Global economy

The recovery in Chinese economic activity continued in August and was led by the services sector which expanded at a much faster pace than previously, while the expansion in manufacturing activity slowed as the country battled with still-weak demand and heavy floods. Data from the National Bureau of Statistics showed that the Non-Manufacturing PMI increased to 55.2 points (July: 54.2 points), the strongest level since early 2018, while the Manufacturing PMI moderated to 51.0 points (July: 51.1 points). The recovery in Q2 has largely been driven by the boost in demand from the government’s fiscal stimulus and there has been a pickup in services as the government eases virus control measures. However, the slowdown in the manufacturing sector reveals that the recovery in production outpaces that of demand. We expect activity to continue to improve, driven by the gradual growth in domestic demand and further reopening of export markets. However, a return to pre-COVID growth rates remains an uphill struggle.

Labour market conditions worsened in the Euro Area, despite the relaxation of COVID-19 containment measures, but unemployment remained massively suppressed by short-time work schemes. According to the data released by Eurostat, unemployment in the Euro Area increased to 7.9% in July from 7.7% in June. Short-time work schemes involving a massive portion of the labour force across the Eurozone has prevented a jump in the unemployment rate so far. We also note that a significant portion of those who had registered in unemployment agencies abandoned their job searches and left the active population. The unemployment rate will continue to trend upwards, albeit at a very subdued pace, as short-time work schemes continue to be extended. However, these schemes provide a comfortable cushion against income declines and any negative second-round effects on the Eurozone economy.

Global markets

Global equities were set to close lower in the week as profit-taking on US technology and other high-flying stock sectors ensued on Thursday.  Consequently, US (DJIA: -1.3%; S&P: -1.5%) and European (STOXX Europe: -0.7%; FTSE 100: -1.9%) stocks were down WTD. Asian markets were mixed – Japanese (Nikkei 225: +1.4%) stocks snapped two consecutive weekly losses after Warren Buffett’s Berkshire Hathaway said that it bought stakes in five of the country’s largest trading companies, while Chinese (SSE: -1.5%) stocks closed lower on Wall Street selloffs and as investors pulled out of high-flying consumer firms on worries over lofty valuations. Emerging market (MSCI EM: -1.1%) stocks were also down on the losses in China, while Frontier market (MSCI FM: +1.3%) stocks were set for a weekly gain on a positive performance in Vietnam (+2.6%), where sentiments were boosted by an announcement of plans for increased government stimulus.

Nigeria

Economy

Nigeria’s trade position worsened at the half-year as the merchandise trade deficit widened from NGN421.26 billion in Q1-20 to NGN1.80 trillion in Q2-20. This marks the third successive quarterly deficit, and the largest since at least 2008, as exports plummeted to a four-year low following the pandemic-induced global oil price crash and lower domestic crude oil output. Exports declined significantly by 51.7% y/y (Q1-20: -10.0%), while imports increased marginally by 0.4% y/y (Q1-20: +21.6% y/y) as the impact of the lockdown as well as FX weaknesses weighed in on consumer and industrial demand. Oil production cuts and still depressed oil prices (Cordros H2-20 Brent forecast: USD40-45/bbl) are likely to weigh on crude oil exports and as such we expect total exports to remain pressured. Conversely, with the CBN gradually improving FX liquidity in the market and the gradual pickup of economic activities in the country, we expect a slight rebound in imports over the rest of the year, barring renewed lockdowns, resulting in the trade balance remaining in deficit.

In line with our expectation, the Petroleum Products Marketing Company (PPMC), in a new memo, increased the ex-depot price of PMS by 9.4% to NGN151.56/litre (July: NGN138.62/litre) with effect from September 2. We highlight that just as it did in July, the PPMC did not give further guidance on the Expected Open Market Price (EOMP) which has thus led to PMS selling in the range of NGN158/litre and NGN162/litre. Using the latest PPPRA pricing template, we estimate the EOMP to be c. NGN164.54 (Landing Cost: NGN145.17 + Distribution Margin of NGN19.37). With the oil price hovering between USD43/barrel and USD45/barrel, we expect the retail price of PMS to remain relatively rangebound (NGN160-165), barring any significant rise in oil price.

Capital markets

Equities

The Nigerian bourse recorded a higher level of activity this week from both local and foreign investors, as positive earnings releases from the tier I banks and bargain buying across some bellwethers drove the market to its largest gain in almost a month. Specifically, interest in GUARANTY (+4.5%), NB (+8.1%), STANBIC (+5.4%), and ZENITHBANK (+3.3%) pushed the All Share Index 1.2% higher, w/w, to 25,605.64 points – the highest level since March 9, 2020. Consequently, the YTD loss moderated to -4.6%. Performance across sectors within our coverage was broadly positive with the Oil & Gas (+3.7%), Banking (+2.8%), Insurance (+2.0%), Consumer Goods (+1.5%), and Industrial Goods (+0.4%) indices all recording gains.

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

In line with our expectations, the overnight (OVN) rate crashed by 12.65 ppts w/w to 2.3%, as inflows from OMO maturities (NGN321.48 billion) outweighed outflows for OMO (NGN100.00 billion) and FX auctions.

Next week, we expect the OVN to remain in single digit territory, as inflows from OMO maturities (NGN265.00 billion) are expected in the system.

Treasury bills

The Treasury bills secondary market traded with bullish sentiments, as average yield across all instruments contracted by 23bps to 2.5%. The overall market was largely influenced by activities in the OMO segment (-31bps to 2.8%), as local players picked on the relatively attractive yields in the space, and covered for lost bids at the OMO auction. Elsewhere, yields at the NTB segment contracted by 11bps to 1.9%, due to sustained demand by retail investors. At the OMO auction, the CBN offered bills worth NGN100.00 billion, with allotments of NGN10.00 billion of the 82-day, NGN10.00 billion of the 180-day and NGN80.00 billion of the 355-day – at respective stop rates of 4.86% (previously 4.87%), 7.68% (previously 7.68%), and 8.94% (previously 8.94%).

We expect the downward trend in T-bills yields to continue next week, on the back of buoyant system liquidity. At the NTB segment, we expect focus to shift to the primary market, where the CBN will be offering NGN128.06 billion worth of instruments to investors.

Bonds

The Treasury bonds secondary market was bearish month end sell-offs at the top of the week and increasing investor apathy for yields at this level drove average yield higher by 9bps to 8.1%. Across the benchmark curve, the average yield at the short (+2bps) and long (+27bps) ends expanded due to sell-offs of the JAN-2022 (+27bps) and MAR-2036 (+98bps) bonds, respectively, while yields they contracted at the mid (-8bps) segment, following buying interest in the FEB-2028 (-24bps) bonds.

We expect mixed trading in the bond market next week as liquidity driven demand is offset by further profit taking.

Foreign exchange

Nigeria’s FX reserves grew slightly this week, despite the CBN’s interventions across the various foreign exchange windows. Precisely, reserves grew by USD5.99 million w/w to USD35.67 billion. Across the FX windows, the naira weakened against the US dollar by 0.1% w/w, to NGN385.67/USD at the I&E window but strengthened significantly by 8.4% to NGN477.00/USD in the parallel market off improved supply from speculative traders as well as retail users in anticipation of renewed supply from the CBN. In the Forwards market, the rates on 1-month (-0.1% to NGN386.91/USD) and 3-month (-0.1% to NGN388.23/USD) contracts weakened, while the 6-month (+0.1% to NGN391.75/USD) and 1-year (+0.2% to NGN402.44/USD) contracts appreciated.

Despite the CBN’s stronger commitment towards exchange rate unification, we still see legroom for the currency to depreciate further in the medium-to-long term, 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.