Economic and Market Report –Week-ended July 09, 2021

Economic and Market Report –Week-ended July 09, 2021

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Global Economy
Private sector activity in the Eurozone expanded to a 15-year high in June in line with the faster expansion across factory activities. According to the IHS Markit, the Eurozone composite PMI surged to 59.5 points in June (May: 57.1 points) – the highest since June 2006, reflecting the pent-up demand that accompanied the continued easing of COVID-19 restrictions during the period. While the Manufacturing PMI (63.4 points vs May: 63.1 points) rose to a new record high, the Services PMI (58.3 points vs May: 55.2 points) grew faster to its highest level since July 2007 as the general easing of COVID-19 restrictions helped to support business activity. The above 50 index point readings in the manufacturing and services sectors suggest that the regional bloc is on track for a cyclical recovery following the reopening of the economy, given the vaccination progress. However, we note that the imbalance between growing demand and supply constraints could create room for higher inflationary pressure over the coming months.

According to China’s National Bureau of Statistics (NBS), the headline inflation rate slowed to 1.1% y/y in June (May: 1.3% y/y). We highlight that the moderation in the headline index was due to a sharp decline in food prices (-1.7% y/y vs May: +0.3% y/y) given the sustained fall in pork prices (-36.5% y/y vs May: -23.8% y/y) in line with the recovery of the country’s pig herds from the African swine fever. Meanwhile, the non-food basket (1.7% y/y vs May: 1.6% y/y) increased slightly following the rise in the prices of transportation (5.8% y/y vs May: 5.5% y/y) and utilities (0.9% y/y vs May: 0.7%). On a month-on-month basis, consumer prices declined for the fourth consecutive month to -0.4% m/m (May: -0.2% m/m). While we expect the improved food supply to moderate food prices in the near term, increased mobility and higher energy prices would keep the non-food index higher. Overall, we expect the headline inflation to remain rangebound at 0.9% to 1.2% in the near term.

Global Markets
Global stocks stumbled this week as investors were rattled by the surge in COVID-19 Delta variant cases which raised fears that the vaccine-induced recovery may be truncated even as vaccination rates remain uneven globally. In the U.S., the DJIA (-1.0%) and S&P (-0.7%) were on track to end a two-week bullish run as growing anxiety about economic rebound outweighed hopes of reflation trade even as investors awaited Q2 earnings releases from big banks. In Europe, the STOXX Europe (-0.5%) and FTSE 100 (-0.9%) were set for a weekly loss as renewed interest in treasuries drove a rally in bond markets and dampened appetite for risk assets amid ECB reduced stimulus. Asian markets posted mixed performances, with the Nikkei 225 (-2.9%) poised to end the week in the negative territory as the declaration of a state of emergency in Japan sparked sell-offs. In comparison, the SSE (+0.2%) managed to eke out a gain despite lingering concerns about China’s cybersecurity crackdown as well as selloffs in tech stocks. Similarly, the Emerging (MSCI EM: -2.9%) stocks also mirrored the downturn across global equities consequent upon losses in South Korea (-1.9%) which offset gains in China (+0.2%). Similarly, the Frontier (MSCI FM: -1.3%) declined following Kuwait’s (-0.4%) market losses.

Nigerian Economy
During the public consultation of the draft 2022-2024 Medium-Term Expenditure Framework (MTEF), the Minister of Finance gave an update of the FGN’s fiscal performance in 5M-21. Based on the presentation document, Nigeria’s actual revenue (NGN1.84 trillion) in 5M-21 grossly underperformed the prorated budgeted revenue (NGN3.33 trillion) by 44.6%, largely due to a 49.5% decline in oil revenue (NGN423.00 billion vs prorated budget: NGN837.92 billion) as lower oil production volume capped the gains from oil prices during the period. Meanwhile, actual expenditure (NGN4.86 trillion) underperformed by 14.2% compared to the prorated budget (NGN5.66 trillion) with recurrent non-debt expenditure (NGN1.87 trillion or 38.5% of total expenditure) and debt service (NGN1.80 trillion or 37.0% of expenditure) contributing the most significant chunk of total spending. Accordingly, the total fiscal deficit printed NGN3.01 trillion – 29.1% above the prorated budget deficit. Based on our H2-21 domestic macroeconomic outlook report, we expect a 75.6% performance ratio for 2021E actual revenue (vs 2020FY: 73.4%) and assume a budget implementation rate of 90.5%. Accordingly, we expect the fiscal deficit (excluding GOEs and project-tied loans) to range between NGN5.01 trillion and NGN6.51 trillion in 2021E.

On 7th July, the Senate approved the FGN’s request to borrow NGN2.34 trillion (or USD5.72 billion using the NAFEX rate of NGN410.00) to fund the 2021FY budget in line with the 2021 Appropriation Act. We understand that the Senate Committee on Local and Foreign Loans recommended that the Eurobond issuance be USD3.00 billion but not more than USD6.18 billion in the international capital market to finance part of the 2021E deficit (NGN4.89 trillion excluding GOEs and project-tied loans). We note that the Senate also approved that the amount authorised may be raised from multiple sources, including the International Capital Market and any other Multilateral or Bilateral sources as may be available. Overall, we see scope for reduced domestic borrowings over the rest of the year if the (1) Eurobond sale covers the amount the FGN expects to raise (USD5.72 billion), (2) World Bank approves the pending USD1.50 billion loan and (3) the government successfully borrows c.NGN900.00 billion from unclaimed dividends and dormant account balances.

Capital Markets
The local bourse was not immune to the rout in global equities, as profit-taking activities in the last two trading sessions of the week (Thur: -0.1%; Fri: -1.2%) completely wiped off the week’s gains and pushed the market into the red. Accordingly, the All-Share Index fell below the 38,000 psychological mark, as it declined by 0.6% w/w to 37,994.19 points. Notably, selloffs in AIRTELAFRI (-10.0%) and DANGSUGAR (-3.0%) drove the weekly loss. Accordingly, the MTD and YTD return settled at 0.2% and -5.7%, respectively. On activity levels, trading volume rose by 32.0% w/w, while trading value declined by 14.2% w/w. Elsewhere, performance across sectors was broadly positive, as the Oil & Gas (+6.5%) index topped the gainers’ chart trailed by the Banking (+3.3%), Industrial Goods (+2.2%) and Insurance (+2.2%) indices. The Consumer Goods (-0.3%) emerged as the week’s sole loser.

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 their H1-21 earnings announcement. However, we do not rule out the possibility of continued profit-taking activities. As a result, we think the local bourse will likely exhibit a zig-zag pattern. Therefore, we advise investors to take positions in only fundamentally justified stocks.

Money Market and Fixed Income
The overnight rate expanded by 800bps w/w to 20.5% as debits for CRR and CBN’s weekly auctions (FX and OMO: NGN17.00 billion) auction outweighed inflows from OMO maturities (NGN20.00 billion).

Next week, we expect improved system liquidity and, by extension, moderation in the OVN rate, as inflows from the maturing JUL-2021 bond (NGN561.05 billion), FGN bond coupon payments (NGN40.68 billion) and OMO maturities (NGN10.00 billion) outweigh funding requirements.

Treasury Bills
The Treasury bills secondary market closed on a bearish note, as liquidity conditions deteriorated as the week progressed. Consequently, the average yield across all instruments expanded by 3bps to 8.4%. Across the market segments, the average yield at the NTB segment expanded by 4bps to 6.6%. Elsewhere, the average yield at the OMO segment contracted by 5bps to 9.9% given improved demand in the secondary market following the CBN’s two-week hiatus from the primary market. We highlight that the CBN returned to the market this week, and sold NGN17.00 billion worth of OMO bills to market participants and maintained the stop rates across the three tenors, as with prior auctions.

In the coming week, we expect the average yield on T-bills to decline as we envisage improved system liquidity. Also, we expect quiet trading at the NTB market as participants position for next week’s PMA, with the CBN set to roll over NGN109.43 billion worth of maturities.

Bonds
Bearish sentiments also returned to the bonds secondary market as demand for the short and mid dated instruments weakened. Specifically, average yields expanded by 8bps to 11.7%. Across the benchmark curve, average yield expanded at the short (+4bps) and mid (+20bps) segments following sell-offs of the JAN-2026 (+25bps) and NOV-2029 (+27bps) bonds, respectively; while it pared at the long (-3bps) end following sustained buying interest in the APR-2037 (-13bps) bond. On Wednesday, the DMO published the Q3-21 bond issuance calendar, which showed no changes in volumes offered. However, the short and mid dated instruments were changed to the FEB-2028 and MAR-2036 bonds, respectively (previously MAR-2027 and MAR-2035).

In the coming week, we maintain our expectations of lower yields as investors take positions ahead of the maturing JUL-2021 bond. Also, we expect the release of the June 2021 CPI (Cordros Forecast: 17.83%) to further shape market sentiments and the direction of yields.

Foreign Exchange
Nigeria’s FX reserves sustained its decline, dipping USD113.15 million w/w to USD33.12 billion (6th July 2021). Meanwhile, the naira depreciated by 0.1% to NGN411.75/USD and 0.4% to NGN505.00/USD at the I&E window (IEW) and parallel market, respectively. At the IEW, total turnover (as of 8th July 2021) decreased by 24.5% WTD to USD526.79 million, with trades consummated within the NGN400.00 – 420.86/USD band. In the Forwards market, the rate was flat at the 1-month (NGN413.52/USD) contract but appreciated across the 3-month (+0.1% to NGN417.65/USD), 6-month (+0.1% to NGN423.69/USD) and 1-year (+0.1% to NGN435.54/USD) contracts.

We expect improved liquidity in the IEW over the medium term, given our expectation of (1) increased oil inflows in line with the rise in crude oil prices, and (2) inflows from FCY borrowings. Accordingly, we expect the naira to remain relatively range-bound (NGN410.00/USD – NGN415.00/USD) at the IEW.

 

Cordros


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