Based on data released by the U.S. Labour Department, the number of people filing initial claims for jobless benefits fell for the first time in three weeks, although the numbers remained above pre-pandemic levels. Specifically, initial jobless claims fell to 712,000 in the week ended Nov 28 from an upwardly revised estimate of 787,000 in the prior week and was below the consensus expectation of 775,000. We understand that manufacturers are encountering challenges in maintaining production runs due to high rates of absenteeism and difficulties in hiring new people due to the second wave of the pandemic. Although the reading points to an improvement, the fact that it remains above 700,000 levels, compared to 200,000 in the pre-pandemic era, suggests that the labour market is still reeling from the impact of the pandemic amid the waning impact of fiscal stimulus. With the economy still grappling with the second wave of the pandemic, we expect labour market conditions to remain soft in the near term. 

The imposition of a four-week partial lockdown to curtail the second wave of the pandemic dampened activities in the UK services sector. Services PMI fell to 47.6 in November, a six-month low from 51.4 in October but was better than the initial flash estimate of 45.8. The weakness was largely attributed to the reintroduction of restrictions in consumer-facing parts of the services sector. Notably, this is the first time since June this year that reading has come in below 50 points suggesting that the rekindling of lockdown measures dealt a big blow to activities in the dominant services sector (c.80% of total UK economic output in 2019). Considering that the pandemic restrictions are not as stringent compared to the initial lockdown, we expect the impact on business activities to dissipate in the coming months. We think the positive developments on COVID-19 vaccines as well as prospects of further stimulus from the Bank of England will further boost business optimism and provide a tailwind for a stronger recovery in the medium to long term.

Global markets

Global stocks rallied again this week as investors digested the latest developments surrounding a new round of U.S. fiscal stimulus negotiations. Hopes were raised after a bipartisan group of lawmakers laid out a USD908 billion plan and Democratic congressional leaders threw their weight behind the proposal. Consequently, US (DJIA: +0.2%; S&P: +0.8%) stocks were on track to end the week in the green with the S&P 500 reaching record highs. European (STOXX Europe: -0.4%; FTSE 100: +1.9%) shares were mixed as optimism around the news of the UK’s approval of a coronavirus vaccine was partly offset by some profit-taking after the impressive November gains. Asian (Nikkei 225: +0.4%; SSE: +1.1%) shares closed higher on optimism over the vaccines and US stimulus. Elsewhere, emerging (MSCI EM: +0.7%) and frontier (MSCI FM: +0.7%) markets were higher, following gains in South Korea (+3.7%) and Vietnam (+1.1%) respectively.

Nigeria

Economy

The Central Bank of Nigeria disclosed it intends to introduce special bills as part of efforts to deepen the financial markets and avail the monetary authority with an additional liquidity management tool. According to the CBN, the features of the CBN special bills are: a tenor of 90 days; zero-coupon; CBN determined yield at issuance; tradable among banks, retail and institutional investors; unacceptable for repurchase agreement transactions with the CBN; non-discountable at the CBN window. This is another attempt by the apex bank to achieve the dual objective of managing system liquidity and supporting money flows to the real sector without injecting fresh liquidity. However, we note that it remains unclear whether the special bills will trade pari-passu with existing treasury bills.

In what can be regarded as a move aimed at narrowing the spread between the I&E window and parallel market rates, the Central Bank of Nigeria (CBN) released a circular amending the procedures for receipts of diaspora remittances.  In the circular, CBN stated that beneficiaries of Diaspora Remittances through International Money Transfer Operators (IMTOs) shall henceforth receive such inflows either in foreign currency cash or in their domiciliary accounts. The apex bank further noted that IMTO’s must remit all funds in favour of beneficiaries into the Agent Banks’ correspondent account. The policy action of the CBN is well-timed given the high demand for the greenback in the parallel market – we believe this is due to the inability of manufacturers to get sufficient dollar liquidity from official sources ahead of year-end festivities. In the short term, we expect the pressures on the local currency in the parallel market to dissipate as the increased flexibility on diaspora remittances will likely support dollar liquidity. Over the medium to long term, we believe there is the need for improved dollar supply and or further adjustment in the naira peg at official windows to eliminate the differential between I&E window and parallel market rates. 

Capital markets

Equities

Local stocks managed to eke out a weekly gain, amidst profit-taking pressure, as the All-Share Index ended the week 0.7% higher at 35,137.99 points. Gains in AIRTELAFRI (+19.6%) on either side of the week, following continued foreign investor interest, managed to offset the declines in DANGCEM (-2.9%), GUARANTY (-5.0%), NB (-7.1%), BUACEMENT (-1.8%) and ZENITHBANK (-2.1%). Activity levels softened as volume and value traded declined by 7.8% and 1.4% w/w, respectively. The MTD and YTD return settled at 0.3% and 30.9% respectively. Performances across sectors were mixed, with the Oil and Gas (+1.7%), and Insurance (+1.6%) indices recording gains while the Banking (-3.1%), Consumer Goods (-2.8%) and Industrial Goods (-2.2%) indices closed in the red.                   

In the short term, we still see scope for expansion in valuation multiples as the hunt for alpha-yielding opportunities in the face of increasingly negative real returns in the fixed income market remain positive for stocks. However, we advise investors to take positions in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate expanded by 275 bps w/w, to 4.3%. The rate was depressed for most of the week following an improvement in net liquidity position (averaged NGN536.97 billion this week; last week: NGN326.89 billion) as inflows into the system for OMO maturities (NGN341.10 billion) and FX retail refunds saturated the market. The eventual expansion in the funding rate was caused by debits for CRR and CBN’s weekly auctions at the latter part of the week.

We expect the OVN rate to trend southwards next week, as the system is further supported by inflows for OMO maturities (NGN294.12 billion).

Treasury bills

Trading sentiments in the Treasury bills secondary market was bearish, as investors’ apprehension for yields at this level persisted. As a result, the average yield across both market segments expanded by 5bps to 0.2%. Most of the activity, albeit minute, in the T-bills market this week occurred at the OMO segment, with the average yield in the space expanding by 8bps to 0.2%. We note that participants in that space prefer to stay on the sideline and wait for another primary market auction from the CBN, due to the low supply in the market. In the same vein, the NTB side of the market traded quietly, with the average yield in the segment expanding slightly by 2bps to 0.1%.

In the coming week, we expect the minimal activity in the T-bills secondary market to persist as participants await the issuance of the CBN’s special bills. Also, we expect market participants at the NTB segment to shift their focus to the PMA on Wednesday, where the CBN will be rolling over NGN50.93 billion worth of maturing bills.

Bonds

The Treasury bond secondary market retraced this week, as investors’ sentiment turned bearish due to a combination of re-pricing due to the rumours that the CBN special bills would be issued at a yield significantly above the current market level, as well as a decline in daily demand due to the low yields available. Consequently, the average yield expanded by 20bps to 4.1%. Also, duration apathy resurfaced across the benchmark curve, as the average yield at the short (-10bps) end declined, following interest in the MAR-2025 (-44bps) bond. Further down the curve, average yield expanded at the mid (+37bps) and long (+18bps) segments, due to profit-taking on the NOV-2029 (+68bps) and APR-2037 (+129bps) bonds, respectively.

We expect the slow demand witnessed in the Treasury bonds secondary market to persist, as investors close round up their investing activity for the year. Regardless, we expect sizeable demand at the bond auction for December.

Foreign exchange

Nigeria’s FX reserves continued its descent, as the gross reserves position declined by USD115.83 million w/w to USD35.30 billion. This is as the outflows for the CBN’s interventions across the various FX windows continue to outstrip dollar inflows. At the I&E window, the naira depreciated further and hit a new low, as it weakened by 1.2% to NGN395.00/USD, in the face of reduced supply from the CBN. Conversely, pressure on the naira eased in the parallel market (+5.3% to NGN475.00/USD) following the CBN’s announcement that it would allow beneficiaries of remittances to be paid in dollars, a measure introduced to increase the supply of dollars to BDCs. Across the forward contracts, the naira weakened across the 1-month (-1.8% to NGN397.56/USD), 3-month (-3.9% to NGN406.35/USD), 6-month (-6.6% to NGN417.98/USD) and 1-year (-11.0% to NGN439.56/USD) contracts. 

Going forward, we expect CBN’s FX management strategies to continue supporting the naira at its current level at the official and I&E windows. However, we believe the parallel market rate will remain volatile and continue to trade above the CBN’s Relative Purchasing Power Parity (RPPP) of NGN433.64/USD and our REER fair value estimate of NGN453.67/USD at the current level of intervention in the FX market.