According to the China Federation of Logistics and Purchasing (CFLP), China’s manufacturing PMI slowed for the fifth consecutive month to 50.1 points in August (vs July: 50.4 points) – the lowest reading since the peak of the pandemic in February 2020 (35.7 points). Higher raw material costs largely drove the slow pace of expansion amid a regulatory clampdown on some sectors to tame rising property prices. Similarly, non-manufacturing PMI (47.5 points vs July: 53.3 points) plunged below the 50.0 points threshold for the first time since February 2020 (29.6 points), given the impact of renewed restrictions and lockdown measures to combat the spread of the Delta variant of the pandemic. Overall, the composite PMI fell to 48.9 points from 52.4 points in the prior month. Although the government has lifted restrictions in some cities given the progress with vaccinations, we expect the spread of the COVID-19 Delta variant to continue to limit the scope of factory and business activities in the short-term.

In the Euro area, flash estimates from the Eurostat showed that headline inflation increased by 0.8ppts to 3.0% y/y in August (July: 2.2% y/y) – the highest print since November 2011 (3.0% y/y). The rise in the inflation rate was triggered by the (1) pandemic-induced low base effect from the prior year, (2) recovery in domestic demand following the sustained easing of COVID-19 containment measures and (3) sustained rally in oil prices. Accordingly, price pressures were most significant in the energy (15.4% y/y vs July: 14.3% y/y), services (1.1% y/y vs July: 0.9% y/y), non-energy industrial goods (2.7% y/y vs July: 0.7% y/y) and food (2.0% y/y vs July: 1.6% y/y) baskets. Meanwhile, core inflation increased to 1.6% y/y in August (July: +0.7% y/y). Looking ahead, we expect headline inflation to remain elevated in the coming months as the (1) unfavourable base effect from the prior year and (2) rebound in domestic demand put pressure on commodity prices amid supply chain disruptions.

Global Markets
 
This week, global stocks posted broadly positive performances bolstered by Fed’s chairman – Jerome Powell’s dovish comment on monetary stimulus. However, investors traded cautiously ahead of US nonfarm payroll data due Friday to determine when the Federal Reserve will start tapering its asset purchase programme. Accordingly, US (DJIA: 0.0%; S&P: +0.6%) stocks hung on to marginal gains on the back of better-than-expected weekly jobless claims figures. European markets (STOXX Europe: +0.4%; and FTSE 100: +0.4%) held steady as investors monitored key economic indicators from the Eurozone and US. In Asia, the Japanese Nikkei 225: (+5.4%) surged, hitting a more than three-decade high, as investors reacted positively to Prime Minister Yoshihide Suga decision to step down from the governing party’s leadership race. Likewise, the SSE: (+1.7%) posted a weekly gain following a rebound in tech stocks earlier in the week. Emerging markets (MSCI EM: +3.1%) and Frontier (MSCI FM: +0.3%) market stocks also closed higher consequent upon gains in China (+1.7%) and Kuwait (+0.2%), respectively.

Nigeria
 
Economy
 
The Central Bank Governor disclosed that the CBN had started formal engagement with Bitt Inc., as the Technical Partner for its digital currency – eNaira – which is scheduled for pilot launch on 1st October 2021. Although the CBN’s decision to digitise the Naira started in 2017, we believe the rapid rise in the use of digital payments (exacerbated by the pandemic) has led the CBN to intensify its efforts to bring the project forward. Besides, we understand that over 85 percent of Central Banks around the globe are now considering adopting digital currencies in their countries. We believe digital currencies’ purported benefits (acceleration of financial inclusion, increase cross-border trade, improvements in monetary policy effectiveness, and payment systems efficiency) remains hypothetical for now, given that the global rollout of digital currencies is still at an early stage. For instance, factors such as technological illiteracy, privacy concerns, and limited trust in the monetary authority could deter significant adoption of the eNaira.

According to the data obtained from the Nigerian National Petroleum Corporation (NNPC), the corporation incurred NGN756.99 billion as PMS under-recovery costs as of 7M-21. Recall that the FGN announced the removal of fuel subsidies in March 2020 when oil prices were low. However, under-recovery costs resurfaced in January 2021 when the FGN decided to leave the PMS pump price unchanged within a range of NGN162.00 – NGN165.00 per litre, despite the increase in global oil prices. Accordingly, under-recovery costs for each month reflected the increase in global oil prices – January (NGN25.37 billion), February (NGN60.40 billion), March (NGN111.97 billion), April (NGN126.30 billion), May (NGN114.34 billion), June (NGN143.29 billion) and July (NGN175.32 billion). At the July run rate, we estimate under-recovery costs will settle at NGN1.63 trillion or 32.5% of our projected FGN’s retained revenue (NGN5.02 trillion) in 2021E. Given that the under-recovery costs were not provided for in the 2021 budget and the NNPC deducts them before remitting funds to the Federation Account, it implies that revenue will continue to be constrained over the rest of the year amid an increase in total expenditure.

Capital markets
 
Equities
 
Bearish sentiments dominated the market this week, with the local bourse recording losses in three of the five trading sessions of the week, following sell-offs of large cap stocks including NB (-7.7%), DANGCEM (-1.8%) and ZENITHBANK (-1.2%). Consequently, the All-Share Index shed 0.6% w/w to close at 39,261.01 points. Accordingly, the MTD and YTD return settled at +0.1% and -2.5%, respectively. However, activity levels were strong, as trading volumes and value rose by 29.3% w/w and 5.0% w/w, respectively. Analysing by sectors, the Oil and Gas (-3.0%), Consumer Goods (-1.3%), Industrial Goods (-0.9%), and Banking (-0.6%) indices all closed in the red. However, the Insurance (+0.8%) index emerged as the sole gainer for the week.
 
In the coming week, we expect earnings from the big banks, specifically GTCO and UBA to drive buying sentiments on the bourse, as the declaration of interim dividends may likely accompany the results. Overall, 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 expanded by 500bps w/w to 13.5%. The rate remained in the single-digit territory for most of the week following a higher net liquidity position (this week’s average: NGN373.87 billion vs last week: NGN43.46 billion) supported by OMO maturities (NGN57.00 billion). However, the eventual expansion was driven by debits at the latter part of the week for CRR and the CBN’s weekly FX and OMO (NGN50.00 billion) auctions.

In the coming week, we expect the OVN rate to remain relatively rangebound as expected inflows from OMO maturities NGN170.00 billion is likely to offset funding pressures for CBN’s weekly auctions.

Treasury bills

The Treasury bills secondary market traded with bullish sentiments following higher demand on the back of the improved system liquidity. Thus, the average yield contracted by 13bps to 5.4%. Across the market segments, the average yield at the NTB segment declined by 34bps to 4.6% but expanded by 8bps to 6.1% at the OMO segment. On Thursday, the CBN sold NGN50.00 billion worth of OMO bills to market participants and maintained the stop rates across the three tenors, as with prior auctions (82-days: 7.0%, 152-days: 8.5%, and 327-days: 10.1%). Also, the CBN also rolled over Special Bills maturities worth NGN4.20 trillion at 0.5% for three tenors of 30, 60 and 90 days.
 
In the coming week, we envisage lower average yields as market participants take positions ahead of further declines in auction stop rates. Also, we expect the NTB market to trade quietly as the CBN is set to roll over NGN138.17 billion worth of instruments. 

Bonds
 
Bullish sentiments persisted in the Treasury Bonds secondary market as investors continue to cherry-pick attractive instruments across the curve. Specifically, the average yield declined by 11bps to 11.0%. Across the benchmark curve, the average yield declined at the short (-10bps), mid (-9bps), and long (-12bps) segments following investors’ interest in the JAN-2022 (-53bps), FEB-2028 (-15bps) and MAR-2035 (-35bps) bonds, respectively.
                 
Next week, we maintain our expectations of lower average yields in the face of limited supply and deliberate efforts by the DMO to moderate borrowing costs for the government.

Foreign Exchange

Nigeria’s FX reserve sustained its weekly accretion closing higher by USD438.35 million w/w to settle at USD34.10 billion (1st September 2021). Meanwhile, the naira appreciated by 0.1% w/w to NGN411.50/USD at the I&E window (IEW) but depreciated by 1.1% w/w to NGN530.00/USD in the parallel market. At the IEW, total turnover (as of 2nd September 2021) increased by 19.0% WTD to USD926.51 million, with trades consummated within the NGN400.00 – 449.99/USD band. In the Forwards market, the rate depreciated at the 1-month (-0.4% to NGN413.25/USD), 3-month (-0.8% to NGN417.68/USD), 6-month (-1.2% to NGN423.91/USD), and at the 1-year (-1.8% to NGN436.29/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.