According to S&P Global, Eurozone’s Composite PMI (54.9 points vs February: 55.5 points) remained in the expansionary region in March, easing only slightly from February’s five-month high as looser COVID-19 restrictions continued to accommodate rising levels of private sector activity. Based on the preceding, business activity as measured by the Services PMI (55.6 points vs February: 55.5 points) rose to a four-month high while the Manufacturing PMI declined to 56.5 points in March (February: 58.2 points). Notably, we highlight that factory activity was weighed by the (1) spillover impact of the geopolitical tensions arising from the Russia-Ukraine conflict and (2) intensification of supply chain pressures over the month as rising COVID-19 infections in China led to longer lead times. Although the further reopening of the regional bloc supported business activity expansion in the first quarter of the year, we expect overall private sector activity to slow in the short term given (1) rise in energy costs and commodity prices and (2) worsening supply chain constraints exacerbated by the Russia-Ukraine conflict.

Automotive fuels and non-food products drove Euro Area’s consumer spending in February. According to Eurostat, Euro Area’s retail sales rose by 5.0% y/y in February (January: 8.4% y/y), ahead of market expectations of a 4.8% y/y increase. We believe the increase stems from further ease of COVID-19 restrictive measures amidst higher fuel prices. Accordingly, automotive fuels (12.0% y/y vs January: 13.1% y/y) and non-food products (9.3% y/y vs January: 16.1% y/y) recorded the largest increase in the volume of retail trade during the review period. On a month-on-month basis, retail sales increased by 0.3% m/m (January: 0.2% m/m) – the highest in four months with the largest increase seen in automotive fuels (3.2% m/m vs January: -1.8% m/m) amidst a 0.5% m/m decline in food products. We expect the continued reopening of the economy to support consumer spending in the short term. However, the key downside factor to our expectation is the negative impact of the lingering Russia-Ukraine conflict on energy and commodity prices.

Global Markets

Global stocks posted another mixed performance as investors weighed (1) the prospects of a rapid reduction in Fed Reserve’s debt holdings to curb the increase in inflation and (2) a new wave of sanctions on Russia from the European Union following the ongoing geopolitical crisis. Accordingly, US (DJIA: -0.7%; S&P 500: -1.0%) stocks were on track to close the week in the red as investors digested the prospects of monetary policy tightening from the US Fed Reserve. On the other hand, European stock markets (STOXX Europe: +0.3%; and FTSE 100: +1.0%) were on course for another weekly gain as defensive sectors buoyed investors’ sentiments even as they traded cautiously on concerns about the global economic outlook. Elsewhere, Asian markets posted broadly negative performances, as the (1) Nikkei 225 (-2.5%) settled lower mirroring the selloffs on Wall Street, and (2) SSE (-0.9%) recorded losses as surging Covid-19 cases heightened concerns about further lockdown measures in China.  The Emerging (MSCI EM: -1.7%) markets stocks closed lower following bearish sentiments in China (-0.9%) while the Frontier (MSCI FM: +0.6%) market stocks closed in green consequent upon gains in Kuwait (+1.2%).

Nigeria

Economy

In line with the FGN’s directive through the Ministry of Communications and Digital Economy, Telecoms operators in Nigeria have barred outgoing calls from all unlinked SIM cards with their National Identity Number (NIN). Recall that in December 2020, the FGN ordered all SIM cards to be linked with their NINs to curb the rising security challenges in the country. Since then, the NIN-SIM linkage deadline has been extended several times, with the final deadline on 31st March 2022. According to the Nigerian Communications Commission (NCC), 125.00 million had their NINs submitted for linkage as of 4th April, representing 63.1% of the total registered SIMs (198.12 million) as of February. Accordingly, we estimate that 73.12 million SIM cards have been barred from making outgoing calls as they are yet to be linked with their NINs. Barring a reversal of the order halting outgoing calls from unlinked SIM cards, we expect the voice revenue of mobile network operators to be negatively impacted in 2022FY. At the same time, the prerequisite of having NIN before an individual can purchase a new SIM card could undermine the Telecommunications sector’s growth in the short term.

In a letter written to the House of Representatives, President Buhari requested the Parliament to approve a request to borrow an additional NGN965.42 billion from the domestic debt market to cover a wider budget deficit in 2022FY. Accordingly, the government expects the 2022FY budget deficit (including GOEs and project-tied loans) to rise to NGN7.35 trillion or 3.99% of GDP (Previously: NGN6.39 trillion). According to the President, the wider deficit is necessitated given the (1) elevated subsidy costs given the decision to suspend the removal of PMS subsidy and (2) need to make adequate provisions for the recent enhancements of allowances for the Nigeria Police Force. Based on the preceding, our revised 2022E budget deficit, including GOEs and project-tied loans (NGN9.39 trillion), points to elevated borrowings for the year, supporting our view of increased yield in the fixed income market. Indeed, as of Q1-22, the FGN already borrowed 42.6% of its 2022E domestic borrowing plan (NGN3.53 trillion), inclusive of the NGN965.42 billion additional request. Therefore, at this run rate, total domestic borrowing alone could settle at NGN6.02 trillion in 2022E.

Capital markets
 
Equities
 
The bears continued to dictate proceedings in the local bourse as the market suffered its fourth consecutive weekly loss. Precisely, the All-Share Index shed 0.5% to close at 46,631.46 points. Particularly, profit-taking activities witnessed in NASCON (-8.9%), WAPCO (-2.7%), FBNH (-3.3%) and DANGSUGAR (-1.9%) led the weekly loss. Consequently, the MTD and YTD return for the index moderated to -0.7% and +9.2%, respectively. In terms of activity levels, trading volume and value declined by 12.8% w/w and 21.0% w/w, respectively. Across sectors, the Oil and Gas (+3.1%) and Banking (+1.5%) indices advanced, while the Consumer Goods (-0.4%), Industrial Goods (-0.4%), and Insurance (-0.2%) indices declined.

With the moderation in the prices of bellwether stocks this week, we expect savvy investors to take advantage of this and make re-entry ahead of Q1-22 earnings announcements. Considering that the 2021FY earnings season has run its course, we now expect investors’ sentiment to be influenced by developments in the macroeconomic landscape and the movement of yields in the fixed income space. Overall, we advise investors to take positions in only fundamentally sound stocks as the weak macro story remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate dipped by 4.42ppts w/w to 6.3%, as the system remained afloat with liquidity in the absence of any significant outflows from the system.

We expect a further tightening in the system liquidity in the coming week, as the outflows from CBN’s weekly auctions (NTB, OMO, and FX) will most likely offset expected inflows from OMO maturities (NGN50.00 billion). Hence, we envisage an expansion in the OVN rate from current levels.

Treasury bills

The Treasury bills secondary market maintained last week’s bearish sentiments following the sustained dearth in the demand for bills. Thus, the average yield across all instruments expanded by 5bps to 3.4%. Across the market segments, the average yield closed flat at 3.6% in the OMO segment but expanded by 6bps to 3.3% in the NTB segment.

Next week, we expect the outcome of the NTB auction to shape the direction of yields in the T-bills market. The CBN is set to roll over NGN141.26 billion worth of maturities to market participants at the auction.

Bonds

Similarly, the Treasury bonds secondary market traded with bearish sentiments, as the average yield expanded by 31bps w/w to 11.0%. Investors sold off various positions across the curve in anticipation of higher yields following the release of the Q2-22 FGN bonds issuance calendar. For clarity, the DMO intends to raise c. NGN675.00 billion in Q2-22 – 50.0% increase from the NGN450.00 billion offered in Q1-22 – through reopening of the MAR-2025 and JAN-2042 bonds, and a new issue ten-year instrument (APR-2032). Consequently, we observed profit-taking across the short (+6bps), mid (+47bps), and long (+32bps) segments of the benchmark curve, following sell-offs of the MAR-2027 (+44bps), JUL-2030 (+62bps), and JUL-2034 (+63bps) bonds, respectively. 

We highlight that the increased FGN borrowing plan based on the Q2-22 bond calendar lends credence to our view of an elevated supply, in the face of thin liquidity. Thus, we reiterate our view of an uptick in bond yields in the medium term.

Foreign Exchange

Nigeria’s FX reserves increased by USD84.25 million w/w to USD39.63 billion (6th April 2022). Meanwhile, the naira was flat at NGN416.67/USD at the I&E window (IEW) but appreciated by 0.2% to NGN587.00/USD at the parallel market. At the IEW, total turnover (as of 7th April 2022) declined by 23.1% WTD to USD528.14 million, with trades consummated within the NGN410.00 – NGN453.15/USD band. In the Forwards market, the naira appreciated at the 1-month (+0.1% to NGN418.00/USD) and 6-months (+0.1% to NGN432.61/USD) contracts but was flat at the 3-months (NGN424.02/USD) and 1-year (NGN448.85/USD) contracts.

Given inflows from the recently issued Eurobond and the IMF’s SDR, we think the CBN has enough supply to support the FX market over the short term. Nevertheless, we note that foreign inflows are paramount for sustained FX liquidity over the medium term, in line with our expectation that accretion to the reserves will be weak given that crude oil production levels remain pretty low. Thus, FPIs which have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels. Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would significantly attract foreign inflows back to the market.