The uptick in gasoline prices has continued to exert upward pressures on consumer prices in the United States (U.S). According to the U.S. Bureau of Labour Statistics, headline inflation increased by 0.4% m/m in February (January: +0.3% m/m). The uptick was primarily due to a 6.4% m/m increase in gasoline prices (January: +7.4% m/m), which accounted for more than half of the seasonally adjusted increase in the consumer price index. Food inflation also rose by 0.2% m/m (January: 0.1% m/m), with the index for food at home and food away from home rising. On a year-on-year basis, we highlight that the consumer price index rose by 1.7% y/y (January: +1.4% y/y) – the highest rate since February 2020 (+2.3% y/y). Over the short term, we expect further build-up in inflationary pressures due to the (1) low base effect in the prior year, (2) reopening of the economy as more citizens get vaccinated, and (3) impact of the recently signed USD1.9trn stimulus package.

After a careful assessment of the (1) second wave of the COVID-19 pandemic and (2) slow vaccine rollout on the Eurozone economy, the European Central Bank (ECB) elected to keep policy rates steady to continue to lay the foundation for a substantial economic recovery. Pertinently, the ECB kept the interest rate on the main financing operations unchanged at 0.00%. The bank also affirmed to continue to conduct net asset purchases under the Pandemic Emergency Purchase Programme (PEPP) with a total envelope of EUR1.85 trillion until at least the end of March 2022. Meanwhile, the Committee acknowledged that net asset purchases’ pace was lower in the first months of the year and expects purchases to be significantly higher over the next quarter. For us, the decision to increase the pace of net asset purchases cements the Committee’s stance to tame borrowing costs to support the quick recovery of the bloc’s economy.

Global markets

Global stocks edged higher as investors flocked into cyclical and heavyweight tech stocks, following a short reprieve in rising U.S Treasury yields. Later in the week, investor sentiment was further strengthened by President Biden’s assent to the USD1.9trillion economic relief bill. In the U.S, the DJIA (+3.1%) and S&P (+2.5%) rallied on the back of lower-than-expected inflation data, which eased concerns about an impending end to the era of ultra-loose monetary policy and reactions to the stimulus package. In Europe, the STOXX Europe (+3.3%) and FTSE 100 (+1.2%) were buoyed by dovish comments made by the ECB President, Lagarde, which helped soothe concerns about higher borrowing rates that will hamper economic recovery. In Asia, Wall Street’s rally boosted the Nikkei 225 (+3.0%). In comparison, SSE (-1.4%) extended losses from the prior week as investors reacted to higher Covid-19 cases that affected a substantial number of financial-market executives. Emerging markets (MSCI EM: +2.5%) stocks also mirrored the upbeat mood across global equities consequent on the gains in India (+0.9%), while Frontier (MSCI FM: +0.1%) market stocks posted marginal gains, driven by increases in Kenya (+0.7%).

Nigeria

Economy

Nigeria’s trade position worsened in the last quarter of 2020 as the merchandise trade deficit widened from NGN2.39 trillion in Q3-20 to NGN2.73 trillion in Q4-20. This puts the 2020FY total trade deficit at NGN7.38 trillion, the country’s worst trade position since at least 2008. To underscore the scale of things, we note that the trade deficit in 2020FY was equal to total imports in 2014FY (NGN7.37 trillion). Meanwhile, total exports declined significantly by 33.0% y/y in Q4-20 (Q3-20: -43.4% y/y), given lower oil prices amid the decline in oil production. On the other hand, imports grew by 10.8% y/y (Q3-20: +38.1% y/y) due to the huge demand for chemical products (+141.4% y/y vs Q3-20: +84.8% y/y), manufactured goods (+45.3% y/y vs Q3-20: +52.0% y/y) and food items (+114.2% y/y vs Q3-20: +116.5% y/y). Looking ahead, we expect a marginal pickup in imports as the demand for chemical and food items which contributed to the spike in Q4-20, moderates. We, however, expect exports to decline at a slower pace, given lower crude oil exports amidst higher oil prices. Overall, we expect the trade balance to remain negative in Q1-21, albeit smaller than in Q4-20.

The CBN released a circular introducing the “Naira 4 Dollar Scheme” whereby recipients of diaspora remittances, through licensed IMTOs, are paid NGN5.00 for every USD1.00 received as remittance inflow. We believe the scheme is part of the CBN’s effort in attracting (1) more diaspora remittances through official channels (banking system), (2) boosting FX supply, (3) reducing the divergence between the parallel and interbank/IEW exchange rates. The CBN expects the scheme to last until 8th May 2021. We expect the scheme to boost FX supply to the parallel market if (1) it lasts for more than one year and (2) the distribution channels are enhanced while targeting remittance rich areas. Assuming the incentive scheme’s pilot phase leads to a significant increase in FX supply in the parallel market as envisaged, we think the CBN would (1) extend the scheme’s duration or (2) increase the minimum amount of inflows that would qualify for the incentive. Read more

Capital markets

Equities

Although the market closed positive on two of the five trading days of the week, the gains proved insufficient in lifting the market back into the green as the local bourse suffered its sixth consecutive weekly loss. Specifically, the All-Share Index declined by 1.7% w/w to close at 38,648.48 points. Consequently, the YTD return dipped further into negative territory, settling at -4.0%. Activity levels were also weak, as volume and value traded declined by 22.6% w/w and 30.7% w/w, respectively. Notably, sell-offs in bellwether stocks UBA (-10.0%), MTNN (-7.0%), ZENITH (-5.4%) and GUARANTY (-0.9%) drove the weekly loss. Sectoral performance was broadly negative as the Industrial Goods index (+1.3%) emerged as the week’s sole gainer. The Banking (-7.6%) led the losers’ chart, followed by Consumer Goods (-4.3%), Insurance (-2.3%) and Oil and Gas (-1.6%) indices.       

We expect the choppy theme that played out this week to persist in the week ahead as investors continue to cherry-pick dividend-paying stocks and, at the same time, exhibit reluctance in leaving gains in the market. With uncertainties about the direction of yields in the FI market still bugging investors’ minds, the bears are likely to retain dominance in the market. 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) rate (decreased by 216bps to 14.2%) ended the week lower. Still, it remained elevated due to the reduced level of inflows from OMO maturities (NGN60.00 billion) amid significant funding pressures on the system for CBN’s weekly FX and OMO (NGN60.00 billion) auctions and net NTB issuance (NGN19.86).

Barring any significant mop-up from the CBN, we expect the OVN rate to trend southwards, as inflows from OMO maturities (NGN143.35 billion) and FGN bond coupon payments (NGN142.09 billion) comes into the system.

Treasury bills

Just as we envisaged, activities in the Treasury bills secondary market remained bearish (average yield across all instruments expanded by 125bps to 5.1%), as (1) the tight system liquidity triggered sell-offs from local banks, and (2) markets participants shifted their focus to the PMAs in both market segments. Consequently, the average yield was higher by 78bps to 6.8% at the OMO secondary market and by 130bps to 2.8% at the NTB segment.  At this week’s OMO auction, the CBN sold NGN60.00 billion worth of bills to market participants and maintained stop rates across the three tenors, as with previous auctions. At the NTB auction, the CBN offered NGN88.91 billion – NGN4.41 billion of the 91-day, NGN14.00 billion of the 182-day, and NGN70.50 billion of the 364-day – in bills and ultimately allotted NGN108.77 billion. The auction stop rates were unchanged at 2.00% and 3.50% on the 91D and 182D bills but increased by 100bps to 6.50% – Its highest level since February 2020 – on the 364D bill.

We expect yields to temper in the coming week as the net liquidity position in the system improves. We expect participants at the NTB market to shift their focus to the primary market, with the CBN expected to roll over maturities worth NGN47.06 billion.

Bonds

The Treasury bonds secondary market ended the week on a bullish note, as investor’s cherry-picking on attractive yields supported the market performance, amid sell-offs on various positions on Thursday, in reaction to the higher stop rate on the long-dated NTB.  As a result, the average yield in the space was lower by 10bps to 9.3%. Across the benchmark curve, the average yield was lower at the short (-12bps), mid (-18bps), and long (-6bps) segments, following significant demand for the JAN-2026 (-130bps), MAR-2027 (-60bps) and MAR-2050 (-16bps) bonds, respectively.

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 position sustained its decline, as outflows from the reserves outstripped inflows. Thus, it dipped by USD176.57 million w/w to USD34.67 billion (10th March 2021). The naira appreciated by 0.2% to NGN411.00/USD at the I&E window (IEW) and weakened by 1.0% to NGN485.00/USD in the parallel market. At the IEW, total turnover (as of 11th March 2021) increased by 37.9% WTD to USD371.62 million, with trades consummated within the NGN390.00 – 415.00/USD band. In the Forwards market, the rate appreciated across the 1-month (+0.4% to NGN412.27/USD), 3-month (+0.5% to NGN418.11/USD) and 6-month (+0.8% to NGN425.41/USD) contracts, and weakened on the 1-year (-0.5% to NGN442.13/USD) contract.

We expect improved liquidity in the IEW over the medium term, given the higher oil prices and an expected increase in crude oil production volume. Accordingly, we expect the naira to remain relatively range-bound (NGN410.00/USD – NGN415.00/USD) at the IEW. Similarly, we believe the CBN will devalue the naira by 5.3% to NGN400.00/USD at the interbank market to narrow the gap with the IEW rate.