The blend of stimulus packages and sustained easing of containment measures has helped the Euro Area pull out of a 5-consecutive quarter of pandemic-induced recession. According to flash estimates from the Eurostat, the Euro Area grew by 13.6% y/y in Q2-21 (Q1-21: -1.3% y/y) – the highest since the Eurostat started keeping records in 1985. The growth was primarily induced by the favourable base effect from the corresponding quarter of 2020 when economic activities were at a low ebb. Nonetheless, we note that the Euro Area’s economy remains c. 3.0% lower than in the pre-pandemic era. On a quarter-on-quarter basis, the regional bloc grew by 2.0% (Q1-21: -0.3% q/q) as the (1) fiscal and monetary stimulus and (2) ease of restrictive measures boosted business activities, particularly in the services sector. Although the spread of the delta variant of the COVID-19 virus poses downside risks to the growth outlook, we expect the economy to grow albeit slowly over the rest of the year given the impact of (1) favourable base effects from the prior year, (2) continued relaxation of COVID-19 restrictions, and (3) fiscal and monetary stimulus.

According to the Office for National Statistics (ONS), headline inflation in the United Kingdom (UK) moderated by 50bps to 2.0% y/y in July from a three-and-half year high of 2.5% y/y recorded in June. The slowdown in the headline inflation reflects the (1) base effects impact from the prior year and (2) decline in the prices of clothing & footwear (1.7% y/y vs June: 3.0% y/y) and recreational goods (0.7% y/y vs June: 2.1% y/y) which outweighed the increase in transport prices (7.7% y/y vs June: 7.2% y/y). The headline inflation was flat at 0.0% on a month-on-month basis, compared with 0.5% m/m recorded in June. We see the moderation in July as a one-off event given the base effect from the prior year. Hence, we expect consumer prices to resume an uptrend in August because of increased demand as the country has lifted almost all its remaining covid-19 restrictions since 19th July.
 
Global Markets
 
Global stocks suffered huge losses as risk-off sentiment reverberated across the world. This was due to the combined impact of the rapid spread of the COVID-19 delta variant, which ignited concerns about the global recovery and China’s unrelenting series of regulatory crackdowns on big tech companies. Consequently, US (DJIA: -1.7%; S&P: -1.4%) stocks retreated from the record highs attained in the prior week as investors flocked into safe-haven assets. In Europe, the STOXX Europe (-2.2%) and FTSE 100 (-2.5%) posted negative performances, as the Federal Reserve stimulus tapering worries and China’s crackdown sparked selloffs. Asia markets were broadly bearish, with the Nikkei 225: (-3.4%) set for a weekly loss following the rout on Wall Street. Similarly, the SSE: (-2.5%) declined as selloffs in technology shares deepened following increased regulatory curbs on the sector. Likewise, Emerging markets (MSCI EM: -3.8%) stocks mirrored the downbeat mood across global equities consequent on the losses in China (-2.5%). On the other hand, Frontier (MSCI FM: +0.3%) market stocks posted marginal gains primarily driven by gains in Kuwait (+1.2%).
 
Nigeria
 
Economy
 
According to the National Bureau of Statistics, headline inflation slowed by 37bps to 17.38% y/y in July – the lowest since February 2021 (17.33%). The moderation was primarily driven by food inflation which declined by 80bps to 21.03% y/y (June: 21.83% y/y) given the impact of (1) green harvest in the country’s southern regions and (2) favourable base effects from the prior year. Meanwhile, core inflation increased by 63bps to 13.72% y/y (June: 13.09% y/y) on account of price pressure witnessed across all the sub-baskets safe for the Health (-7bps) and Processed food (-66bps) sub-baskets. On a month-on-month basis, the headline inflation moderated by 13bps to 0.93% m/m. Although we expect the headline inflation to increase by 5bps to 0.98% m/m in August due to the lean season and lingering security challenges in the country, we expect the high base from the prior year to underpin further moderation in consumer prices on a year-on-year basis. Accordingly, we forecast the headline inflation to print 16.95% y/y in August. 

In what can be regarded as a desperate move to preserve the value of the naira, the Central Bank of Nigeria (CBN) obtained a court order to freeze the account of some Fintech companies in the country. The order was on the back of allegations that the Fintech companies are (1) operating without asset management licenses and (2) utilizing FX sourced from the Nigerian FX market for purchasing foreign bonds/shares in contravention of the CBN circular referenced TED/FEM/FPC/GEN/01/012, dated 1st July 2015. Consequently, we note that the CBN has implemented freezing of the bank accounts of the affected companies – Rise Vest Technologies Limited, Bamboo Systems Technology Limited, Chaka Technologies Limited, CTL/Business Expenses and Trove Technologies Limited – for 180 days pending the outcome of its investigation. For us, this development could further worsen foreign investors’ perception of the country’s investment climate and may constrain private investment in the Fintech space.  

Capital markets
 
Equities
 
The local bourse was not immune to the rout in global equities, as losses recorded on the last trading day (Friday: -0.5%) eroded the cumulative 0.4% gain as of the penultimate trading day. Precisely, selloffs in bellwether — NESTLE (-9.1%) drove the weekly loss. As a result, the All-Share Index declined marginally by 0.1% w/w to close at 39,483.08 points. Consequently, the MTD and YTD return settled at +2.4% and -2.0%, respectively. Activity levels were weaker than the prior week, as trading volumes and value declined by 45.9% w/w and 2.4% w/w, respectively. Save for the Industrial Goods (+1.9%) index that closed in the green; the Consumer Goods (-6.3%), Insurance (-1.0%),  Banking (-0.8%) and Oil and Gas (-0.6%) indices closed in the red.
 
We expect the bulls to regain dominance in the market given the moderation in the prices of bellwether stocks this week amid the declining yields in the fixed income market. However, we do not rule out the possibility of continued profit-taking activities.  As a result, we think the choppy trading pattern that played out this week will persist in the week ahead. Overall, we advise investors to take positions in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings. 
 
Money market and fixed income
 
Money market
 
The overnight (OVN) rate expanded by 658bps w/w to 23.8% as debits for CRR and the FGN bond auction (NGN260.09 billion) outweighed inflows from OMO maturities (NGN89.00 billion).

Next week, we envisage improved system liquidity following expected inflows from FAAC disbursements, OMO maturities (NGN157.27 billion) and bond coupon payments (NGN49.89 billion), all of which should limit the impact of outflows for CBN’s primary market and FX auctions. 

Treasury bills

Bullish sentiments persisted in Treasury bills secondary market following sustained demand for OMO instruments, in the absence of renewed primary market supply by the CBN. Thus, the average yield across all instruments contracted by 88bps to 5.4%. Across the market segments, the average yield at the OMO segment declined by 171bps to 6.0%. Similarly, the average yield at the NTB segment pared by 2bps to 4.7%. 

In the first few trading days, we expect quiet trading as the CBN is set to roll over NGN157.20 billion worth of maturities to market participants at its bi-weekly PMA. Afterwards, we envisage the trend of lower yields on T-bills to continue as market participants take positions due to expectations of further decline in auction stop rates amidst the CBN’s continued absence from the OMO primary market. 

Bonds
 
Trading in the Treasury bonds secondary market also closed the week on a bullish note, as investors sought to fill lost bids from Wednesday’s bond auction. Specifically, the average yield declined by 17bps to 11.4%. Across the benchmark curve, the average yield declined at the short (-5bps), mid (-41bps) and long (-7bps) ends following demand for the MAR-2024 (-39bps), MAR-2027 (-77bps) and MAR-2036 (-21bps) bonds, respectively. At the bond auction, the DMO offered instruments worth NGN150.00 billion to investors through re-openings of the 13.9800% FGN FEB 2028 (Bid-to-offer: 1.55x; Stop rate: 11.60%, previously: 12.35%), 12.4000% MAR 2036 (Bid-to-offer: 2.10x; Stop rate: 12.75%, previously: 13.15%) and 12.9800% FGN MAR 2050 (Bid-to-offer: 3.55x; Stop rate: 12.80%, previously: 13.25%) bonds. As expected, demand was higher (subscription: NGN360.02 billion; bid-to-offer: 2.4x) than July’s auction (Subscription: NGN286.11 billion; Bid-to-offer: 1.9x). The DMO eventually over-allotted instruments worth NGN260.09billion, resulting in a bid-to-cover ratio of 1.4x.

In the coming week, we maintain our view of lower yields given our expectations of limited supply and deliberate efforts by the DMO to reduce domestic borrowing costs for the government.

Foreign Exchange

Nigeria’s FX reserve reversed its five consecutive weeks of accretion, as the gross reserves position declined by USD63.11million w/w to USD33.52 billion (18th August 2021). Meanwhile, the naira depreciated by 0.1% and 1.0% to NGN411.67/USD and NGN520.00/USD at the I&E window (IEW) and parallel market, respectively. At the IEW, total turnover (as of 19th August 2021) decreased by 29.2% WTD to USD482.28 million, with trades consummated within the NGN400.00 – 420.95/USD band. In the Forwards market, the rate was flat at the 1-month (NGN412.33/USD) and 6-month (NGN421.66/USD), depreciated at the 3-month (-0.1% to NGN415.27/USD) but appreciated at the 1-year (+0.1% to NGN421.65/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 (USD6.18 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.