Overall business activity in the Eurozone returned to growth for the first time in six months. A recent survey showed a record increase in manufacturing output even as global demand continues to recover from the COVID-19 induced decline. According to the IHS Markit Flash PMI survey report, the Eurozone Composite PMI increased to 52.5 points in March (February: 48.8 points). While the Manufacturing PMI grew to an all-time high of 62.4 points (February: 57.9 points), the Services sector remain constrained by COVID-19 restrictions as the Services PMI printed 48.8 points (February: 45.7 points), the seventh consecutive month of below 50-points readings. Over the short term, we think subdued activities in the service sector will continue to weigh on the overall business activities amid the continued growth in manufacturing output. The preceding is against the backdrop of contact-facing service companies’ compliance with fresh social distancing restrictions in the region.

According to the Office for National Statistics (ONS), the United Kingdom’s inflation rate grew slower by 0.4% y/y in February (January: 0.7% y/y). The slower increase in the headline index was due to the falling prices of clothing (-5.6% y/y vs January: -3.3% y/y), second-hand cars (3.5% y/y vs January: 7.8% y/y), and games, toys and hobbies (7.4% y/y vs January: 8.4% y/y). However, this was partly offset by rising prices for motor fuels (-9.2% y/y vs January: -25.0% y/y) and household services overall (1.4% y/y vs January: 1.3% y/y). Notably, the decline in clothing and footwear was the sharpest decrease since November 2009. We understand that this was due to a widespread moderation in demand amid the closure of all non-essential stores across the country. On a month-on-month basis, the inflation rate rose by 0.1% (January: -0.2% m/m). Over the medium term, we maintain our expectation of a sustained rise in consumer prices due to (1) higher energy prices and (2) the lingering impact of Brexit on supply chains amid the reopening of the economy.

Global markets

Global stocks posted bearish performances this week as investors’ sentiment for risky assets waned due to fresh concerns on Sino-US relations, a stronger U.S dollar and subdued progress on Europe’s vaccinations. In the U.S, the DJIA (0.0%) and S&P (-0.1%) were on course to end the week unchanged as investors traded cautiously in light of a brewing spat between U.S and China amidst concerns on global supply chains due to a blockade on Suez Canal. In Europe, the STOXX Europe (-0.1%) and FTSE 100 (-0.5%) were on course to end the week in the red as the rekindling of lockdown measures derailed optimism about reflation trade expected to boost risky assets. In Asia, the Nikkei 225 (-2.1%) declined on the back of fears over a global resurgence in new coronavirus cases. The SSE (+0.4%) recorded marginal gains as investors deemed the recent selloff overdone and bought the dip. Emerging markets (MSCI EM: +1.5%) stocks diverged from the bearish trend in global equities, due mainly to the gains in China (+0.4%), while Frontier (MSCI FM: +0.2%) market stocks posted marginal gains, primarily driven by gains in Nigeria (+2.2%).

Nigeria

Economy

Recent data published by the Debt Management Office revealed that Nigeria’s public debt stock grew by 2.2% q/q to NGN32.92 trillion (or 21.61% of GDP) in Q4-20 (Q3-20: NGN32.22 trillion), 0.4% (NGN130.00 billion) below our estimate of NGN33.05 trillion. This puts the actual borrowing for 2020FY at NGN5.51 trillion (2019FY: NGN3.01 trillion). We highlight that the increase in the public debt was mainly due to incremental borrowing to finance part of the 2020 budget and additional issuance of Promissory Notes to settle some arrears of the FGN. We now expect total public debt to hit NGN49.69 trillion in 2021FY (or 27.4% of 2021FY projected nominal GDP). Our estimate takes into account (1) the securitisation of the outstanding CBN’s Ways and Means to the CBN (estimated at NGN11.91 trillion) and (2) additional borrowing by the States and FGN to fund their 2021 fiscal operations – estimated at NGN4.86 trillion. 

Faced with the dilemma of (1) maintaining an accommodative monetary stance to stimulate economic growth or (2) hiking interest rates to tame rising inflationary pressures, the Monetary Policy Committee (MPC) voted to hold all key parameters constant. However, unlike the previous meeting where the Committee reached a unanimous decision, three members voted for an increase in the Monetary Policy Rate (MPR). In comparison, the remaining six members voted to hold. Although the meeting’s outcome is broadly in line with market expectations, we note that the Committee softened its dovish tone due to the rising concerns about inflationary pressures. The preceding did not come as a surprise to us, as we believe the growing divergence from the CBN’s medium-term inflation target of 6-9% has compelled the Committee to begin a gradual realignment to its primary mandate of price stability. For us, the Committee’s decision to shift away from its hawkish stance now rests on the outcome of the Q1-21 GDP numbers.

Capital markets

Equities

The six-week losing streak in the market came to a halt this week, as investors reacted positively to juicy dividends declared by blue-chip companies DANGCEM and STANBIC. Consequently, the All-Share Index advanced by 2.2% w/w to close at 39,216.20 points. As a result, the YTD loss moderated to -2.6%. However, activity levels were mixed, as trading volumes declined by 34.7% w/w while value traded rose by 10.6% w/w. Notably bargain hunting in bellwether stocks; STANBIC (+30.0%), BUACEMENT (+5.1%), DANGCEM (+2.3%), and MTNN (+1.9%) drove the weekly gain. Sectoral performance was positive as all sectors closed in the green. The Industrial Goods (+2.9%) index led the gainers’ chart, followed by Consumer Goods (+1.4%), Insurance (+0.9%), Oil and Gas (+0.7%) and Banking (+0.2%) indices.

With the MPC meeting now out of the way, we expect investors’ attention to be focused on the bond auction results as they keep an eye on the movement of yields in the FI market. As the FY 2020 earnings season gradually fades away, we expect investors’ sentiment to be influenced by developments in the macroeconomic landscape and corporate actions. 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 fell 14.75ppts, w/w, to 10.8%, in line with our expectations. The contraction was as inflows for FAAC disbursements, OMO maturities (NGN50.00 billion), and FGN bond coupon payments (NGN18.12 billion) limited the impact of outflows for FGN bond (NGN262.10 billion), OMO (NGN40.00 billion) and FX auction debits on system liquidity.

Next week, a combined NGN221.55 billion is expected to come into the system from OMO maturities (NGN180.78 billion) and FGN bond coupon payments (NGN40.77 billion). Nevertheless, we expect the OVN rate to remain elevated, as the week’s outflows are likely to outweigh the inflows.

Treasury bills

As in prior weeks, the depressed system liquidity underpinned another bearish performance in the Treasury bills secondary market as local banks continued to sell-off positions to fund their liquidity obligations. Thus, the average yield across all instruments expanded by 30bps to 5.6%. Across the market segments, the average yield pared by 5bps to 6.6% at the OMO secondary market and expanded by 75bps to 4.2% at the NTB segment. At this week’s OMO auction, the CBN sold NGN40.00 billion worth of bills to market participants and maintained stop rates across the three tenors, as with the previous auction.

We still expect the average yield on T-bills to maintain its uptick in the coming week, given the expected tight liquidity picture. Also, we expect quiet trading at the NTB market as participants position for next week’s PMA, with NGN95.68 billion worth of maturities on offer.

Bonds

The Treasury bonds secondary market also remained bearish, as investors anticipated higher stop rates at the FGN bond auction. Thus, the average yield in the space expanded by 31bps to 9.8%. Across the benchmark curve, the average yield was higher at the short (+36bps), mid (+28bps), and long (+34bps) segments, following profit-taking on the JAN-2022 (+163bps), MAR-2027 (+47bps) and JUL-2045 (+64bps) bonds, respectively. At the primary auction, the DMO offered instruments worth NGN150.00 billion to investors through re-openings of the 16.2884% FGN MAR 2027 (Stop rate: 10.50%), 12.50% MAR 2035 (Stop rate: 11.50%) and 9.80% FGN JUL 2045 (Stop rate: 12.00%). We note that demand was higher (subscription: NGN333.48 billion; bid-to-offer: 2.2x) compared to January (Subscription: NGN189.51 billion; Bid-to-offer: 1.3x). Conclusively, the DMO allotted NGN262.10 billion, with stop rates increasing by an average of 23bps compared to the previous auction.

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 recorded its first accretion in nine weeks, as it grew by USD166.80 million w/w to USD34.62 billion (24th March 2021). The naira was flat at NGN410.00/USD and NGN485.00/USD at the I&E window (IEW) and parallel market, respectively. At the IEW, total turnover (as of 25th March 2021) decreased by 29.4% WTD to USD265.60 million, with trades consummated within the NGN393.00 – 414.00/USD band. In the Forwards market, the rate was flat on the 1-month (NGN412.17/USD) contract but weakened across the 3-month (-0.1% to NGN418.24/USD), 6-month (-0.2% to NGN426.88/USD) and 1-year (-0.3% to NGN443.72/USD) contracts.

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.