Global economy

U.S. orders for durable goods rose in July by more than double estimates amid a continued surge in automobile demand, indicating factories will help support the economic rebound in coming months. Data from the U.S Census Bureau shows that new orders for long-lasting manufactured goods, including transportation items, grew by 11.2% m/m, after a 7.7% jump in June, largely due to strong consumer demand for transportation equipment (+35.6% m/m). With consumers taking advantage of discounted pricing and the low-interest environment, orders for new cars and trucks increased by 21.9% m/m. This shows that key-parts of the US economy have returned close to pre-crisis trends despite the resurgence in the virus. However, we expect the pace of growth for manufacturers to remain slow until the virus is contained.

Eurozone businesses became more confident about the economy in August as the bloc gradually recovered from the fallout of the coronavirus pandemic, according to new survey data. The closely watched European Eurozone economic sentiment indicator rose by a better than expected 5.3 points to 87.7 in August. Amongst the bigger member states, all countries saw higher sentiment figures, with Spain being the notable exception. All sectors, except for construction and the consumer where sentiment was broadly unchanged, saw confidence improving. The services sector specifically stood out, with a nine-point jump in confidence. The positive data suggests strong GDP growth for the Eurozone in Q3 but only due to the significantly low base in Q2.  The pace of growth is not likely to extend into Q4 which implies generous monetary and budgetary support will have to be maintained in 2021, especially if the introduction and the roll-out of a COVID-19 vaccine will be prolonged.

Global markets

Global equities were mostly positive this week on improved prospects of a global economic recovery. US (DJIA: +2.0%; S&P: +2.6%) stocks were set for a fourth consecutive weekly gain as investors weighed healthy earnings results, positive economic data, and falling daily COVID-19 infections. European stocks were mixed with the STOXX Europe (+1.1%) set to close higher as investors welcomed coronavirus drug developments, while UK (FTSE100: -0.1%) stocks were set to record a weekly loss on poor retail and consumer data and weak earnings releases. In Asia, Japanese (Nikkei 225: -0.2%) shares closed lower following the resignation of the Japanese prime minister, while Chinese (SSE: +0.7%) stocks were up, with sentiment supported by improving economic data and a slew of new listings. Elsewhere, emerging (MSCI EM: +2.3%) and frontier (MSCI FM: +1.9%) market stocks were set to close higher following gains in South Korea (+2.1%) and Vietnam (+2.8%) respectively.

Nigeria

Economy

Nigeria’s economy contracted by the most in at least a decade in Q2-20 as lower oil prices and production and COVID-19 induced disruptions weighed down output. Real GDP contracted by 6.10% y/y (Q1-20: +1.87% y/y) compared to our estimate and Bloomberg consensus median estimate of a drop of 2.87% and 4.05% respectively. Quarter on quarter, real GDP declined by 5.04%. The oil sector plummed by 6.63% y/y as oil production fell to 1.81 mb/d due to Nigeria’s efforts to comply with its OPEC production quota. Activities in the non-oil sector, which plunged by 6.05%, were dampened by restrictions and shelter-in-place mandates put in place to combat the spread of COVID-19. Having factored in the upside and downside risks across both Oil and Non-Oil GDP, we project negative growth of 1.85% in Q3-20 and revise our 2020FY GDP growth estimate to -1.88%.

Nigeria’s PMI remained in contractionary territory for the fourth consecutive month, as (1) weak consumer spending, (2) the low-level of business activities, (3) rising cases of banditry especially in the Northern parts of the country, and (4) the high cost of procurement due to the weaker currency and FX illiquidity continue to dampen the country’s macroeconomic environment. According to the CBN, Manufacturing PMI for the month of August rose to 48.5 points (July: 44.9 points) while the non-Manufacturing PMI rose to 44.7 points (July: 43.3 points). The broader recovery across the subsectors indicates the initial impact of the pandemic is dissipating. The continued relaxation of the social distancing measures will remain positive for the manufacturers. We note, however, that this will not be enough to drive positive economic growth in 2020FY as activities in the non-manufacturing segment will take a while to move into expansionary territory.

Capital markets

Equities

Nigerian stocks inched higher for the sixth successive week, following bargain buying across large-cap stocks. Specifically, interest in BUACEMENT (+2.8%), STANBIC (+4.5%), GUARANTY (+1.2%) and NB (+2.8%) pushed the ASI 0.3% higher w/w, to 25,309.37 points. The YTD loss moderated to -5.7%, while the MTD gain increased to 2.5%. Performance across sectors within our coverage was mixed with the Insurance (+2.8%), Consumer Goods (+1.1%), and Industrial Goods (+0.6%) indices recording gains, while the Banking (-0.2%) index declined. The Oil & Gas index was flat.

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 and Fixed income

Money market

The overnight (OVN) rate surged by 12.27 ppts w/w to 14.9%, as CRR debits, and OMO (NGN97.27 billion) and FX auctions debits pressured liquidity in the system and outweighed inflows from OMO maturities (NGN283.42 billion), FGN bond coupons (NGN49.89 billion) and FX retail auction refunds.

Barring any liquidity mop-up activity by the CBN, we expect the OVN rate to trend southwards, as inflows from OMO maturities (NGN321.48 billion) come into the system.

Treasury bills

Trading in the Treasury bills secondary market was bullish this week, as a healthy system liquidity sustained demand for instruments in the space. Thus, the average yield across all instruments contracted by 27bps to 2.7%. The bulk of demand was at the OMO segment, as the average yield in the space contracted by 47bps to 3.1%. Elsewhere, sell-offs witnessed on mid-tenor instruments resulted in the average yield expanding by 4bps to 1.6%. At the NTB PMA on Wednesday, the CBN rolled over maturing bills worth NGN197.60 billion, with allotments of NGN20.37 billion of the 91-day, NGN55.85 billion of the 182-day and NGN121.38 billion of the 364-day – at respective stop rates of 1.15% (previously 1.20%), 1.80% (previously 1.39%), and 3.34% (previously 3.12%).

In the coming week, we expect healthy system liquidity to sustain demand for T-bills.

Bonds

The trading in the Treasury bonds secondary market this week was mixed with bullish sentiments, as average yield pared by 2bps to 8.0%. In our view, this was due to investors’ reinvesting inflows from OMO maturities and bond coupons, as noted earlier. Across the benchmark curve, the average yield at the short (-1bp) end contracted slightly following demand for the JAN-2022 (-49bps) bond, while yields also expanded at the mid (+21bps) and long (+1bp) segments of the curve due to sell-offs of the MAR-2027 (+32bps) and JUL-2034 (+28bps) bonds, respectively.

We expect a pick-up in demand for bonds next week, as maturities are re-invested in the space.

Foreign exchange

The CBN’s foreign reserves bucked the trend of the last three months, as it recorded its first weekly accretion since 29th May, 2020. Thus, the reserves grew by USD53.30 million w/w to USD35.66 billion. Across the FX windows, the naira strengthened against the US dollar by 0.1% w/w, to NGN385.67/USD at the I&E window but continued to trade flat at NGN477.00/USD in the parallel market. In the Forwards market, appreciations were recorded across the exchange rates for the 1-month (+0.1% to NGN386.50/USD), 3-month (+0.3% to NGN388.23/USD), 6-month (+0.6% to NGN391.00/USD) and 1-year (+1.0% to NGN402.55/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.