Weekly Economic and Market Report

Following the gradual ease of lockdown instituted across China, manufacturing activities rebounded in May, after contracting in the prior month. Specifically, manufacturing PMI rose to the expansionary territory of 50.7 index points in May, from 49.4 points in April. This is not surprising as we had expected the gradual re-opening of the Chinese economy would keep manufacturing activities afloat in May, even as the external sector remains broadly weak due to pressured demand. Despite the positive outturn, we do not believe the Chinese economy is completely out of the woods. The combination of still benign spending patterns, amid job losses, together with the deteriorating external sector will continue to pressure activities over the next few months. Thus, we foresee further economic headwinds.

Elsewhere, manufacturing activities in the US for May sustained the contractionary trend from the prior month, as PMI slumped to 43.1 index points, although up from the 41.5 points recorded in April. The disruption of the supply value chain, occasioned by the COVID-19 induced lockdown across the states weighed significantly on export orders. Meanwhile, the postponement of new orders, or in extreme cases, cancellation of orders, led to the retrenchment of workforces in the review period. For the next few months, we see headroom for further moderation in manufacturing activities, due to the unrelenting spread of the coronavirus and the recent social unrest, which continues to exacerbate the situation.

Global Markets
Sentiments remained positive in the global space as investors’ optimism for a speedy economic recovery from the pandemic continues to support appetite for risky assets. Specifically, stocks in the US (DJIA: +6.2%; S&P: +4.5%) sustained the performance from the prior week after recording another large weekly gain, as investors focused on states reopening and looked past dismal economic data. Asides for the hope of a speedy economic recovery, investors in the European (STOXX: +6.9%; FTSE 100: +6.6%) markets were pleased as signs of a pickup in China’s services sector activity offset concerns about the Sino-U.S. trade tensions. Also, the equities markets in Asia (SSE: +2.8%; Nikkei 225: +4.5%) were up as PMI data released by China’s National Bureau of Statistics indicated the economy moved back into the expansionary zone in May. Finally, gains in South Korea (+7.5%) and China (+2.8%) supported the Emerging market index (MSCI EM: +6.3%), while the Frontier market (MSCI FM: +1.7%) was buoyed by the Vietnamese (+2.5%) and Moroccan (+2.8%) indices.

Nigeria -Domestic Economy
Capital importation in Nigeria still lacks skid resistance, following another 31.2% y/y decline to USD5.85 billion over Q1-20. Given the outbreak of COVID-19 pandemic, which disrupted global economic activities from institutions of lockdowns, together with its passthrough impact on domestic economic indices, we were unsurprised that the decline inflows was broad-based, save for other investment (+15.2% y/y). Notably, FPI and FDI, both of which constitute 77.3% of total flows, moderated by 39.4% y/y and 13.4% y/y, respectively. On the former, flows to equities dipped by 2.5% y/y, mirroring the marked risk asset sell-offs in the same period (ASI: -20.8%). Meanwhile, the segregation of the OMO bills market by the CBN, which engineered deceleration in rates, comes to mind as the driver of the reduced flows to the money market (-41.6% y/y).

For the next few quarters, the trajectory of pull and push factors are central in framing our outlook for flows. On the pull side, emerging markets have experienced record portfolio outflows in recent times, larger than during any recent crisis, including the global financial crisis. The blend of the global COVID-19 shock and a significant drop in oil prices led to record-breaking outflows, especially in March (c. USD82.00 billion). For us, the recovery in flows will most likely follow the full resumption of economic activities towards the tail end of the year, which Nigeria should benefit from. On the domestic front, while we expect macroeconomic milieu to deteriorate further, the stronger harmony between the fiscal and monetary authorities should pave the way for a gradual pickup by Q4-20. Hence, we expect capital inflows to ride the wave of stronger economic prospects by Q4-20.

Capital Markets -Equities
Negative sentiments took precedence in the domestic markets despite the further easing of the lockdown in the country, amid persistent increases in daily coronavirus cases. Consequently, profit-taking was witnessed on BUACEMENT (-4.8%), NB (-3.0%), and some banking stocks. Precisely, the All-Share Index declined by 1.0% w/w, to settle at 25,016.30 points. Thus, the MTD return settled at -1.0%, as the YTD loss increased to -6.8%. Analysing by sectors, the general performance was broadly negative, as losses in the Banking (-3.7%), Oil and Gas (-0.7%) and Consumer Goods (-0.4%) sectors outweighed the positive performances in the Insurance (+2.4%) and Industrial Goods (+1.6%) sectors.

In our opinion, risks remain on the horizon due to a combination of the increasing number of COVID-19 cases in Nigeria and weak economic conditions. Thus, we continue to advise investors to trade cautiously and seek trading opportunities in only fundamentally justified stocks.

Money market
The overnight (OVN) rate expanded by 13.70 ppts, w/w, to 16.7%. The OVN contracted consecutively throughout the week, as system liquidity remained elevated. System liquidity was further buoyed by inflows from OMO maturities (NGN149.68 billion), however, outflows for CRR debits (NGN459.72 billion) and the CBN’s weekly OMO auction (NGN70.00 billion) caused the rate to increase to its current level. At the OMO auction, the CBN fully allotted NGN70.00 billion worth of bills – NGN20.00 billion of the 82-day, NGN20.00 billion of the 173-day and NGN30.00 billion of the 341-day – at respective stop rates of 4.95%, 7.79%, and 8.99%.

In the coming week, we expect a tightened system liquidity and an expansion in the OVN due to the absence of significant inflows to the system.

Treasury bills
Trading in the Treasury bills secondary market was quiet through the week, as investors remained wary of the rates in both segments of the market. Nonetheless, bullish sentiments prevailed due to the healthy system liquidity, as the average yield across all instruments contracted by 30bps to 4.5%. Average yield at the OMO segment (-97bps to 5.1%) contracted due to liquidity conditions, while sell-off of short and mid tenured instruments caused average yield in the NTB segment to expand by 121bps to 3.3%.

We expect reduced demand for T-bills as system liquidity squeezes. At the NTB segment, we expect muted trading activity in the secondary market as participants seek better rates at next week’s PMA.

Trading in the Treasury bonds secondary market was mixed, albeit with bullish bias, as the average yield contracted by 9bps to 10.0%. Trading was static due to muted activity in the market, as market participants shifted attention to FGN’s Sukuk bond issuance. Across the benchmark curve, yield contracted at the short (-15bps) and long (-3bps) ends as investors demanded JAN-2026 (-55bps) and MAR-2050 (-10bps) bonds, respectively, while they expanded at the mid (+1bp) segment due to sell-offs of the MAR-2027 (+1bp) and FEB-2028 (+1bp) bonds.

In the coming week, we expect the tight system liquidity to negatively influence the demand for instruments in the Treasury bond secondary market. Nonetheless, we expect yields to pare, as investors’ demand should remain focused on this side of the market, given the level of yields in the Treasury bills market.

Foreign Exchange
This week, the CBN stepped up its currency market intervention as it recorded its first reserve depletion in four weeks. Notably, the country’s external balance dipped by USD17.09 million WTD to USD36.58 billion. Nonetheless, the Naira depreciated against the USD by 0.04% w/w to NGN386.50/USD at the I&E window but closed largely flat at NGN450.00/USD in the parallel market. In the Forwards market, the naira depreciated against the USD across all contracts. Specifically, the 1-month (-0.2% to NGN389.06/USD), 3-month (-0.8% to NGN394.84/USD), 6-month (-1.5% to NGN403.18/USD), and 1-year (-2.5% to NGN426.56/USD), contracts all lost some ground against the US dollar.

For us, the widening current account (CA) position suggests that odds are stacked against the Naira. Beyond that, as the economy gradually reopens, the resumption of FX sales to the BDCs segment of the market will place an additional layer of pressure on the reserve as the CBN funds the backlog of unmet FX demand.

Cordros Research