After more than four days of negotiations, European Union (EU) leaders finally agreed on a landmark stimulus package worth EUR750 billion (USD860 billion) to pull their economies out of recession (IMF 2020E: -10.2%) and tighten the financial bonds holding their 27 nations together. Taking the previously passed stimulus package of EUR500 billion into consideration, the total stimulus passed now stands at EUR1.25 trillion (c.17.0% less than the EUR1.50 trillion euros the ECB said the bloc may need to tackle the crisis). The emergency fund will give out EUR360 billion of low-interest loans and EUR390 billion of grants. This agreement comes at a critical moment when the global pandemic is taking its toll on the continent with the death toll among the European citizens edging above 145,000.
We believe opting for a mixture of grant and loans will reduce the burden of already over-indebted countries such as Italy and Greece while also providing ample time for repayment of the interest-bearing loans, which is expected to end in 2058. The agreement also sends a strong signal of unity among the 27 countries and should strengthen the market’s belief in more integration.
The U.S jobless claims rose for the first time since March, underlining the economic pain from renewed COVID containment measures in many states. Initial claims through the regular state programs rose to 1.42 million in the week ended July 18, up 109,000 from the prior week and greater than the consensus forecast of 1.3 million. The Census Bureau’s weekly Household Pulse survey also showed the number of employed Americans dropped by c. 6.7 million from mid-June through mid-July, representing a pause sign in the economic recovery of the largest economy in the world as COVID-19 cases surge in the country and force businesses to close their doors once again. Amidst renewed containment measures, retail sales and employment are likely to post declines in July. Compounded by the expiration of the USD600/week federal jobless benefits imminent, the outlook for the US economy in H2-20 is bleak.
Global markets were broadly negative, as investor sentiment weakened on the back of escalating tensions between the U.S. and China, and weak economic data from the U.S. and falling Eurozone consumer confidence. US (DJIA: -0.1%; S&P: +0.3%) and European (STOXX Europe: -1.7%; FTSE 100: -2.9%) stocks looked set to record weekly losses. Asian markets were mixed as Japanese (Nikkei 225: +0.2%) stocks closed marginally higher on positive vaccine news in the holiday-shortened week, Chinese (SSE: -0.5%) stocks closed lower on growing Sino - U.S. tensions. Despite the preceding, emerging markets (MSCI EM: +2.1%) shares were still set to end the week higher after a massive stimulus agreement between EU leaders and positive developments from a wave of coronavirus vaccine candidates. Frontier markets (MSCI FM: -1.9%) stocks were set to close lower, as the benchmark Vietnamese Index (-5.0%) dropped by the most in more than a month after a report signalling the first possible local transmission of the novel coronavirus since April 16.
The Monetary Policy Committee (MPC) in its last meeting retained the MPR at 12.5%. All other monetary policy parameters were also held constant – the asymmetric corridor around the MPR was maintained at +200bps/-500bps; CRR at 27.5% and Liquidity Ratio at 30.0%. The committee reiterated that choices remained limited. Tightening, in recognition of increased upside risk to inflation and mounting external sector pressures, would be counterintuitive, as it will further constraint economic growth; while a rate cut is unnecessary and may not necessarily lead to a corresponding decrease in market interest rates, given the weak transmission of monetary policy changes to the real economy and the current economic challenges. The risks to economic growth, especially during the current pandemic, will continue to dominate the body language of the monetary authorities, and as such, guides towards prioritizing and sustaining its expansionary policy drive. Against that backdrop, we do not rule out a further 100bps benchmark rate cut towards the end of the year or in the first quarter of 2021.
According to the CBN, Nigerian banks are restructuring 41% of their total outstanding loans (H1-20: NGN18.90 trillion), which represents NGN7.80 trillion granted to 35,640 clients across the economy, and will allow the banks to change the terms of such loans without classifying them as non-performing. This comes at a time when the COVID-19 pandemic has brought credit challenges to major sectors of the Nigerian economy, thus exposing the banks to increasing NPLs. particularly in the oil & gas, hospitality, and manufacturing sectors. We see this as positive for the banks, as it gives them ample time to recover their funds without necessarily affecting bottom line as well as Capital Adequacy Ratio (CAR). We note, however, that this will enable banks to keep their cost of funds at low levels thereby reducing the real value of money for the fund providers.
Capital Markets: Equities
Sentiments remained weak in the domestic market amidst rising COVID-19 cases in the country as well as persisting FX illiquidity. However, a one-off gain on Thursday, driven by a surge DANGCEM (+6.5%), led the domestic bourse to its largest weekly gain in seven weeks. Thus, the All-Share Index advanced by 0.6% w/w, to 24,427.73 points, also supported by gains in MTNN (+1.7%) and STANBIC (+3.5%). Notably, the Month-to-Date and Year-to-Date losses moderated to -0.2% and -9.0%, respectively. Analysing by sectors, the Oil & Gas (-4.7%) index led the losses, followed by the Insurance (-0.8%), Banking (-0.6%) and Consumer Goods (-0.4%) indices. The Industrial Goods (+0.6%) index was the sole gainer for the week.
Our view continues to favour cautious trading owing to the fact the gains recorded this week were not broad-based. We reiterate that 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 seek trading opportunities in only fundamentally justified stocks.
Money Market and Fixed Income
The overnight (OVN) rate plunged 19.5ppts to 2.2% as inflows from FAAC disbursements to state and local governments (NGN430.03 billion), FGN bond coupon payments (NGN94.42 billion) and OMO maturities (NGN25.36 billion) boosted system liquidity, and outweighed outflows for FGN bond auction debits (NGN178.52 billion).
We expect an expansion in the OVN next week, as expected inflows from FGN bond coupon payments (NGN49.61 billion) may not be sufficient to support liquidity, especially if the conducts an OMO auction.
Trading activities picked up in the Treasury bills secondary market, on the back of the healthy liquidity in the system. Thus, the average yield across all instruments contracted by 68bps to 4.0%. The overall market was majorly impacted by the OMO segment (-96bps to 4.6%), as reduced funding pressures for local banks buoyed participation, amid weak participation from FPIs. At the NTB segment (-17bps to 1.8%), retail demand continues to support activities despite the abysmal yield in the space.
In the coming week, the expected strain in system liquidity should impede the demand for instruments in the space. At the NTB segment, we expect market participants to switch focus to the primary market where the CBN will be rolling over maturing bills worth NGN256.95 billion.
Trading in Treasury bonds secondary market was bullish, as investors re-invested maturities and coupon payments, and looked to cover lost bids at the PMA. Thus, the average yield contracted by 50bps to 7.3%. At the PMA, the DMO offered instruments worth NGN130.00 billion to investors through three re-openings – 12.50% JAN 2026 (Bid-to-offer: 2.9x; Stop rate: 6.00%), 12.50% MAR 2035 (Bid-to-offer: 1.7x; Stop rate: 9.50%) and 12.98% MAR 2050 (Bid-to-offer: 5.9x; Stop rate: 9.95%) –, and a new issue – 9.80% MAR 2050 (Bid-to-offer: 3.7x; Stop rate: 9.80%) –, which has the second-lowest coupon rate in the Treasury bonds market. Despite a total subscription of NGN470.13 billion, the DMO eventually allotted instruments worth NGN177.00 billion, resulting in a bid-cover ratio of 2.7x.
Next week, we expect investors in the Treasury bonds market to continue to cherry-pick due to the relatively attractive yields in the space.
The CBN’s foreign reserves sustained its descent as FX outflows continue to outpace inflows, thus dipping by USD86.69 million w/w to USD36.00 billion. Nonetheless, the naira weakened against the US dollar by 0.3% w/w to NGN389.50/USD at the I&E window, and by 0.4% to NGN472.00/USD at the parallel market. In the forwards market, the naira weakened against the US dollar across the 1-month (-0.3% to NGN391.38/USD), 3-month (-0.4% to NGN395.16/USD), 6-month (-0.6% to NGN400.14/USD) and 1-year (-1.1% to NGN418.10/USD) contracts.
Despite the CBN’s stronger commitment towards exchange rate unification, we still see legroom for the currency to depreciate further, 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 as the CBN funds the backlog of unmet FX demand.