In its July policy meeting, the United States Federal Open Market Committee (FOMC) voted to keep the target range for the key policy rate unchanged at 0.00% to 0.25%, noting that the economic recovery remains on track, but risks to the outlook remain. Similarly, the Committee elected to keep the monthly pace of the Fed’s asset purchase programme at USD120.00 billion to help foster smooth market functioning and accommodative financial conditions. On inflation and unemployment, we highlight that the Committee noted that progress had been made, and it will continue to watch the conditions to see how close they get to the Fed’s goal. For us, the underlying tone of the Fed suggests that it has started considering tapering its asset purchase programme given the growing divergence between the inflation rate and the bank’s target of 2.0%. Overall, we expect the Committee’s announcement of when it plans to start tapering on its monthly bond purchases to come at the last meeting of the year.
 
According to the Bureau of Economic Statistics (BEA), the United States economy grew by 6.5% q/q in Q2-21 (Q1-21: +6.3% q/q), reflecting sustained gains from vaccinations and Government stimulus package on consumption. Accordingly, Personal Consumption Expenditure (11.8% q/q vs Q1-21: 11.4% q/q), non-residential fixed investment (8.0% q/q vs Q1-21: 11.7% q/q) and state and local government spending (0.8% q/q vs Q1-21: 0.8% q/q) maintained the growth momentum during the period. Nonetheless, we highlight that the print was below market expectation (+8.5% q/q) on account of supply-chain disruptions and labour shortages amidst the boom in consumer spending. Notably, the reading indicates that the GDP has now recouped all pandemic losses. On a year-on-year basis, the economy grew by 12.2% y/y in Q2-21 (Q1-21: +0.5% y/y). Although we do not envisage the widespread reinstitution of lockdown rules across major states given the impressive vaccination rate (56.9% as of 29th July), we expect growth to moderate over the rest of the year given the (1) waning impact of the base effect, (2) supply-chain disruptions and spread of the delta variant of the COVID-19 virus.

Global markets

Global stocks posted broadly negative performances as the rout in Asia due to clampdown on financial technology and the surge in Covid-19 cases unnerved investors’ concerns about a speedy global recovery. Accordingly, U.S (DJIA: +0.1%; S&P: +0.2%) eked out marginal gains despite the disappointing second-quarter GDP, weekly jobless claims data and losses in heavy-weight tech stocks late in the week. In Europe, the STOXX Europe (-0.4%) and FTSE 100 (-0.4%) were set to end the week with marginal losses as investors traded cautiously following Fed’s dovish comments amid positive GDP data for the Eurozone. In Asia, the Nikkei 225: (-1.0%) and SSE: (-4.3%) suffered losses on the back of Beijing’s widening tech-sector crackdown amid renewed concerns over the coronavirus pandemic. Emerging markets (MSCI EM: -1.2%) stocks also mirrored the selloff in global equities consequent on the losses in China (-4.3%). In comparison, Frontier (MSCI FM: +1.7%) market stocks were set for a weekly gain following Kuwait (+3.3%) market rally.

Nigeria

Economy

At the July policy meeting, the Monetary Policy Committee unanimously voted to keep the MPR at 11.5% alongside other key monetary policy parameters. The major highlight of the meeting was the decision reached on the activities of Bureau De Change Operators (BDCs) – the CBN Governor disclosed that the apex bank has immediately discontinued the sale of FX to the BDCs due to their rent-seeking behaviour. The Governor also disclosed that a significant portion of weekly FX allocation to the BDCs would be channelled to the commercial banks to meet the legitimate FX demand of consumers. In the short term, we expect the decision to amplify pressures on the exchange rate in the parallel market, given the knee jerk reaction from market participants induced by the urge to stockpile the greenback. Overall, we believe the effectiveness of the modalities in disbursing the greenback to the retail segment through the commercial banks would determine how much the current rates at the parallel market will diverge from the NAFEX rates over the medium term.
 
According to the data released by the National Bureau of Statistics (NBS), capital importation into Nigeria in Q2-21 plummeted by 32.4% y/y to USD875.62 billion (Q1-21: -67.4% y/y to USD1.91 billion)– the lowest since Q1-16 (USD710.97 million). We believe the continuous decline stems from foreign investors limiting their exposure to the country given (1) weak macro narrative, (2) relatively lower yields on fixed income instruments and OMO bills compared to historical trends, and (3) lingering FX liquidity constraints. Analysing the breakdown, Foreign Portfolio Investment (FPI) increased by 43.1% y/y to USD551.37 million – we attribute this to the increase in global liquidity conditions, which has made investors search for yields in emerging markets. On the contrary, Other Investments (USD246.27 million) declined by 67.6% y/y while Foreign Direct Investment (-47.5% y/y to USD77.97 million) declined to the lowest level since at least Q1-13. Over the medium term, we expect foreign investors to remain on the sidelines until there is improved flexibility in the FX framework and structural reforms are implemented to reduce the economy’s vulnerability to external shocks.

Capital markets

Equities

Sentiments turned bearish as profit-taking activities dominated market performance throughout the week. Specifically, the local bourse recorded losses in three of the five trading sessions. Notably, profit taking in BUACEMENT (-4.2%), GUARANTY (-3.7%) and ZENITHBANK (-1.2%) drove the weekly loss. Consequently, the All-Share Index shed -0.3% w/w to close at 38,547.08 points. Accordingly, the MTD return moderated to +1.7%, while the YTD loss increased to -4.3%. Activity levels were stronger than the prior week, as trading volume and value rose significantly by 53.8% w/w and 125.8% w/w, respectively. Sectoral performance was broadly negative, following declines in the Industrial Goods (-1.3%), Insurance (-1.1%) and Banking (-0.9%) indices, and gains in the Oil and Gas (+3.8%) and Consumer Goods (+0.1%) indices.
 
We believe investors will digest the flurry of earnings released this week to gauge the extent of improvement in company’s fundamentals given the tepid recovery in macroeconomic conditions. As a result, we expect portfolio rebalancing activities into cyclical stocks and positioning in dividend-paying stocks to shape market performance in the week ahead. With the MPC meeting out of the way, we believe developments in the macroeconomic landscape and corporate actions will shape the direction of the local bourse.

Money market and fixed income

Money market

The overnight rate contracted by 21.00ppts w/w to 7.8%, as inflows from FGN bond coupon payments (NGN53.28 billion) and OMO maturities (NGN16.84 billion) outweighed funding pressures for net NTB issuances (NGN49.05 billion) and CBN’s weekly FX auctions.
 
We expect tighter liquidity in the system in the coming week, as funding for CBN’s weekly auctions are likely to outweigh expected inflows from OMO (NGN5.00 billion) maturities.
 
Treasury bills

Trading in the Treasury bills secondary market sustained its bullish run for the third consecutive week, following (1) an improved system liquidity, and (2) market participants piling to the secondary market to fill the unmet demand from Wednesday’s NTB PMA. Consequently, the average yield across all instruments contracted by 39bps to 7.6%. Across the market segments, the average yield at the OMO segment expanded by 12bps to 8.7%. Elsewhere, average yield at the NTB segment contracted by 100bps to 5.9% ad market participants reacted to lower stop rates at the auction. At the bi-weekly NTB PMA, the CBN offered bills worth NGN216.19 billion and eventually allotted NGN265.24 billion – NGN3.17 billion of the 91D, NGN3.54 billion of the 182D and NGN258.53 billion of the 364D – at respective stop rates of 2.50% (previously 2.50%), 3.50% (previously 3.50%), and 8.20% (previously 8.67%).
                 
We expect the yield on T-bills to inch higher in the coming week, given the expected tight liquidity picture.

Bonds

Proceedings in the Treasury bonds secondary market also closed the week on a bullish note, despite relatively lower demand as investors continued to cherry-pick instruments at the mid and long segments of the curve. Thus, the average yield pared by 2bps to 12.1%. Across the benchmark curve, the average yield declined at the short (-15bps) and long (-4bps) ends as investors’ interest in these segments piqued on the APR-2023 (-78bps) and JUL-2045 (-67bps) bonds, respectively. However, the average yield expanded at the mid-segment (+9bps) following upward repricing of the FEB-2028 (+18bps).
 
In the coming week, we maintain our expectations of lower average yields in the medium term as investors are likely to maintain the strategy of playing at the short to medium segments of the yield curve with careful selective positioning on long-dated instruments.

Foreign exchange
 
Nigeria’s FX reserves position sustained its accretion, as the gross reserves position increased by USD48.94 million w/w to USD33.38 billion (29th July 2021). Meanwhile, the naira stayed flat at NGN411.44/USD at the I&E window (IEW) but depreciated by 2.5% to NGN517.00/USD at the parallel market. At the IEW, total turnover (as of 29th July 2021) increased by 52.2% WTD to USD671.84 million, with trades consummated within the NGN387.67 – 420.90/USD band. In the Forwards market, the rate depreciated across the 1-month (-0.2% to NGN413.70/USD), 3-month (-0.3% to NGN417.79/USD), 6-month (-0.2% to NGN424.01/USD) contracts but was flat on the 1-year (NGN436.43/USD) contract.
 
We expect improved liquidity in the IEW over the medium term, given our expectation of (1) increased oil inflows in line with the rise in crude oil prices, and (2) inflows from FCY borrowings. Accordingly, we expect the naira to remain relatively range-bound (NGN410.00/USD – NGN415.00/USD) at the IEW.