Economic activities nosedived into a technical recession in Germany over the first quarter of the year – the first recession in seven years. Notably, after contracting by 0.1% q/q in Q4-19 following weaknesses in the external sector, GDP growth plunged by another 2.2% q/q, occasioned by the COVID-19 pandemic outbreak, which took a toll on growth outturn. This is the sharpest quarterly decline in growth since the global financial and economic crash of 2009, and the second-largest decrease since the German unification. We highlight the blend of a slump in private consumption (-3.2% q/q), fixed investment (-0.2% q/q), and exports (-3.1% q/q) as the primary drivers. From a year ago, GDP growth shrank by 1.9% y/y. Even as the German government has begun to gradually ease the previously instituted economic lockdown, growth is still expected to contract in Q2-20, before a gradual pickup beyond Q2.

Elsewhere, we had stated that Q1-20 GDP in the US contracted by 4.8% (annualized) in our last commentary on the US economic growth. However, Q1-20 GDP growth outturn proved to be a lot worse than initially estimated. Precisely, the US growth shrank by 5.0% (annualized) – the steepest quarterly decline since Q4-08 (-8.4% y/y). The downward revision came amid weaker inventories for businesses. For us, given the sizeable impact on growth, despite the great lockdown in the U.S only commencing at the tail end of March, we believe that the contraction in Q1-20 may be the first of succession over the next few quarters. In Q2-20, growth is expected to contract much deeper and lead to an economic recession in the U.S, which would be the first since the 2008 financial meltdown.

Global Markets

Equities markets across the globe were generally positive, as positivity regarding the reopening of economies across the globe outweighed negatives, especially given depressed levels of stock prices. In the US, markets (DJIA: +5.6%; S&P: +4.2%) rallied in the week, as the country gradually reopens following lockdowns across majorly affected states. Similarly, European equities (STOXX: +4.5%; FTSE 100: +3.8%) reacted given similar happenings in the region. Also, the expectation of further stimulus to boost economic activities seemed to stoke market activities. Elsewhere, Asian equities markets (SSE: +1.2%; Nikkei 225: +7.5%) shrugged off possibilities of heightening tension between the US and China to post similarly strong performances. We do, however, note that performances across markets were weak on the last trading day of the week, as strained Sino-US relations and fresh cases of Coronavirus in China, spread negativity.

Nigeria

Domestic Economy

This week, the National Bureau of Statistics reported that Nigeria’s economic activities grew at a slower pace when compared to the prior quarter. Specifically, GDP grew by 1.87% y/y (Q4-19: +2.55% y/y), mostly on the account of a slower pace of growth in the oil and non-oil sectors. The growth outturn outperformed Cordros’ estimate of 0.74% y/y by 113bps. For the oil sector, an 11.0% y/y growth in crude oil production to 2.07mb/d, cascaded into a 5.06% y/y growth in oil GDP (previously: 6.36% y/y). Meanwhile, despite the resilient agriculture (+2.20 y/y) and construction (+1.69%) sectors, slower pace of growth in the service (+1.57% y/y) and manufacturing (+0.43% y/y) sectors weighed markedly on the non-oil sector (+1.55% y/y; vs. +2.26% y/y previously). For the next few quarters, we believe the impact of COVID-19 induced economic lockdown will reflect markedly on output growth. We now look for Q2-20 GDP to contract by 2.30% y/y, mostly driven by the oil sector, which is expected to contract on lower production.

Elsewhere, having expressed explicitly in March 2020 that it has lost faith in the effectiveness of a rate cut in tackling economic growth-related problems, the Monetary Policy Committee (MPC) delivered a 100bps rate cut, while leaving all other policy parameters unchanged. This move came as a surprise to the market (Bloomberg consensus had expected a hold). Notably, seven members voted to cut the rate by 100bps, two members voted for a 150bps rate cut, while one member elected for a 200bps rate cut. This is the first-rate cut since March 2019, and the steepest since November 2015. Our key takeaway is that the committee acknowledged that growth will slide into the negative territory in Q2-20. However, in a bid to avoid an economic recession over 2020, the MPC elected to cut rate by 100bps, signalling its resolve to sustain its accommodative policy stance, despite imminent currency and inflationary pressure.

Capital Markets

Equities

The Nigerian equities market posted another positive performance in the week, as activities seem to be normalizing post-lockdown. The ASI recorded a gain of 0.3% w/w to bring the YTD return to -5.9%, and index level to 25,267.82 points. Analysing performances by sector, the Consumer Goods (+3.0%) sector led the gainers, followed by the Banking (+2.4%) and Insurance (+0.6%) sectors. On the other hand, the Oil & Gas (-1.0%) and Industrial Goods (-1.8%) sectors recorded the weakest performance.

In our opinion, risks remain on the horizon due to a combination of the increasing number of COVID-19 cases in Nigeria and weak economic conditions. Thus, we continue to advise investors to trade cautiously and seek trading opportunities in only fundamentally justified stocks.

Fixed income and money market

Money market

The overnight (OVN) rate contracted by 12.63ppts, w/w, to 3.0%. The rate started the week pressured, following Friday’s CRR debit by the CBN. However, inflows from OMO maturities (NGN319.72 billion) and FGN bond coupon payments (NGN5.63 billion) were enough to saturate the market and drive down the OVN, notwithstanding debits for Thursday’s OMO auction (NGN114.00 billion).

Barring any mop-up activity by the CBN, we expect the OVN to steady at current levels, as we expect system liquidity to remain healthy, as inflow from OMO maturities (NGN155.78 billion) come in.

Treasury bills

The Treasury bills secondary market was seemingly bullish during the week as the average yield pared moderately by 2bps to settle at 4.9%. This primarily driven by increased interest in the PMA segment of the market, which recorded a decline in yields by 5pbs to 2.1%. In the OMO segment, yields increased by 3bps to 6.1%, given the shift in focus to the auction during the week. At Wednesday’s NTB PMA, the CBN fully allotted NGN59.37 billion worth of bills – NGN20.37 billion of the 91-day, NGN19.16 billion of the 182-day and NGN19.84 billion of the 364-day – at respective stop rates of 2.45% (previously 2.50%), 2.72% (previously 2.85%), and 4.02% (previously 3.84%).

In the coming week, we expect improved demand for T-bills, given the expectation of improved system liquidity.

Bonds

Activities in the Treasury bonds secondary market were seemingly bullish during the week, leading to the average yield across instruments contracting by 30bps to close at 10.1%. While trading was tepid for most of the week with the average yield trading sideways for most of the week, there was a strong level of demand on the final trading day of the week following the reduction of the MPR to 12.5%. We adduce the increase trading activities to both this factor and the refocus of the country to foreign debt with the announcement that the country would be seeking out a further USD5 billion in borrowings from various multilateral agencies. Across the benchmark curve, yield contracted at the short (-45bps), mid (-34bps) and long (-14bps) segments as investors accumulated the MAR-2025 (-171bps), APR-2029 (-49bps) and JUL-2030 (-37bps) bonds, respectively.

We expect demand to remain strong at the start of the coming week. However, we expect this to tail off, especially if yields pare significantly over the first few trading days, as investors refocus on the primary auction in the upper week on the 17th of June when the expectation of better yields takes precedence.

Foreign Exchange

For the fourth straight week, the CBN recorded another FX reserves buildup, with the country’s external balance growing by USD535.00 million WTD to USD36.40 billion. We attribute the driver of the reserve accretion to the inflow of RFI facility by the IMF, which continues to outweigh FX outflows. Nonetheless, the Naira depreciated against the USD by 0.10% w/w to NGN386.33/USD at the I&E window and by a steeper 2.2% w/w to NGN460.00/USD in the parallel market. In the Forwards market, the naira depreciated against the USD across the 1-month (-0.08% to NGN388.01/USD) and 3-month (-0.04% to NGN391.49/USD) contracts, while it appreciated across the 6-month (+0.02% to NGN396.63/USD) and 1-year (+0.06% to NGN414.75/USD), contracts.

We still hold the view that the RFI inflow will continue to provide short-term support for the FX reserves. Nonetheless, we expect the currency market to remain largely volatile, especially in the parallel as the CBN’s suspension of FX sales to BDCs continues to create a backlog of unmet FX demand.