According to the preliminary estimates from the IHS Markit, economic activity in the United States maintained its slow-pace expansion as the composite PMI moderated to 59.9 points in July (June: 63.7 points) – the lowest in 4 months. However, the reading remains substantially above the 50-points benchmark, reflecting the impact of sustained stimulus packages on consumer demand amid impressive vaccination rate. Notably, the slow pace of expansion was due to a slowdown in Services PMI (59.9 points vs June: 64.6 points) – the lowest since February, due to the high inflationary pressures and labour shortages within the period. Meanwhile, the Manufacturing PMI maintained its uptrend for the fifth consecutive month to a record high of 63.4 points (June: 62.1 points) following more robust expansions in output and new orders. We believe the continued gains from stimulus packages and easing of COVID-19 restrictions will remain supportive of improvement in economic activities. However, we expect the rate of expansion to ease further in the coming months due to supply-chain disruptions and the spread of the delta variant of the COVID-19 virus.
 
In line with our expectation, the Bank of England’s (BoE) Monetary Policy Committee (MPC) voted unanimously to keep the key policy rate unchanged at 0.1% while maintaining the existing asset purchase programme, targeting GBP895.00 billion by the end of 2021. Notably, the Committee revised its inflation outlook as they now expect inflation to rise temporarily to 4.0% (vs 2.5% – May forecast) by the end of the year before falling back to the 2% target. Meanwhile, the central bank stated that it would start reducing its stock of bonds when its policy rate reaches 0.5% by not reinvesting the proceeds of maturing debt. Given the underlying tone of the Committee, we do not envisage a tightening in the monetary policy rate in the near term despite our expectation of elevated inflationary pressures. More importantly, we think the recent spread of delta variant and slacks in the labour market will likely reinforce the rhetoric of “lower for longer interest rate environment”.

Global markets

Despite the growing spread of the COVID-19 Delta variant, global stocks were broadly bullish as investors took solace in impressive corporate earnings in U.S and Europe and expectations that global systemic important banks will likely push back the normalization of monetary policy. Consequently, U.S. (DJIA: +0.4%; S&P: +0.8%) stocks gained marginally as investors sentiment was buoyed by strong corporate earnings and a decline in unemployment claims amidst the economic threat of the delta virus variant. In Europe, the STOXX Europe (+1.6%) and FTSE 100 (+1.1%) were set for a weekly gain as stronger-than-expected quarterly results, and a flurry of merger activity among European companies boosted sentiments. Likewise, Asian markets posted positive performances, with the Nikkei 225 (+2.0%) and SSE (+1.8%) set for a weekly gain as upbeat corporate earnings on Wall Street lifted sentiments. Emerging (MSCI EM: +1.7%) and Frontier (MSCI FM: +1.2%) markets stocks mirrored the bullish trend across global equities consequent on gains in China (+1.8%) and Vietnam (+2.4%), respectively.

Nigeria

Economy

According to the Debt Management Office (DMO), the federal government has appointed transaction advisers to facilitate the issuance of eurobonds in the international capital market. The appointment is based on the plan to raise funds for the new external borrowing of NGN2.34 trillion (about USD6.18 billion) provided in the 2021 Appropriation Act to part finance its estimated NGN5.20 trillion deficit. The institutions include International Bookrunner (JP Morgan, Citigroup Global Markets Limited), Joint Lead Managers (Standard Chartered Bank and Goldman Sachs), Nigerian Bookrunner (Chapel Hill Denham Advisory Services Ltd), Financial Adviser (FSDH Merchant Bank Ltd), International Legal Adviser (White & Case LLP), and Nigerian Legal Adviser (Banwo & Ighodalo). We see a possibility for reduced domestic borrowing over the rest of the year as the DMO will likely be less aggressive with issuances. More importantly, we think this development combined with IMF Special Drawing Rights (SDR) estimated at USD3.4 billion (to be disbursed by the end of August) will materially influence the ability of the CBN to improve dollar liquidity.
 
The Nigerian National Petroleum Corporation (NNPC) is set to withhold NGN117.41 billion from the three tiers of government this month as it continues its regime of deduction from the federation account. According to the information from NNPC’s July presentation on its activities to the FAAC, the corporation was only able to contribute NGN47.10 billion during the month. However, its projected remittances to the joint account remained at about NGN122.00 billion, leaving a deficit of about NGN75.00 billion. The FAAC document indicated that year-to-date, NGN90.86 billion was remitted to FAAC in January, NGN64.16 billion was contributed in February, while NGN41.18 billion was contributed in March. NNPC remitted zero naira in April, but able to make a payment of NGN38.61 billion and NGN47.16 billion in May and June respectively. Considering the higher oil prices compared to the prior year, we expect the subsidy payments to weigh on the NNPC income and consequently support the continuous deduction from the federation account. Barring any major shock to oil prices, we expect subdued FAAC remittance in the coming months.

Capital markets

Equities

In line with our expectations, positive sentiments returned to the local bourse this week as the gradual release of corporate earnings bolstered buying interests in dividend-paying stocks. Save for the penultimate trading day; the market recorded gains on all five trading sessions. Consequently, the All-Share Index advanced by 0.7% w/w to close at 38,811.11 points. As a result, the MTD gain increased to +0.7%, while the YTD loss moderated to -3.6%. However, activity levels were weaker, as trading volumes and value declined by 30.1% w/w and 32.0% w/w, respectively. Notably, foreign investor’s interest in AIRTELAFRI (+5.7%) drove the weekly gain. Sectoral performance was broadly negative following declines in the Insurance (-1.5%), Oil and Gas (-0.6%), Banking (-0.6%), Industrial Goods (-0.2%) and Consumer Goods (-0.5%) indices.
 
Considering the positive performance in the local bourse this week, we believe earnings from the Big banks in the coming week will sustain the positive market sentiments. Particularly as the declaration of interim dividends will accompany the results.  Overall, we advise investors to take positions in only fundamentally justified stocks as the weak macro story remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate expanded by 12.75ppts w/w to 20.5%. The rate remained in the single-digit territory through most part of the week following a higher net liquidity position (this week’s average: NGN219.50 billion vs last week: NGN80.69 billion) supported by OMO maturities (NGN19.20 billion). However, the eventual expansion was driven by debits at the latter part of the week for CRR debits and CBN’s weekly FX auction. 

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

The Treasury bills secondary market closed the week on a bullish note following the healthy system liquidity in the week.  Thus, the average yield across all instruments contracted by 64bps to 6.8%. Across the market segments, the average yield at the OMO segment contracted by 91bps to 7.7%, as lesser funding pressures influenced improved demand for bills. Similarly, the average yield at the NTB segment contracted by 27bps to 5.6%. 
                 
We envisage the yield on T-bills will settle lower in the coming week, as investors improve buying activities in anticipation that issuances of instruments will reduce given the recent developments on foreign currency denominated borrowings (Eurobond issuance). Also, we expect quiet trading in the first few days at the NTB market as participants position for the mid-week PMA, with the CBN set to roll over NGN51.49 billion worth of maturities.
 
Bonds

Trading in the Treasury bonds secondary market sustained its bullish run as the average yield contracted by 13bps to 11.9%. We note that there was improved demand in this space as investors continued to select attractive offers across the different segments of the curve. Across the benchmark curve, the average yield declined at the short (-11bps), mid (-18bps) and long (-5bps) ends following investors’ interest in the JAN-2022 (-28bps), NOV-2029 (-27bps) and MAR-2050 (-13bps) bonds, respectively.
 
Next week, we still expect lower average yields as investors continue to cherry-pick relatively attractive instruments. In the longer term, we also maintain our view of tempered yields in the second half of the year, given our expectations of limited supply and deliberate efforts by the DMO to reduce borrowing costs for the government.

Foreign exchange
 
Nigeria’s FX reserves closed higher for the third consecutive week, as the gross reserves position increased by USD137.23 million w/w to USD33.54 billion (4th August 2021). Meanwhile, the naira stayed flat at NGN411.50/USD at the I&E window (IEW) but appreciated by 1.4% to NGN510.00/USD in the parallel market. At the IEW, total turnover (as of 6th August 2021) decreased by 37.8% WTD to USD489.19 million, with trades consummated within the NGN400.00 – 427.95/USD band. In the Forwards market, the rate appreciated across the 1-month (+0.3% to NGN413.70/USD) and 3-month (+0.5% to NGN417.79/USD), 6-month (+0.5% to NGN424.01/USD) and 1-year (0.3% to NGN436.43/USD) contracts.

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 (USD6.20 billion) and IMF SDR (USD3.40 billion). Accordingly, we expect the naira to remain relatively range-bound (NGN410.00/USD – NGN415.00/USD) at the IEW.