain positive, albeit at a slower pace of 2.1% y/y. Overall, we project growth of 2.1% y/y for Q1-2020.
 
According to the November 2019 Monthly Financial and Operations Report by the NNPC, Nigeria’s crude production (oil and condensates) declined by 0.8% m/m to 2.05 mb/d in October 2019 – 10.9% lower than the 2019 budget estimate of 2.30mb/d. The production decline was attributed to shutdowns of the Trans-Forcados and Bonny NCTL due to leaks, oil loss, and pipeline repairs. Meanwhile, petrol subsidy expenses (under-recovery) settled at NGN608.46 billion as of August 2019 – 6.1% below the total amount expended in 2018 (NGN648.27 billion). At this run-rate, we estimate that under-recovery would have topped NGN900 billion in 2019. Clearly, the recent crash in oil price, occasioned by the rising cases of coronavirus, is negative for Nigeria’s public finances as more than 70% of FX earnings are from crude oil sales. However, lower oil price-induced reduction in subsidy payments should slightly help limit the impact.
 
Capital markets
 
Equities

Nigerian stocks suffered their biggest weekly loss since April 2019 with investors exiting on increasing regulatory risk in the banking sector, a slump in oil prices, and as the first case of the Coronavirus was reported in the country. Consequently, the benchmark index declined by 4.3% w/w to 26,216.46 points, driven primarily by selloffs in GUARANTY (-14.8%), MTNN (-5.2%) and NB (-16.4%), and bringing the YTD return (-4.3%) deep into negative territory for the first time in 2020. Month-to-date, the market returned -8.1%, the worst monthly loss since January 2016. Analysing the performance by sectors, the Banking (-11.8%), Insurance (-8.2%), Consumer Goods (-3.8%), and Oil & Gas (-2.1%) indices all declined. The Industrial Goods (+1.1%) index was the sole gainer on interest in BUACEMENT (+1.92%).

Amidst continued weak market sentiments, we advise investors to trade cautiously, taking positions in fundamentally justified stocks.
 
Money market & fixed income
 
Money market
 
The overnight (OVN) rate expanded by 12.59 ppts, w/w, to 16.42%. The system was awash with liquidity for most of the week following inflows from OMO maturities (NGN927.75 billion) and FAAC disbursements (NGN356.06 billion). However, outflows from OMO (NGN480.00 billion) auction and CRR debits (c. NGN700 billion) at the end of the week drove the OVN higher w/w. 
 
We expect a contraction in the OVN rate to contract in the coming week, supported by a boost to system liquidity from OMO inflows worth NGN232.26 billion on Thursday.
 
Treasury bills
 
Activities in the Treasury bills market were bullish as the average yield across instruments contracted by 92bps to 8.5% on the back of liquidity-driven demand in the OMO space. The average yield in the OMO segment of the market contracted by 133bps to 10.6% while the average yield in the NTB market expanded by 14 bps to 4.0%. At the week’s NTB primary auction, the CBN fully allotted NGN104.12 billion worth of bills – NGN20.37 billion of the 91-day, NGN31.75 billion of the 182-day and NGN52.00 billion of the 364-day – at respective stop rates of 3.00% (previously 3.00%), 4.00% (previously 4.00%), and 5.70% (previously 6.54%).
 
We expect the bullish trend to continue in the Treasury bills market, supported by relatively healthy liquidity.
 
Bonds
 
Trading in the FGN bond secondary market was similarly bullish, as market players looked to re-invest maturities from short-term instruments at relatively attractive yields. Consequently, the average yield across instruments contracted by 69bps to close at 9.2%. Yields across the short (-92bps), mid (-58bps), and long (-28bps) segments of the curve all contracted due to buying interest in the MAR-2024 (-131bps), FEB-2028 (-70bps), and JUL-2034 (-53bps) bonds.
 
We expect sustained demand next week across the bond yield curve supported by excess system liquidity.
 
Foreign Exchange
 
Nigeria’s FX reserves declined by USD442.1 million WTD to USD36.33 billion (27th Feb 2019), as the CBN maintained its support for the currency via its weekly FX interventions; USD210.00 million was sold 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. Nonetheless, the naira depreciated by 0.3% w/w to NGN365.25/USD at the I&E window but closed flat at NGN360/USD in the parallel market. In the Forwards market, the naira depreciated across the 1-month (-0.2% to NGN367.19/USD) and 3-month (-0.2% to NGN371.38/USD) contracts, but appreciated at the 6-month (+0.2% to NGN377.91/USD) contract. Meanwhile, the 1- year contract was flat at NGN398.88/USD.
 
Looking ahead, we expect the still healthy foreign reserves to support the CBN’s currency defence over H1-20. Further out, the blend of tighter cash inflows, faster pace of capital repatriation, and possible resurgence of speculative attacks on the naira will force the CBN to throw in the towel in our opinion.