Following the growth momentum in Q2-20 (+3.2% y/y), China’s economy grew by 4.9% y/y in Q3-20, although below the consensus estimate of 5.2% y/y. The positive growth outturn was driven by the service sector which grew by 4.3% y/y (Q2-20: +1.9% y/y) and retail sales (+0.9% y/y vs. Q2-20: -3.9% y/y) following the relaxation of social distancing measures, which fuelled domestic consumption expenditure. Although the slower consumption growth remained a drag, the recovery was broad-based compared to Q2-20 when it was largely driven by the state-backed investment stimulus. Notably, the Chinese economy has recovered all lost output from H1-20 as growth for the first three quarters of the year now stands at 0.7%. Barring a second wave of COVID-19 infections, we expect the economic recovery to remain intact over the rest of the year. We, however, note that growth may be hindered by rising trade tensions with the United States, and will be a major headwind for the manufacturing sector.
We had projected in our weekly economic commentary (18th September) that the 0.2% y/y drop in inflation in the United Kingdom (U.K) for August was momentary, with the influence of the Government tax cut and Eat Out to Help Out Scheme loosening up the next month. True to our prognosis, the UK’s inflation rate rose to 0.5% y/y in September following the expiration of the discount meals scheme, which pushed up restaurant and café prices. We also note that transport costs increased following the growth in the demand for second-hand cars as people sought alternatives to public transport. Compared to a month ago, we highlight that the inflation rate increased by 0.4% (August: -0.4% m/m). We expect inflation to remain broadly muted amidst the renewed prevalence of COVID-19 in the UK, and an expected increase in unemployment as the furlough scheme is wound down. Combined with the forthcoming end to the post-Brexit transition period, the continued lack of significant inflationary pressure is likely to push the Bank of England towards further stimulus in November.
Investors were caught between several opposing forces ranging from (1) growing tensions ahead of the U.S. presidential election, (2) lingering stimulus negotiations, (3) broadly positive Q3 corporate earnings, and (4) encouraging labour market data. In the US, the DJIA (-0.8%) and S&P (-0.9%) shares were on track to end a three-week bullish run as election uncertainty overshadowed positive labour market data. European markets (STOXX Europe: -1.1%; FTSE 100: -1.2%) were on course to end the week in the red as rising Covid-19 infections amid Brexit trade deal-related uncertainty weighed on investors sentiment. Asian markets were also mixed – Japanese (Nikkei 225: +0.5%) stocks closed the week marginally positive, driven by a rebound late in the week after an initial dip fuelled by uncertainties over U.S. politics; Chinese (SSE: -0.8%) stocks posted a weekly loss as investors booked profits in consumer and healthcare stocks due to concerns over stretched valuations which outweighed the initial positive reaction to the Q3 GDP data. Emerging market (MSCI EM: +1.1%) stocks were broadly positive following gains in Brazil (+3.7%) and India (+1.8%), while Frontier market (MSCI FM: -0.5%) stocks posted mild losses.
Dwindling revenue since the onset of the COVID-19 pandemic has continued to affect the Federal Government’s (FGN) fiscal operations. At NGN2.52 trillion, total FGN revenue (excluding GOEs) for 8M-20, was 70.4% of the prorated target (NGN3.58 trillion), and 46.9% of the expected total revenue (NGN5.34 trillion) for 2020FY. The underperformance comes despite the (1) improvement in average oil prices (USD38.64/bbl) above the projected oil price (USD28.00/bbl) in the revised budget, (2) increased daily average crude oil production (1.88mb/d compared to the expected production of 1.80mb/d in the revised budget), and (3) the two-stage devaluation of the local currency in the official window, all of which implies higher federal oil receipts. With improved oil receipts not offsetting the decline in non-oil receipts, we believe government revenue will remain challenged over the rest of the year. Accordingly, we expect the weak revenue profile to constrain fiscal spending, potentially leaving a wider fiscal deficit to be financed by borrowings.
Over the past three weeks, the front wheels of economic activities have been deflated due to the protests across the country against police brutality and the excesses of the Special Anti-Robbery Squad (SARS). The reported cases of the protests being hijacked by the hoodlums have forced some state governments to impose curfews to douse the tension and restore law and order. Destruction of public properties that ensued during the curfews has raised concerns about the possibility of prolonged curfews to return normalcy in the country. This has added pressure to the slow recovery process predicated on the persistent FX liquidity constraints, improved compliance with OPEC oil production cuts, and general low level of business activities. Accordingly, we now estimate Nigeria’s GDP will contract by 6.91% y/y in Q4-20, translating to negative growth of 4.15% y/y in 2020FY (Previous forecast: -3.32% y/y). However, we note that the economic impact is likely to be more severe if the unrest and curfew persist beyond October.
Capital markets –Equities
The ongoing civil unrest across the country weighed on investors sentiment, as activity levels remained weak with the value and volume of trades falling 14.4% w/w and 23.0% w/w respectively. Mid-week sell-offs resulted in the market recording its biggest loss since October 7th, as the ASI declined by 0.8 However, bargain hunting in the last two trading sessions of the week (Thur: +0.4%; Fri:+0.5%) completely wiped off the week’s losses and pushed the market into the green. As such, the All-Share Index ended the week with a marginal gain (+0.1% w/w), representing the fifth consecutive weekly gain. Notably, investors’ interest in NB (+5.7%), DANGCEM (+0.7%), STANBIC (+2.3%) and INTBREW (+18.2%) drove the benchmark index higher to 28,697.06 points. The MTD and YTD return for the index grew to 6.9% apiece. The Consumer Goods (+2.9%) index was the lone advancer as the Banking (-1.4%), Oil & Gas (-0.7%), Insurance (-0.6%) and Industrial Goods (-0.1%) declined.
Despite the heat in the socio-political landscape triggered by the degeneration of the #ENDSARS protests, we do not expect a material dent to investors’ appetite for stocks. We reiterate that pent up system liquidity and the hunt for alpha-yielding opportunities in the face of increasingly negative real returns in the fixed income market remain positive for stocks. However, we advise investors to trade in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings.
The overnight (OVN) rate increased by 7.75 ppts w/w, to 9.8%. The OVN rate was depressed for most of the week, as system liquidity was boosted by inflows from OMO maturities (NGN296.03 billion), FGN bond coupon payments (NGN32.67 billion) and FX retail refunds. However, funding pressures from CRR debits, FGN bond (NGN30.00 billion), OMO (NGN100.00 billion) and FX auctions debits offset the impact of the inflows and triggered the eventual expansion in the rate.
With another liquidity influx expected next week from OMO maturities (NGN336.09 billion) and FGN bond coupon payments (NGN160.32 billion), we expect liquidity in the system to remain healthy, and lead to a contraction in the OVN rate.
Activities in the Treasury bills secondary market remained strong, as the buoyant system liquidity and retail demand sustained active trading in the market. Consequently, the average yield across all instruments contracted by 72bps to 0.5%. Across the segments, the aforementioned factors drove down yields significantly at the OMO (average yield contracted by 73bps to 0.5%) and NTB (average yield contracted by 69bps to 0.4%) segments of the market. At this week’s OMO auction, the CBN offered bills worth NGN100.00 billion with allotments of NGN10.00 billion of the 138-day, NGN10.00 billion of the 180-day and NGN80.00 billion of the 362-day bills – at respective stop rates of 3.74% (previously 4.10%), 6.80% (previously 7.10%), and 8.00% (previously 8.45%).
Following the further contraction in yields witnessed this week, we expect demand for instruments in the T-bills secondary market to slow down in the coming week. Also, we expect investors’ focus to be on the PMA holding next week, where the CBN will rolling over NGN160.32 billion worth of maturing bills.
The Treasury bonds secondary market remained bullish, as investors re-invested the ample liquidity in the system and covered for lost bids at Wednesday’s PMA. Thus, the average yield across instruments contracted by 76bps to 4.2%. At the PMA, the DMO offered instruments worth NGN30.00 billion to investors through re-openings of the 12.50% MAR 2035 (Bid-to-offer: 11.3x; Stop rate: 4.97%) and 9.80% JUL 2045 (Bid-to-offer: 4.4x; Stop rate: 6.00%) bonds. Despite a total subscription of NGN235.87 billion, the DMO eventually allotted instruments worth NGN45.00 billion, resulting in a bid-cover ratio of 5.2x.
We expect trading in the Treasury bonds secondary market to be buoyed by the excess liquidity in the system. Thus, we should see sustained demand and yield contraction across the curve as investors take positions in the coming week.
Nigeria’s FX reserves increased by USD1.77 million w/w to USD35.67 billion, as inflows offset outflows for CBN’s interventions across the various FX windows. Across the windows, the naira was marginally lower, but closed flat at NGN386.00 against the US dollar at the I&E window, while it weakened by 0.2% to NGN463.00/USD in the parallel market. In the Forwards market, the naira appreciated across the 3-month (+0.2% to NGN387.61/USD), 6-month (+0.6% to NGN389.09/USD) and 1-year (+1.2% to NGN395.39/USD) contracts, while the 1-month (NGN386.49/USD) was flat.
Despite the CBN’s stronger commitment towards exchange rate unification, we still see legroom for the currency to depreciate further over the medium-to-long term – at least towards its REER derived fair value. Our prognosis is hinged on (1) the widening current account (CA) position, (2) currency mispricing, which could induce speculative attacks on the naira, and (3) the resumption of FX sales to the BDC segment of the market which should place an additional layer of pressure on the reserves.