Global economy

The UK economy plunged into recession in Q2-20, when the coronavirus lockdown was tightest, contracting by the most since the Office for National Statistics (ONS) began keeping records in 1955. GDP contracted by a record 20.4% q/q (Q1-20: -2.2% q/q) and 21.7% y/y as Britain’s lockdown was more protracted than elsewhere. More importantly, the monthly GDP figure indicates that activity saw a much more solid rebound in June (+8.7%) than the disappointing outcome for May (+1.8%), mostly on wholesale/retail trade, as shops began to reopen. Following the easing of lockdown and social distancing measures, we expect businesses to increase output to meet up with the pent-up consumer demand. As such, we expect the U.K economy to rebound sharply in Q3-20.

According to US Labor Department data, US consumer prices rose in July by more than expected on a jump in auto and apparel costs, though inflation remained broadly muted as the pandemic suppressed demand. Headline and Core Consumer Price Indices (CPI) both posted 0.6% m/m gains vs 0.3% m/m and 0.2% m/m respective consensus expectations. The jump in core CPI was the largest increase since January 1991. The current trend in the CPI reflects the gradual easing of lockdowns as well as the impact of the U.S. stimulus package aimed at boosting depressed due to the COVID-19 pandemic. We see this more as an unwinding of the strains caused by Covid-19 shutdowns rather than a signal that there is a meaningful pick-up in medium-term price pressures. The significantly smaller economy and huge output gap formed due to the pandemic will limit the upside for broader inflation pressures.

Global markets

Global equities were broadly positive on improving economic data, rising hopes over a COVID-19 vaccine and general optimism about a global economic recovery. Consequently, US (DJIA: +1.7%; S&P: +0.7%) stocks were set to close the week higher. In addition to the preceding, European (STOXX Europe: +1.2%; FTSE 100: +0.9%) stocks were also set to close the week higher following a telecoms sector M&A announcement. Asian (Nikkei 225: +4.3%; SSE: +0.2%) stocks were also up on US stimulus hopes and as some weak consumption data reinforced expectations that the Chinese government will take more measures to boost domestic demand. Emerging (MSCI EM: +0.6%) and frontier markets (MSCI FM: +2.0%) stocks were also set to end the week higher following gains in South Korea (+2.4%) and Kuwait (+3.1%).

Nigeria

Economy

The NNPC announced an invitation to investors to bid for the rehabilitation of the crude oil and petroleum product pipelines as well as the upgrade of the depots serving the Group’s oil refineries through a Build, Operate and Transfer (BOT) model. The pipeline network was built in the 1970s and plays a critical role in bringing crude oil to NNPC’s refinery complexes, and moving the finished fuels to consumers. However, the pipelines have fallen into serious disrepair through normal wear and tear, vandalism and oil bunkering. We see this initiative as positive. The rehabilitation and upgrade of the facilities will allow the NNPC free up finances for other purposes while enhancing the efficiency of the network. This could also offer a boost domestic refinery capacity utilization (2019 domestic refining capacity utilization: 7.6%) in conjunction with increased protection from pipeline vandalism.

The Nigerian Bureau of Statistics (NBS) released its Labour Force Statistics report for the first time since December 2018. The unemployment rate rose to 27.1% in Q2-20 (Q3-18: 23.1%), the highest in at least a decade, while the underemployment rate rose to 28.6% (Q3-18: 20.1%). While the working-age population increased by 1.2% to 116.87 million (Q3-18: 115.49 million), we highlight that the number of those who are willing and able to work reduced by 11.3% to 80.3 million (Q3-18: 90.5 million). Youth unemployment also remained significantly high at 34.9% (vs 29.7% in Q3-18). We note that change in methodology and some discrepancies in the official data make like-for-like comparisons difficult. However, taking the data at face value, the unemployment rate more than doubled over the last four years as Nigeria has struggled to recover from the effects of the 2016 recession. The decline in the overall labour force suggests that at least 10 million people, who were previously in full employment, have disappeared from the labour force since 2018 and implies that real unemployment could be much higher.

Capital markets

Equities

For the first time since January, the domestic bourse closed higher for the third successive week, primarily driven by foreign investors taking positions in fungible stocks.  Specifically, AIRTEL (+9.2%), NB (+12.5%), and SEPLAT (+10.0%) were the major drivers of the overall market’s gain, with the All-Share index closing the week 0.6% higher at 25,199.84 points. The YTD loss moderated to -6.1%, while the MTD gain increased to 2.0%. Performance across sectors within our coverage was broadly positive with the Oil & Gas (+5.9%), Consumer Goods (+2.2%), and Insurance (+1.1%) indices recording gains. The Banking index was flat while the Industrial Goods (-2.7%) index was the sole loser.

Our view continues to favour cautious trading as 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 seek trading opportunities in only fundamentally justified stocks.

Money market & Fixed income

Money market

The overnight (OVN) rate surged by 12.63ppts w/w to 19.8% as outflows for OMO (NGN45.36 billion) and FX auction debits outweighed inflows from OMO maturities (NGN87.97 billion) and FX retail refunds (NGN320.00 billion).

In the coming week, we expect a contraction in the OVN, as inflows from OMO maturities (NGN181.36 billion) come into the system.

Treasury bills

The Treasury bills secondary market traded with bullish sentiments, as market players looked to reinvest inflows from OMO maturities and FX retail refunds, and as they looked to the secondary market to fill unmet demand from the NTB PMA. Thus, average yield across all instruments contracted by 9bps to 3.3%. Across the segments, average yield contracted by 4bps and 13bps to 4.0% and 1.6%, at the OMO and NTB markets, respectively. At the PMA, the CBN rolled over maturing bills worth NGN56.78 billion with allotments of NGN19.78 billion of the 91-day, NGN10.00 billion of the 182-day and NGN27.00 billion of the 364-day – at respective stop rates of 1.20% (previously 1.20%), 1.39% (previously 1.50%), and 3.12% (previously 3.40%).

We expect the downward trend in yields to be sustained, with incoming inflows likely to support demand.

Bonds

The Treasury bonds secondary market ended the week bearish, as investors anticipate renewed supply from next week’s PMA. Consequently, average yield expanded by 5bps to 7.9%. Across the benchmark curve, average yield expanded at the short (+92bps) end following a sell-off of the JAN-2022 (+206bps) bond. Conversely, yield at the mid (-1bp) and long (-79bps) segments contracted due to demand for the JUL-2030 (-60bps) and MAR-2036 (-117bps) bonds, respectively.

Next week, we expect investors’ focus to be shifted to the PMA on Wednesday, as the DMO is set to offer instruments worth NGN150.00 billion through re-openings of the 12.50% JAN 2026, 12.50% MAR 2035, 9.80% JUL 2045 and 12.98% MAR 2050 bonds. Nonetheless, we still expect increased activity at the secondary market as investors cover lost bids at the auction which is likely to be oversubscribed.

Foreign exchange

The CBN’s foreign reserves sustained its descent, dipping by USD32.03 million w/w to USD35.62 billion, as FX outflows continue to outpace inflows. Nevertheless, the naira was flat against the US dollar at NGN386.00/USD and NGN475/USD at the I&E window and parallel market, respectively. In the forwards market, the naira depreciated against the US dollar in the 1-month (-0.03% to NGN387.51/USD), and 1-year (-0.3% to NGN409.32/USD) contracts but appreciated against the dollar in the 3-month (+0.05% to NGN389.81/USD), and 6-month (+0.1% to NGN393.79/USD) contracts.

Despite the CBN’s stronger commitment towards exchange rate unification, we still see legroom for the currency to depreciate further, at least towards its REER derived fair value. Our prognosis is hinged on (1) the widening current account (CA) position, (2) currency mispricing, which could induce speculative attacks on the naira, and (3) the resumption of FX sales to the BDC segment of the market which should place an additional layer of pressure on the reserves as the CBN funds the backlog of unmet FX demand.