March 6, 2020/Cordros Report
In an emergency move, the US Federal Reserve slashed the Fed funds rates by 50bps on Tuesday; the first out-of-cycle rate cut since the 2008 financial crisis. The committee stated that this was in response to the growing threat from the coronavirus pandemic, which poses a downside risk to economic activities. While the Fed continues to emphasize that the US economy is stable, the decision to cut rate by 50bps to a range of 1.00% -1.25% was unanimous. While the magnitude of the overall impact of the virus on the US economy is yet to be ascertained, we do not rule out further rate cuts should the outbreak persist. In addition to the preemptive monetary policy move, the US government has recently signed a USD8.3 billion emergency bill to further combat the spread of the virus within the US.
Economic activities fell off the cliff in China, as the continued spread of the coronavirus led to shutdowns across several regions, resulting in disruption of production and reduced domestic demand. Pointedly, manufacturing PMI in February plunged by 14.3 points to 35.7 index points, following significant declines across New order (-22.1 point), Inventory (-13.2 points), and Employment (-16.7 points) subcomponents. In the same vein, the dual impact of weakened exports and reduced business activities had a negative pass through to the non-manufacturing PMI, which plummeted by 20.4 points to 29.6 index points, the lowest historically. If this trend persists, with production grounded and industrial activities at record lows, China’s economy could plunge into its first contraction since the 1970s.
Global markets
Performances across global stocks were largely mixed as coronavirus fears continued to dominate. Stocks in the US (DJIA: +0.6%; S&P: +0.2%) were set to close marginally higher, on expectations that policymakers will move to cushion the impact of the COVID-19 outbreak on the global economy. Elsewhere, European (Euro Stoxx: -3.4%; FTSE 100: -1.8%) stocks were set to close in the red, with travel and leisure shares enduring the biggest hit as the coronavirus continues to wreak havoc. Japanese (Nikkei 225: -1.9%) also recorded another weekly loss. Conversely, Chinese stocks (Shanghai SE: +5.0%) stocks hit a two year high as new coronavirus cases fall inside the country and rise elsewhere around the world. Emerging markets (MSCI EM: +0.8%) were boosted by a positive showing in China (+5.0%) while frontier markets (MSCI FM: -2.6%) were down following losses in Kuwait (-5.0%).
Nigeria
Economy
Nigeria’s industrial activities sustained its expansionary trajectory for the thirty-fourth consecutive month, as the composite PMI settled at 58.5 index points. However, relative to the prior month, the index grew at a slower pace (-1.0 index points), indicating inherent macroeconomic weaknesses. Sifting through the breakdown, we note that the slowdown stemmed from both Manufacturing (-0.9 points to 58.3) and Non-Manufacturing PMI (-0.1 points to 58.6). Further investigation revealed a slower pace of growth across all subcomponents of both manufacturing and non-manufacturing PMIs. Looking ahead, we still hold the view that the blend of the new VAT rate (2.5 ppts to 7.5%), together with persistent upward inflationary pressure (January: 12.13% y/y) will continue to weigh on economic activities. Nonetheless, the CBN’s credit creation drive and lower interest rate environment will continue to keep the composite PMI afloat.
The Nigerian Minister of Finance said on Wednesday that the government was worried about the drop in oil revenue and would soon begin a mid-term review of the budget to determine the way forward. For one, we note that over 75% of 2020 expenditure is recurrent, including debt servicing. While the FGN cannot default on its debt obligations, a reduction in recurrent expenditure is not possible as it will imply either a reversal of minimum wage or retrenchment of workers, neither of which is likely given the precarious state of the nation. Meanwhile, aside from the fact that the budgeted 2020 capital expenditure is already the lowest since 2016, the CAPEX implementation rate has disappointingly trailed 50% over the same period. We strongly doubt that the government will be willing to cut back on CAPEX spending. Hence, the only adjustment we see is a reduction in revenue estimates and a higher borrowing plan.
Capital markets
Equities
Bargain hunting across Banking tickers propelled the market to its first weekly gain in three weeks. The benchmark index gained 0.2% w/w, to settle at 26,279.61 points. Consequently, the YTD loss moderated to -2.1%. On sectoral performances, the Banking (+4.7%) and Insurance (+0.9%) indices gained while the Consumer Goods (-5.9%), Industrial Goods (-4.0%) and Oil & Gas (-0.7%) indices closed in the red.
Despite the market closing positive this week, sentiments remain weak. Hence, we advise investors to trade cautiously, taking positions in fundamentally justified stocks.
Money market and fixed income
Money market
The overnight (OVN) rate contracted by 345 bps w/w, to 12.9%. Liquidity was squeezed in the earlier part of the week, following last Friday’s CRR debits (c. NGN700 billion) and outflows from the OMO auction (NGN110.51 billion). However, CRR credits worth c.NGN200 billion flowed into banks at the end of the week, driving the OVN downwards.
In the coming week, inflows totaling NGN105.86 billion — OMO maturities (NGN54.74 billion) and FGN bond coupon payments (NGN51.12 billion) — are expected to hit the system. In effect, we expect a contraction in the OVN rate.
Treasury bills
Activities in the treasury bills market turned bearish following foreign investor selloffs across the OMO market on coronavirus worries and falling oil prices. Consequently, the average yield across all instruments expanded by 120bps to 13.1%. The average yield in the OMO segment expanded by 242bps to 13.1%. However, the average yield in the NTB segment pared by 1bp to 4.0% amidst quiet trading activity in the market.
We expect quiet sentiments to persist as market players shift attention to Wednesday’s NTB PMA. However, foreign investor selloffs are likely to persist in the OMO secondary market as oil prices continue to plummet.
Bonds
The FGN bond secondary market was bearish, as investors reacted to (1) weakened global markets which continue to suffer from the fallout of coronavirus outbreak, and (2) the FGNs plan to undertake a mid-term review of this year’s budget. Thus, average yields across instruments expanded by 55bps to 10.1%. Yields across the short (+16bps), mid (+74bps), and long (+14bps) segments of the curve all expanded due to sell-offs of the MAR-2024 (+149bps), FEB-2028 (+100bps), and JUL-2034 (+35bps) bonds.
We bearish sentiments to persists as investors remain on the sidelines in a bit to understand market direction.
Foreign exchange
Nigeria’s FX reserves declined by USD108.42 million WTD to USD36.22 billion (3 Mar 2020), 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 NGN366.25/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 (-0.5% to NGN368.46/USD), 3-month (-1.1% to NGN373.72/USD), 6-month (-1.9% to NGN382.03/USD) and 1-year (-2.4% to NGN402.51/USD) contracts.
Looking ahead, we expect the foreign reserves to support the CBN’s currency defense 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.