At its September policy meeting, the Governing Council of the European Central Bank (ECB) voted to keep the interest rate on the main refinancing operations unchanged at 0.0%. Although the Governing Council will continue to conduct net asset purchases worth EUR1.85 trillion under the Pandemic Emergency Purchase Programme (PEPP) until at least the end of March 2022, we highlight that it expects the pace of purchases to be moderately lower than in the previous two quarters due to the favourable financial conditions. Notwithstanding, the Council cautioned that the envelope could be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation. We note that the Council did not provide further details on the tapering schedule – we think it has to do with the concerns over rising infection rates in the United States and as the Federal Reserve hesitates to wind down its asset purchases. Accordingly, we look for the decision on the exact end of the pandemic-induced stimulus package at the December meeting.
 
According to China’s National Bureau of Statistics (NBS), headline inflation in the country moderated to 0.8% y/y in August (July: 1.0% y/y) – the lowest since March 2021 (0.4% y/y). The moderation was driven by the sustained downtrend in the food index (-4.1% y/y vs July: -3.7% y/y) given the continuous decline in pork prices (-44.9% y/y vs July: -43.5% y/y) in line with the recovery of the country’s pig herds size from the African swine outbreak that affected the country between 2019 and 2020. Similarly, the non-food basket (+1.9% y/y vs July: +2.1% y/y) moderated due to a slow rise in transportation (+5.9% y/y vs July: +6.9% y/y) prices. On a month-on-month basis, consumer prices rose by 0.1% compared to 0.3% m/m in July. While we expect improved food supply to moderate prices in the near term, increased mobility and higher energy prices should exert upward pressures on the non-food index. Accordingly, we expect that headline inflation would range between 0.9% and 1.2% over the near term.
 
Global markets

Global stocks extended losses for the second consecutive week following investors’ angst about a slower global economic recovery and the prospect of reduced central bank stimulus. Consequently, US (DJIA: -1.4%; S&P: -0.9%) stocks were set to end the week lower, as the relentless spread of the COVID-19 delta variant continues to undermine global growth prospects. European equities (STOXX Europe: -0.7%, and FTSE 100: -1.3%) were also negative, as investors weighed risks of tighter monetary policies after the European Central Bank signalled a slowdown of its bond purchases. On the other hand, Asian markets were bullish, with the Nikkei 225 (+4.3%) closing higher as Prime Minister Yoshihide Suga’s resignation announcement continued to fuel investors’ optimism. The SSE (+3.4%) was lifted by a rebound in tech stocks following discussions between Chinese leader Xi Jinping and US President Joe Biden amid frayed ties. Elsewhere, Emerging markets (MSCI EM: -1.2%) stocks mirrored the downbeat mood across global equities consequent upon losses in South Korea (-2.4%). In comparison, Frontier (MSCI FM: +0.4%) market stocks posted marginal gains primarily driven by gains in the Vietnamese (+0.8%) market.
 
Nigeria
 
Economy
 
According to the National Bureau of Statistics, Nigeria’s trade deficit moderated by 52.6% q/q to NGN1.87 trillion in Q2-21. Although this makes it the seventh consecutive quarter of trade deficit, we highlight that the print is the lowest and first quarterly moderation since Q1-20 (NGN329.93 billion). The moderation in the trade balance was due to a 74.7% q/q growth in total exports (NGN5.08 trillion vs Q1-21: NGN2.91 trillion) buoyed by crude oil exports (80.3% of total exports) which grew by 111.3% q/q in line with the rally in oil prices (USD69.08/bbl. vs Q1-21: USD61.32/bbl.). Meanwhile, total imports (+1.5% q/q to NGN6.95 trillion) increased marginally on account of the increased importation of mineral fuel (+13.1% q/q), manufactured goods (+8.8% q/q) and food & live animals (+5.2% q/q). We expect the trade deficit to narrow over the rest of the year in line with our expectation of (1) increased oil exports as the global economy continues to recover and (2) imports slowdown from their pandemic-induced rise in corresponding quarters of 2020. Overall, we expect the trade deficit to print NGN7.03 trillion in 2021E (2020FY: NGN7.38 trillion).
 
The Lagos State Governor – Babajide Sanwo-Olu – has signed the recently passed Value Added Tax (VAT) bill into law. The law will empower the Lagos state Internal Revenue Service to impose and charge VAT on certain goods and services in the state. Therefore, it makes Lagos the second state, after Rivers, to have a VAT law that empowers states to collect the tax. Given this new development, we expect the majority of the states to have revenue challenges given that (1) 50.0% of the total VAT generated across the Federation is shared amongst all states and (2) Lagos and Rivers state contribute c.60.0% of total VAT generated in the country. However, we expect it to have a negligible impact on the FGN because VAT revenue (4.2% of retained revenue between 2015 and 2020) represents a negligible fraction of total revenue. Nonetheless, we expect the FIRS and state governments to continue to be in a legal tussle till the (1) Supreme court rules on the matter or (2) National Assembly passes a new law on VAT administration in the country.
 
Capital markets
 
Equities

The bears consolidated their hold on the local bourse as investors booked profit across bellwether stocks throughout the week. Precisely, sell-offs in AIRTELAFRI (-4.7%), FLOURMILL (-3.5%), GTCO (-2.9%) and STANBIC (-2.4%) drove the weekly loss. Thus, the All-Share Index shed 0.9% w/w, to close at 38,921.78 points. Consequently, the MTD and YTD losses increased to -0.8% and -3.3%, respectively. However, activity levels were stronger, as trading volumes and value rose by 7.9% w/w, and 52.1% w/w, respectively. Performance across sectors was mixed as the Oil and Gas (+2.3%), and Consumer Goods (+0.2%) indices recorded gains, while the Insurance (-3.4%) and Banking (-1.0%) indices declined. The Industrial Goods index closed flat.
 
In the week ahead, we anticipate cautious trading in the bourse following the MPC meeting scheduled for next week. Notwithstanding, 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 100bps w/w to 14.5% as funding pressures for net NTB issuances (NGN71.34 billion) and the CBN’s weekly OMO (NGN50.00 billion) and FX auctions outweighed the sole inflow from OMO maturities (NGN119.07 billion).
 
Next week, we expect the OVN rate to remain elevated, as debits for CRR and CBN’s weekly auctions are likely to offset inflows from FGN bond coupon payments (NGN100.67 billion) and OMO maturities (NGN38.00 billion).
 
Treasury bills

Trading in the Treasury bills secondary market turned bearish following market participants’ reaction to the increase in the stop rate of the long-dated instrument at Wednesday’s NTB PMA. Consequently, the average yield expanded by 18bps to 5.6%. Across the market segments, the average yield expanded by 10bps and 30bps to 6.2% and 4.9% at the OMO and NTB segments, respectively. At the bi-weekly NTB PMA, the CBN offered bills worth NGN138.17 billion and eventually allotted NGN209.50 billion – NGN4.94 billion of the 91-day, NGN11.88 billion of the 182-day and NGN192.68 billion of the 364-day bills – at respective stop rates of 2.50% (unchanged), 3.50% (unchanged), and 7.20% (previously 6.80%). In addition, we highlight a lower subscription level at this auction (NGN256.12 billion; bid-to-offer ratio: 1.8x) compared to the last auction (NGN394.12 billion; bid-to-offer ratio: 2.5x).

Considering the current uncertainty created by the higher NTB PMA stop rate, we expect the result of next week’s NTB PMA to provide clarity and dictate the direction of yields. At the PMA, the CBN is set to roll over NGN161.79 billion worth of instruments.
 
Bonds
 
The Treasury Bonds secondary market traded with mixed sentiments, albeit with a bearish bias, following the higher NTB stop rates amid investors’ less aggressive cherry-picking activities. Consequently, the average yield expanded by 5bps to 11.1%. Across the benchmark curve, the average yield declined at the short (-3bps) and mid (-4bp) segments following demand for the APR-2023 (-54bps) and MAR-2027 (-12bps) bonds, respectively. However, it expanded at the long (+18bps) end as investors upwardly repriced the MAR-2036 (+48bps) bond.
 
In the coming week, we expect the market direction to be determined by the (1) outcome of the NTB auction, (2) MPC decision and (3) August inflation result (Cordros’ estimate: 16.95% y/y).
 
Foreign Exchange
 
The accretion to Nigeria’s FX reserves was sustained for the second consecutive week, as it closed higher by USD441.63 million w/w to USD34.70 billion (8th September 2021). Meanwhile, the naira depreciated by 0.1% and 2.8% w/w to NGN412.00/USD and NGN545.00/USD at the I&E window (IEW) and parallel market, respectively. At the IEW, total turnover (as of 9th September 2021) declined by 39.7% WTD to USD635.71 million, with trades consummated within the NGN400.00 – 430.00/USD band. In the Forwards market, the rates on the 1-month (+0.1% to NGN412.75/USD), 3-month (+0.1% to NGN417.31/USD), 6-month (+0.2% to NGN423.01/USD), and 1-year (+0.5% to NGN434.22/USD) contracts reflected appreciations relative to the USD.
 
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.