According to flash estimates released by the IHS Markit, the United States (U.S) Composite PMI slowed sharply to 55.4 points in August (July: 59.9 points), the lowest level in eight months. The moderation in the composite PMI was due to the impact of the (1) delta variant of the COVID-19 pandemic and (2) supply chain disruptions on business activities. Accordingly, the Manufacturing (61.2 points vs July: 63.4 points) and Services (55.2 points vs July: 59.9 points) PMI recorded declines during the review period. Nonetheless, the Composite PMI remains above the 50-points threshold for the 14th consecutive month after the stringent containment measures introduced to combat the pandemic in the first two quarters of 2020. We expect output expansion to continue to moderate over the short term, given the impact of the growing spread of the delta variant of the virus on contact-dependent sectors. However, domestic prices could be pressured if supply chain disruptions outweigh the low demand accompanying rising COVID-19 cases.
 
Overall business activity in the Eurozone continues to expand despite the global shortage of raw materials. According to flash estimates from the IHS Markit, business activity as measured by the Services PMI printed 59.7 points in August (July: 59.8 points) buoyed by the further reopening of the economy as COVID-19 containment measures were further eased during the month to the lowest level since the start of the pandemic. On the other hand, factory activity as measured by the Manufacturing PMI softened to 61.5 points in August (July: 62.8 points) due to the supply chain disruptions that constrained manufacturing activities. Overall, the Composite PMI declined slightly by 0.7 points to 59.5 points (July: 60.2 points), matching the level seen in June (59.5 points) to produce the joint-second-fastest expansion seen since 2006. Although the widespread of the delta variant of the COVID-19 pandemic could make producers cautious, we expect the sustained easing of COVID-19 containment measures to keep activities in a decent shape over the short term.Global Markets
 
Global stocks flirted near record highs as investors kept their gaze on the highly-anticipated speech by the U.S Federal Reserve chief in Jackson Hole to gain clues about when the Fed will commence tapering stimulus. In U.S, the DJIA (+0.3%) and S&P (+0.6%) were on course to end the week in the green despite the dent to sentiments induced by a deadly attack in Afghanistan and the Fed’s more hawkish tone on monetary policy. Similarly, European (STOXX Europe: +0.4% and FTSE 100: +0.7%) equities reacted positively to U.S. health regulators full approval of a COVID-19 vaccine developed by Pfizer Inc and BioNTech SE amid stronger-than-expected economic data in Germany. Likewise, Asia markets posted positive performances, as the Nikkei 225: (+2.3%) rallied on the back of the positive sentiments in Wall Street, amid the unprecedented spread of the delta variant. Likewise, the SSE: (+2.8%) rallied as a bounce in Chinese tech stocks lifted the market out of the bear territory. Emerging markets (MSCI EM: +3.7%) and Frontier (MSCI FM: +0.6%) market stocks mirrored the bullish trend across global equities driven by gains in China (+2.8%) and Kuwait (+2.1%), respectively.
 
Nigeria
 
Economy
 
Base effects propelled real GDP to the highest level of expansion since Q4-14 (5.94% y/y). According to the National Bureau of Statistics, the economy grew by 5.01% y/y in Q2-21 (Q1-21: 0.51% y/y) – the third consecutive quarter of growth since the COVID-19 induced recession in Q3-20. The GDP growth was primarily driven by the non-oil sector, which grew by 6.74% y/y (Q1-21: 0.79% y/y) given the impact of (1) favourable base effects from the prior year and (2) sustained reopening of the economy. Meanwhile, the oil sector contracted by 12.65% y/y (Q1-21: -2.21% y/y) as infrastructural challenges at some of the country’s key oil production terminals continue to affect the sector’s output. Although we believe terminal shut-ins will continue to constrain oil production, we expect the oil sector to grow by 3.59% y/y in Q3-21, driven by the base effect from the prior year. Similarly, we expect the non-oil sector to grow by 3.78% y/y as the low base effect magnifies the impact of sustained economic reopening. Accordingly, we project the economy will grow by 3.76% y/y in Q3-21.
 
According to the July Domestic & Foreign Portfolio Investment report of the Nigerian Exchange Limited (NGX), total transaction value at the local bourse declined by 10.9% m/m to NGN89.77 billion in July (June: NGN100.77 billion) – the lowest since April 2017 (NGN59.40 billion). On the one hand, FX liquidity challenges drove foreign transactions (NGN15.53 billion vs June: NGN23.42 billion) to their lowest level since at least 2013, when the NGX started keeping the transactions records. On the other hand, the decline in domestic transactions (NGN74.24 billion vs June: NGN77.35 billion) was driven by a reduction in the value of transactions executed by institutional investors (down 11.2% m/m; 49.4% of gross domestic transactions). The decline in fixed income instruments yields bodes well for the equities market over the short to medium term. Similarly, we expect the FX liquidity challenges to improve on account of expected inflows from IMF’s SDR allocation and Eurobond issuance. Accordingly, we see scope for improved activities from both the domestic and foreign investors over the medium term.

Capital markets
 
Equities
 
In line with our expectations, cautious trading dominated the local bourse this week, as the All-Share Index ended the week flattish at 39,485.65 points. Notwithstanding, we observed bargain hunting activities in FBNH (+1.4%), ACCESS (+1.1%), ZENITHBANK (+0.4%) and MTNN (+0.3%). Consequently, the MTD and YTD returns were flat at +2.4% and -2.0%, respectively. Activity levels were mixed, as trading volumes rose by 16.7% w/w, while value traded declined by 33.5% w/w. Across sectors, the Insurance (+1.1%), Banking (+0.3%) and Oil and Gas (+0.1%) indices posted weekly gains while the Consumer Goods (-0.4%) and Industrial Goods (-0.2%) indices closed in the red.
 
Considering the lull in the market this week, we believe earnings from the Big banks in the coming week will bring some breath of fresh air to the local bourse. Particularly, as the declaration of interim dividends will accompany the results. Overall, we advise investors to seek trading opportunities 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 rate contracted by 15.33ppts w/w to 8.5%, as inflows from FAAC disbursements (c. NGN439.49 billion), OMO maturities (NGN157.27 billion) and FGN bond coupon payments (NGN49.89 billion) outweighed funding pressures for net NTB issuances (NGN150.13 billion) and CBN’s weekly OMO (NGN60.00 billion) and FX auctions.

We expect tighter liquidity in the system in the coming week as the CBN should mop up excess funding given its tight liquidity management posture. Also, we expect outflows for the weekly auctions to outweigh the only expected inflows from OMO maturities (NGN60.00 billion).

Treasury bills

Bearish sentiments returned to the Treasury bills secondary market sustained as market participants sold off positions to meet funding obligations following the tight system liquidity at the beginning of the week. Consequently, the average yield across all instruments expanded by 16bps to 5.5%. Across the market segments, the average yield at the OMO segment expanded by 9bps to 6.0%. Similarly, average yield at the NTB segment notched higher by 27bps to settle at 5.0%. On Wednesday, there was a bi-weekly NTB PMA where the CBN offered bills worth NGN157.21 billion and eventually allotted NGN307.34 billion (the highest amount recorded this year) – NGN3.54billion of the 91D, NGN22.86 billion of the 182D and NGN280.93 billion of the 364D bills– at respective stop rates of 2.50% (unchanged), 3.50% (unchanged), and 6.80% (previously 7.35%). We also note that the subscription at this auction was expectedly high at NGN392.12 billion (bid to offer ratio: 2.5x).

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 closed the week on a bullish note, as the average yield contracted by 23bps to 11.2%. We attribute the decline to the (1) improved demand following the sustained improvement in macroeconomic conditions as signalled by the third consecutive quarter of positive growth (Q2-21 GDP:  +5.01% y/y vs Q1-21: +0.51% y/y) and (2) further reduced stop rates at the mid-week NTB auction. Across the benchmark curve, the average yield declined at the short (-32bps), mid (-25bps) and long (-18bps) segments as investors’ interest piqued on the JAN-2026 (-48bps), MAR-2027 (-32bps) and JUL-2034 (-49bps) bonds, respectively.

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

Foreign Exchange

Nigeria’s FX reserve declined for the second consecutive week, as it fell by USD15.44 million w/w to USD33.48 billion (25th August 2021). Meanwhile, the naira depreciated by 0.1% to NGN412.00/USD and 0.8% to NGN524.00/USD at the I&E window (IEW) and parallel market, respectively. At the IEW, total turnover (as of 26th August 2021) decreased by 24.9% WTD to USD404.96 million, with trades consummated within the NGN400.00 – 424.25/USD band. In the Forwards market, the rate appreciated at the 1-month (+0.1% to NGN411.78/USD), 3-month (+0.3% to NGN414.39/USD), 6-month (+0.7% to NGN418.73/USD), and at the 1-year (+1.4% to NGN428.55/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.