China’s headline inflation rate printed -0.5% y/y in November, according to the National Bureau of Statistics (NBS) – the first price drop since October 2009 (-0.61% y/y). The fall was primarily driven by food prices (-0.7% y/y vs October: 2.2% y/y), which dropped for the first time in three years. Pork prices (-12.5% y/y vs October: -2.8% y/y) also continued their descent, as the country’s pig herds continue to recover from the African swine fever. Compared to the previous month, consumer prices fell by 0.6% (October: -0.3% m/m), reflecting a 1.6% m/m decline in the prices of food, tobacco, and alcohol, which affected the CPI decrease by 0.52ppt. However, core inflation (0.5% y/y) remained unchanged compared to October, thereby suggesting domestic demand remained soft. Apart from the weak domestic demand, the decline in domestic prices reflects the high base from Q4-19. Consequently, we expect the drag in prices to be short-lived as domestic demand improves in the medium term and as the base effect wanes.

Investors looking for a significantly more considerable stimulus boost by the European Central Bank (ECB) were left disappointed after its latest policy meeting. As expected, the Bank left interest rates unchanged but decided on a set of recalibrations to its existing measures, all aimed at extending the current monetary stimulus by roughly nine months. According to the ECB president, the current measures are extended until early 2022, the moment when – according to the expectations of vaccine experts – the eurozone should have achieved herd, and the economic recovery can finally take off. Consequently, the Bank decided to increase its bond-buying program under the Pandemic Emergency Purchase Programme (PEPP) by EUR500.00 billion to EUR1.85 trillion to ensure that net purchases will last until at least March 2022 (Previous: June 2021) or until it judges that the COVID-19 crisis is over. The ECB continues to follow two main aims: keep financing conditions as favourable as possible and prevent any new euro crisis on the back of an unwarranted widening of government bond yields (a.k.a. keeping the transmission mechanism smooth). The ECB has linked its policies to the virus and the vaccine. The body hinged the measures on the assumption that all eurozone nations will achieve herd immunity by the end of 2021.

Global markets

Global stocks were mixed as investors balanced hopes for approvals and distribution of coronavirus vaccines against a near-term surge in cases and hospitalisations. US (DJIA: -0.7%; S&P: -0.8%) stocks were on track to end the week in the red as Wall Street weighed dimming prospects for a coronavirus relief package. European (STOXX Europe: -0.2%; FTSE 100: +0.8%) shares were mixed as Brexit worries and record virus cases in Germany partially offset gains from US stimulus hopes. Asian (Nikkei 225: -0.4%; SSE: -2.8%) shares closed lower as profit-taking, a flare-up in Sino-U.S. tensions, and worries about policy tightening dented risk appetite. Elsewhere, emerging (MSCI EM: +1.3%) and frontier (MSCI FM: +0.2%) markets were higher, following gains in South Korea (+1.4%) and Vietnam (+1.9%) respectively.

Nigeria

Economy

Nigeria’s trade position worsened for the fourth consecutive quarter as the merchandise trade deficit widened from NGN1.80 trillion in Q2-20 to NGN2.39 trillion in Q3-20. The reading marks the largest quarterly deficit since at least 2008, as exports plummeted while imports beat their pre-pandemic levels. Exports declined significantly by 43.4% y/y (Q2-20: -51.7%) due to the compliance with the OPEC+ oil production agreement and lower oil prices (-31.1% y/y). However, imports increased by 38.0% y/y (Q2-20: +0.4% y/y) due to the demand for food items, chemical products, and machinery as they jointly contributed 70.0% to the total imports during the period. We expect the continued compliance with oil production cuts and still depressed oil prices to keep weighing on crude oil exports (81.0% of exports). Conversely, the improvement in domestic activities is expected to keep imports on the rise, resulting in the trade balance remaining in deficit in Q4-20.

The World Bank may have dashed Nigeria’s hopes of receiving its USD1.50 billion budget-support loan as the Bank’s country director explained that Nigeria needs to compile a solid economic recovery plan with the right FX policies to get the loan approved. The news comes despite the Bank recognising how much the country has done in trying to meet its demands. We understand that one of the critical reforms demanded by the World Bank to approve the loan is for the country to allow for a more unified and flexible exchange rate regime which has an economic impact of improving the attractiveness of naira assets to foreign investors. We, however, think the FG is unlikely to surrender its managed float regime and will continue to embark on its demand management strategy while waiting on oil prices to stabilize around USD55/bbl, based on our estimates. Consequently, we believe the FG will opt for raising funds via the Eurobond market in 2021, given the likely rejection of the loan application.  

Capital markets

Equities

Nigerian stocks recorded a weekly loss on continued profit-taking and as the market reacted negatively to the uptick in short-term yields at the NTB primary auction. The All-Share Index ended the week 2.5% lower at 34,250.74 points. Selloffs of DANGCEM (-8.0%), WAPCO (-10.7%), ZENITHBANK (-5.2%) and MTNN (-0.8%) were the primary drivers of the decline with the MTD and YTD return of the index settling at -2.3% and 27.6% respectively. The performances across sectors were negative, with the Industrial Goods (-5.0%), Banking (-2.9%), Insurance (-1.8%), Consumer Goods (-1.6%) and Oil and Gas (-0.3%) indices recording losses.                 

We expect the profit-taking and negative reaction to the unanticipated front-end supply from the CBN to be short-lived. Yields in the fixed income market remain relatively unattractive, and we expect this to 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

In line with our expectation, the overnight (OVN) rate contracted by 337 bps w/w, to 0.9%, as inflows from OMO maturities (NGN280.09 billion) outweighed outflows for the CBN’s weekly OMO (NGN70.00 billion) and FX auctions. 

In the coming week, we expect the OVN rate to remain depressed, as inflows from OMO maturities (NGN337.64 billion) boost system liquidity.

Treasury bills

The Treasury bills secondary market was bearish this week as investors anticipated the issuance of the CBN’s Special Bills. As a result, the average yield across all instruments expanded by 28bps to 0.4%. At the OMO and NTB segments, average yield expanded by 24bps and 32bps to 0.4% and 0.5%, respectively. On Wednesday, the CBN conducted its bi-weekly PMA, where it offered bills worth NGN50.93 billion with allotments of NGN4.41 billion of the 91-day, NGN7.82 billion of the 182-day and NGN38.70 billion of the 364-day – at respective stop rates of 0.01% (previously 0.02%), 0.60% (previously 0.09%), and 3.20% (previously 0.15%). The CBN on Thursday issued 81-day Special Bills in the form of FGN promissory notes worth c. N4.0trillion (of excess CRR) to local banks. The CBN issued the bills at a discount rate of 0.5%.

The issuance of the Special Bill should ease the uncertainty across the money market. However, trading in the T-bills market is likely to remain subdued amidst the relatively low yields on offer.

Bonds

The Treasury bond secondary market reacted negatively to the unanticipated front-end supply from the CBN and the increase at the long end of the NTB PMA. Trading activity was low as demand thinned out. Consequently, the average yield in the market expanded by 65bps to 4.7%. Across, the benchmark curve, average yield expanded at the short (+68bps), mid (+46bps) and long (+83bps) segments, due to profit-taking on the MAR-2025 (+202bps), FEB-2028 (+66bps) and JUL-2045 (+153bps) 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 NGN60.00 billion through re-openings of the 12.50% MAR 2035 (amount on offer: NGN30.00 billion) and 9.80% JUL 2045 bonds (amount on offer: NGN30.00 billion). Nonetheless, we still expect some activity at the secondary market as investors cover lost bids at the auction, which is likely to be oversubscribed.

Foreign exchange

Nigeria’s FX reserves sustained its descent, declining by USD197.84 million w/w to USD35.01 billion, as the outflows for the CBN’s interventions across the various FX windows continue to outstrip dollar inflows. The naira strengthened by 0.3% to NGN395.00/USD at the I&E window, while it was flat at NGN475.00/USD in the parallel market. Across the forward contracts, the naira weakened in the 1-month (-0.1% to NGN398.01/USD) contract but appreciated in the 3-month (+0.5% to NGN404.54/USD), 6-month (+0.7% to NGN414.90/USD) and 1-year (+1.0% to NGN435.32/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.