The United Kingdom (UK) economy recorded no growth in Q3-23 as the effects of high interest rates and inflation undermined consumer expenditure. According to the Office for National Statistics (ONS), the UK’s real GDP stagnated in Q3-23 (0.0% q/q vs Q2-23: +0.2% q/q). Analyzing the breakdown, we highlight the broad-based decline across gross fixed capital formation (-2.0% q/q vs Q2-23: +0.8% q/q), private consumption (-0.4% q/q vs Q2-23: +0.5% q/q) and general government expenditure (-0.5% q/q vs Q2-23: +2.5% q/q). Similarly, on a year-on-year basis, the economic growth remained flat at 0.6% (Q2-23: +0.6% y/y), as the expansion in housing expenditures (+0.7% y/y vs Q2-23: +0.2% y/y) balanced the slowdown in public expenditure (+0.1% y/y vs Q2-23: +1.3% y/y) and business investment (+2.8% y/y vs Q2-23: +9.2% y/y). Looking ahead, we expect economic growth to remain weak as the tight financial conditions and elevated inflationary pressures continue to pose a downside risk to growth in the near term. Accordingly, the IMF expects the UK economy to slow by 0.7% in 2023E (2022FY: +3.3% y/y).

According to the recently released data by the National Bureau of Statistics, China’s consumer prices declined by 0.2% y/y in October relative to a flat print in September. We attribute the subdued price pressures to an increase in agricultural product supply due to favorable weather conditions, amid signs of easing consumption following the Golden Week break at the beginning of the month. Analyzing the breakdown, food prices (-4.0% vs September: -3.2% y/y) declined for the fourth consecutive month to its lowest level in 25 months due to weaker pork prices (-30.1% y/y) following the aforementioned weak demand. At the same time, core inflation (-0.7% y/y vs September: +1.9% y/y) moderated to a 4-month low. On a month-on-month basis, headline inflation declined by 0.1% (September: +0.2% m/m). We highlight that the deflationary pressures remain a significant risk to China’s growth prospects, amid (1) lackluster domestic demand, (2) persistent property market wobbles, (3) a local debt crisis, and (4) policy disparities with the West. We believe that the preceding do not bode well for the Chinese economy, reinforcing the need for additional monetary policy easing and fiscal support to keep the economy afloat over the short term.

Global Equities

Global stocks edged higher this week following positive reactions to corporate earnings earlier in the week and expectations of stimulus support and economic growth in Asia. However, doubts about the Federal Reserve’s conclusion of its tightening policy weighed on sentiments later in the week. Accordingly, the Federal Reserve’s hawkish comments, signaling a lack of confidence in curbing inflation, and increasing bond yields resulted in a retreat in US stocks (DJIA: -0.5%; S&P 500: -0.3%). However, European equities (STOXX Europe: +0.8%; FTSE 100: +0.5%) traded positively, with investors focusing on upbeat corporate earnings. Similarly, Asian markets (Nikkei 225: +1.9%; SSE: +0.3%) closed higher due to optimism surrounding Japan’s new stimulus policy and China’s commitment to boosting imports to enhance ties with trade partners. Finally, the Emerging market (MSCI EM: +0.8%) and Frontier market (MSCI FM: +1.5%) indices posted positive performances, influenced by gains in China (+0.3%) and Vietnam (+3.1%), respectively.

Nigeria

Domestic Economy

According to the Nigerian Upstream Regulatory Commission (NUPRC), aggregate crude oil production (including condensates) declined after two consecutive months of  increases by 0.7% m/m to 1.56mb/d in October (September: 1.57mb/d). According to the breakdown provided, we note that the low crude oil production in the review period was primarily driven by the shortfall in Forcados (-3.7% m/m) and Escravos (-4.7% m/m) production terminals, which were enough to offset the 43-month high production recorded at the Bonga (+18.9% m/m) terminal. While progress is still underway as regards the fight against crude oil theft and pipeline vandalism, we believe that (1) frequent leaks from pipelines and (2) intermittent oil terminal shutdowns for repairs pose downside risks to crude oil production in the near term. Thus, we maintain our 2023E average crude oil production estimate of 1.42mb/d (vs FGN’s estimate: 1.69mb/d), a relatively slight improvement compared to 2022FY production volume (1.37mb/d). Consequently, we expect the government’s oil revenue performance to remain underwhelming over the short term.

Fitch Ratings has affirmed Nigeria’s long-term foreign-currency Issuer Default Rating (IDR) at “B-” with a stable outlook. The rating decision was supported by (1) the country’s large economy, (2) a developed and liquid domestic debt market, and (3) a large oil and gas reserve. The agency also acknowledged the government’s faster-than-expected progress in implementing reforms. However, it noted some regression in these reforms, casting doubt on the sustainability of the positive momentum. Simultaneously, Fitch noted that the rating is still constrained by various factors, including (1) weak governance, (2) structurally low non-oil revenue, (3) elevated inflation, and (4) a weak exchange-rate framework. Our medium-term expectation is for Nigeria’s credit ratings to improve from current levels, given the present administration’s reforms, which we expect to persist into 2024E. However, we highlight the strong risk of policy backtrack, considering the socio-economic challenges involved in reform implementation, which could trigger downgrades on the current outlook.

Capital Markets

Equities

As expected, the prevalence of bullish sentiments fueled by recent developments in the FX landscape ensured the local bourse’s positive end to the week. Notably, the market recorded gains on all trading sessions, driven by increased demand for BUACEMENT (+6.5%), FBNH (+12.4%), and SEPLAT (+3.9%). Accordingly, the All-Share Index advanced by 0.9% w/w to 70,854.18 points, resulting in Month-to-Date and Year-to-Date returns of +2.3% and +38.2%, respectively. Trading activity levels reflected market optimism, as total traded volume and value increased by 3.3% and 12.3% w/w, respectively. Meanwhile, sectoral performance was mixed as the Oil and Gas (+2.9%), Industrial Goods (+2.7%), and Banking (+1.2%) indices recorded gains while the Consumer Goods index closed flat. The Insurance (-0.5%) index was the sole loser for the week.

In the coming week, we expect the bears to book profit across most counters following the recent market rally. Consequently, we expect a “choppy theme” even as institutional investors search for clues on the direction of yields in the FI market. Notwithstanding, 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

In line with our expectations, the overnight (OVN) rate expanded by 90bps w/w to 17.6%, as the debits for CRR (c. NGN308.00 billion) and net NTB issuances (NGN187.08 billion) pressured the system liquidity amid DMBs’ sustained utilisation of the SDF window. As a result, the average system liquidity closed at a net short position of NGN206.05 billion this week (vs. a net short position of NGN333.50 billion in the previous week).

Next week, we believe that the debits for the November 2023 FGN Bond auction (NGN360.00 billion) will offset the paltry inflow from OMO maturities (NGN30.00 billion). Consequently, we expect the OVN rate to trend higher following continuous liquidity squeeze in the financial system.

Treasury bills

This week, the Treasury bills secondary market turned bullish, primarily driven by market players moving to the secondary market to cover for lost bids at the T-bills auction on Wednesday. Consequently, the average yield across the market contracted by 85bps to 13.6%. Across the market segments, the average yield declined in the NTB and OMO secondary markets by 93bps and 5bps to 13.4% and 15.9%, respectively. At this week’s NTB PMA, the DMO offered participants instruments worth NGN310.12 billion – NGN4.52 billion for the 91-day, NGN5.44 billion for the 182-day, and NGN300.16 billion for the 364-day bills. The subscription level at the auction settled at NGN875.79 billion (bid-to-offer: 2.8x), with more demand skewed towards the longer-dated bill (NGN826.79 billion translating to 94.4% of the total subscription). Eventually, the DMO over-allotted on the one-year bill with total sales amounting to NGN497.20 billion – NGN4.52 billion for the 91-day, NGN5.44 billion for the 182-day, and NGN487.24 billion for the 364-day – at respective stop rates of 7.00% (previously: 6.00%), 11.00% (previously: 9.00%), and 16.75% (previously: 13.00%).

Next week, we envisage reduced bill demand in the secondary market following our expectations of lower system liquidity. Thus, we believe yields in the secondary market will likely head northwards.

Bonds

Proceedings in the FGN bonds secondary market closed this week on a bearish note, as the average yield advanced by 6bps to 15.7%. Across the benchmark curve, the average yield declined at the short (-7bps) end as investors demanded the MAR-2024 (-202bps) bond but expanded at the mid (+1bp) and long (+15bps) segments following selloffs on the APR-2032 (+5bps) and MAR-2036 (+36bps) bonds, respectively.

Next week, we expect the outcome of the FGN bond primary auction scheduled to be held on Monday (13 November) to shape the direction of yields in the secondary market. At the auction, the DMO is offering instruments worth NGN360.00 billion through re-openings of the 14.55% FGN APR 2029, 14.70% FGN JUN 2033, 15.45% FGN JUN 2038 and 15.70% FGN JUN 2053 bonds. Notwithstanding, we maintain our expectation of higher yields in the FGN bonds secondary market over the short term, driven by the sustained imbalance in the demand and supply dynamics.

Foreign Exchange

Nigeria’s FX reserve settled lower for the first time in 4 weeks, as the gross reserves position fell by USD44.39 million w/w to close at USD33.42 billion (09 November). Meanwhile, the naira depreciated by 22.1% to NGN996.75/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), with total turnover at the market (as of 09 November 2023) decreasing by 7.4% WTD to USD545.89 million, as trades were consummated within the NGN700.00 – NGN1,100.00/USD band. In the Forwards market, the rate declined across the 1-month (-9.9% to NGN873.59/USD), 3-month (-10.0% to NGN890.19/USD), 6-month (-10.3% to NGN918.00/USD), and 1-year (-9.5% to NGN969.18/USD) contracts.

Looking ahead, we expect FX liquidity conditions to improve slightly, albeit still frail relative to historical levels, as it appears the CBN has regained its momentum regarding FX reforms. Consequently, if the recent convincing actions by the policymakers to turn the tide are sustained, we expect the local currency pressures to ease. Nonetheless, we expect foreign investors to be keenly watching the development in the FX space with regard to the (1) expected FX inflows as guided by the authorities, (2) CBN’s recent actions in clearing its FX backlogs, and (3) firm direction of short-term interest rates.