Global economy

According to Eurostat’s harmonised inflation data, consumer prices in the Euro Area rose by 0.9% y/y in January (December 2020: -0.3%y/y), the highest level since February 2020. We believe this reflects the impact of higher energy prices and the expiration of a temporary reduction in sales taxes. We observed price increases across food, alcohol and tobacco (+1.5% y/y vs December: +1.3% y/y), services (+1.4% y/y vs December: +0.7% y/y), and non-energy industrial goods (+1.5% y/y vs December: -0.5% y/y) all of which contributed 1.32 ppt to the overall price increase. Meanwhile, energy prices that contributed -0.41 ppt to the headline inflation fell at a slower pace of -4.2% y/y than -6.9% y/y in December 2020. We think the rise in inflation is temporary, given the idiosyncratic factors responsible for it. We believe inflationary pressures will be subdued over the medium term due to the weak demand arising from the pandemic-induced cautious spending.

Unemployment in the United Kingdom (U.K.) showed no abating signals as the impact of lockdown continues to weigh on the labour market. According to the Office for National Statistics (ONS), the unemployment rate in the three months (3M) to December rose to 5.1% (vs 5.0% in 3M-November) – the highest since the 3M to September 2015. We, however, believe that the real unemployment picture would have been worse but for the government’s furlough scheme, which is currently supporting one in every five employees amidst the tighter COVID-19 restriction measures in December. Meanwhile, the number of redundancies rose by 29,000 to 343,000 in the quarter – the smallest increase since Q2-20. We expect the unemployment rate to maintain its uptrend, albeit at a slower pace over the short term, until the current job protection scheme expires at the end of April. Barring an extension, we expect a pronounced increase in the unemployment rate once the current scheme ends.

Global markets

Global stocks plummeted as the spike in global bond yields unnerved investors’ concerns about an earlier-than-expected tightening of monetary policy by systemically important banks, given that global growth prospects have brightened with inflation set to increase. Consequently, U.S (DJIA: -0.3%; S&P: -2.0%) stocks were on course for weekly losses as the 10-year Treasury yield hit 1.61% (the highest level since Feb. 14, 2020) on the penultimate trading day of the week. In Europe, the STOXX Europe (-0.8%) and FTSE 100 (+0.4%) gave up gains accumulated earlier in the week following the rout in the global bond market. In Asia, the Nikkei 225: (-3.5%) and SSE: (-5.1%) suffered huge losses as investors sold off heavyweight tech stocks in the wake of the spike in U.S. 10-year Treasury yield. Emerging markets (MSCI EM: -2.4%) stocks also mirrored in sell-off in global equities consequent on the losses in China (-5.1%) and India (-3.0%), while Frontier (MSCI FM: -1.0%) market stocks declined, following weakness in Kuwait (-0.9%) and Nigeria (-0.2%).

Nigeria

Economy

https://standardbank.eu.qualtrics.com/jfe/form/SV_9HaQjwARZCaYb09The Federation Accounts Allocation Committee (FAAC) shared NGN640.31 billion amongst the three government tiers in January 2021 (December 2020: NGN619.34 billion). Of the total amount, the FGN received 35.5% or NGN227.00 billion (December: NGN218.30 billion), State Governments got NGN177.17 billion (December: NGN178.28 billion), while the Local Governments received NGN131.40 billion (December: NGN131.79 billion). The cost of collection amounted to NGN75.97 billion, while the oil-producing states received NGN26.78 as derivation. We highlight that the amount shared among the three tiers of government in January marks the fourth consecutive month it has been below the one-year average of NGN653.98 billion. The preceding suggests that the country’s compliance with the oil production cuts has continued to limit gains associated with the rally in oil prices amidst the official exchange rate adjustment. In the near term, we expect allocation to remain below pre-pandemic levels as the country maintains its pledge to OPEC+ production cuts.  

As part of the Highway Development and Management Initiative (HDMI) of the Federal Government of Nigeria (FGN), the Federal Ministry of Works and Housing (FMWH) has commenced the procurement process for the concession of 12 federal highways under the HDMI. In essence, this implies that private individuals are now permitted to build, operate and maintain assets on the national highways available for concession. We highlight that the HDMI execution would be in two categories: (1) Value Added Concession and (2) Unbundled Assets Approvals – to provide adequate highway services across the country. For us, this is a positive development as it seeks to spur private sector participation in developing economically viable highways that were previously in a poor state. If successfully implemented, this should ease bottlenecks associated with the movement of goods and services across the federation, with a multiplier effect on aggregate economic activities and reduction in domestic prices of goods and services over the long term.

Capital markets

Equities

The local bourse was not immune to the rout in global equities as the market suffered its fourth consecutive weekly loss, amid growing concerns about the rising yields in the FI market. Again, the NTB auction results wherein stop rates rose by an average of 254bps to 3.67% (from 2.33% at the last auction) also weighed on investors sentiment. Accordingly, the All-Share Index fell below the 40,000 psychological mark, declining by 0.96% w/w to close at 39,799.89 points. Consequently, the YTD return dipped further in the negative territory, settling at -1.2%. However, activity levels were strong, as trading volumes and value rose by 25.3% w/w and 13.3% w/w, respectively. Notably, sell-offs in large-cap stocks; NB (-11.9%), LAFARGE (-7.6%), MTNN (-3.3%) and DANGSUGAR (-2.7%) drove the weekly loss. The sectoral performance was broadly negative. Save for the Oil and Gas (+1.0%) and Banking (+0.7%) indices that posted gains, the Insurance (-4.9%), Consumer Goods (-3.2%) and Industrial Goods (-0.5%) recorded losses.       

In the week ahead, we expect the NSE floor to be flooded with corporate earnings as more companies publish their audited FY 2020 numbers, accompanied by dividend declarations. We believe this should provide respite for market performance. However, we expect intermittent profit-taking activities to continue due to lingering concerns about yield elevation in the FI market.  As a result, we think the local bourse will likely exhibit a zig-zag pattern. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the unimpressive macro story remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) declined by 14.17ppts w/w, to 6.3%. The contraction was due to a boost in system liquidity following inflows from OMO maturities (NGN423.79 billion), FAAC disbursements (NGN335.35 billion) and FGN bond coupon payments (NGN49.75 billion). The preceding outweighed the debits for CBN’s weekly FX and OMO (NGN325.46 billion) auctions, as well as the NTB net (NGN19.04 billion) issuance.

We expect tighter liquidity in the system next week, as funding pressures from CBN’s weekly auctions are likely to outweigh expected inflows from OMO (NGN132.11 billion) maturities.

Treasury bills

Just as we envisaged, the Treasury bills secondary market ended the week on a bullish note, following the system liquidity boost. The average yield across all instruments declined by 21bps to 3.9%. Across the curve, local demand for OMO instruments sustained the space’s bullish performance, as the average yield fell by 27bps to 6.1%. At this week’s OMO auction, the CBN maintained stop rates across the three tenors and sold NGN325.46 billion worth of bills to market participants. Elsewhere, trading was weak in the NTB secondary market (average yield pared by 2bps to 1.5%) as focus shifted towards the NTB PMA in anticipation of higher rates. The CBN offered a total of NGN128.22 billion – NGN20.37 billion of the 91-day, NGN55.85 billion of the 182-day, and NGN51.99 billion of the 364-day – in bills the auction and ultimately allotted NGN147.27 billion. The auction stop rates were 2.00% (previously 1.00%), 3.50% (previously 1.50%), and 5.50% (previously 4.00%) on the 91D, 182D and 364D bills, respectively. The auction was oversubscribed with a subscription level of NGN192.05 billion, translating to a bid-to-cover ratio of 1.4x (previous auction: 1.2x).

We expect yields to trend higher in the coming week as local investors sell instruments to meet funding obligations amidst the anticipated liquidity squeeze.

Bonds

The Treasury bonds secondary market turned bullish, as the average yield declined by 18bps to 9.2%. We attribute the drop to improved market liquidity following the payment of the FEB-2028 bond coupon and speculative demand from investors in anticipation of higher yields. Across the curve, average yield at the short (-79bps) and mid (-1bp) segments contracted, as investors took positions in the MAR-2025 (-181bps) and FEB-2028 (-12bps) bonds, respectively. In contrast, investors continued to upwardly re-price long (+19bps) dated instruments, with major sell-offs recorded on the MAR-2036 (+69bps) bond.

With the current happenings in the market, we expect the uptrend in yields to be maintained as the DMO seeks to securitize the Ways and Means balance. Overall, while pressure points remain that could pressure yields, we expect yields to touch double-digit on the average over the short term.

Foreign exchange

Nigeria’s FX reserves dipped by USD196.11 million w/w to USD35.23 billion (23rd February 2021), as the outflows from the reserves outstripped inflows. The naira weakened by 0.1% to NGN410.25/USD at the I&E window and by 0.8% to NGN482.00/USD in the parallel market. At the I&E window, total turnover (as of 25th February 2021) increased by 89.2% WTD to USD432.34 million, with trades consummated within the NGN382.00 – 429.75/USD band. In the Forwards market, the rate weakened across the 1-month (-0.3% to NGN415.01/USD), 6-month (-0.1% to NGN429.80/USD) and 1-year (-0.1% to NGN443.52/USD) contracts, but was flat in the 3-month (-1.4% to NGN421.12/USD) contract.

Given the expected pressure on the external reserves amid weak portfolio inflows, we expect the naira to depreciate closer to its fair value implied by the long-run REER (NGN453.67) in the medium term. Our baseline expectation is that the CBN will devalue the naira by 5.3% to NGN400/USD in the interbank market and 5.1% to NGN415/USD at the IEW.