Economic and Market Report –Week-ended July 23, 2021

Economic and Market Report –Week-ended July 23, 2021

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Global Economy
The Governing Council of the European Central Bank (ECB) elected to keep the key policy rate unchanged at 0.00% at its July policy meeting. The Council noted that the decision was hinged on the need to push inflation higher and mitigate the risk posed by the Delta variant of the COVID-19 pandemic on the region’s economic recovery. Notably, the ECB announced a shift in its inflation targeting as it now expects the interest rates to be at their present or lower levels until it sees inflation stabilising at 2.0% over the medium term (Previously: inflation target of below, but close to 2.0%). Asides from that, the Governing Council also elected to continue to conduct net asset purchases under the Pandemic Emergency Purchase Programme (PEPP) with a total envelope of EUR1.85 trillion until at least the end of March 2022. Given the change in the inflation target, we expect the ECB’s monetary policy stance to remain accommodative over the medium term, with the likelihood of the net asset purchase program extending beyond March 2022.

According to the United States Department of Labor, the initial jobless claims in the U.S. increased by 51,000 to 419,000 in the week ending 17th July (vs week ending 10th July: 368,000) – the highest since the week ending 14th May (444,000). We believe the major contributing factor to the increase is the fear of another wave of the COVID-19 pandemic among unvaccinated parts of the population, given increased infection cases from the delta variant of the virus. Accordingly, the unexpected rise in initial jobless claims was primarily concentrated in four states – Michigan (+13,083 w/w), Texas (+9,946 w/w), Kentucky (+8,898 w/w) and Missouri (+5,751 w/w) as they contributed 73.9% of the total increase during the review period. Although the robust vaccination program is expected to sustain the reopening of the economy, we expect the continued spread of the delta variant of the virus to amplify the slacks in the job market. Consequently, we expect the jobless claims to rise slowly in the short term.

Global Markets
Global stocks were broadly bullish as the appetite for risk assets strengthened, following the renewed optimism about global economic recovery, which outweighed concerns over rising COVID-19 cases. Consequently, U.S. (DJIA: +0.4%; S&P: +0.9%) stocks rebounded from the losses recorded in the prior week as a plethora of earnings reports boosted sentiments amid the rally in tech stocks. In Europe, the STOXX Europe (+1.0%) managed to eke out a weekly gain. In comparison, the FTSE 100 (0.0%) was set to end the week on a flattish note as investors traded cautiously following dovish comments from the ECB and concerns about the resurging Delta variant. Asian markets posted mixed performances, with the Nikkei 225 (-1.6%) on track for a weekly loss as worries that the ongoing Tokyo 2020 Olympics could worsen the health crisis dampened investors sentiments. Elsewhere, the SSE (+0.3%) gained marginally despite lingering concerns about Beijing’s crackdown as well as the surge in Covid-19 Delta variant cases. Emerging (MSCI EM: -1.0%) and Frontier (MSCI FM: -0.4%) markets stocks were on track to close lower following losses in South Korea (-0.7%) and Vietnamese (-2.4%) markets, respectively.

Nigerian Economy
The Federation Accounts Allocation Committee (FAAC) shared NGN733.10 billion amongst the three tiers of government in July (June: NGN606.96 billion) from the June revenue – the highest since March 2020 (NGN780.93 billion). We understand that the increase was supported by a substantial rise in inflows from Petroleum Profit Tax (PPT), Companies Income Tax and Oil & Gas Royalties. Of the total amount, the FGN got 41.6% or NGN304.95 billion (June: NGN242.12 billion), State Governments received NGN215.57 billion (June: NGN194.20 billion), while the Local Governments received NGN161.10 billion (June: NGN143.74 billion). We expect the amount to be shared by the tiers of government to remain stable at current levels (NGN650.00 billion to NGN750.00 billion) over the coming months. Our prognosis is hinged on the impact of (1) official exchange rate alignment with the IEW and (2) rally in oil prices, which would partly offset the decline in crude oil production volume.

The Monetary Policy Committee (MPC) is expected to hold its fourth meeting of the year on the 26th and 27th of July. We expect the Committee to assess the developments in the domestic and external macroeconomic and financial markets since its last meeting in May and provide forward guidance on the timing of a change in monetary policy stance. Although inflation (17.75% as of June) is still well ahead of the CBN’s medium target of 6.0%-9.0%, we do not expect the Committee to make a U-turn from its short-term objective of supporting economic recovery. Particularly as growth remains fragile and macroeconomic vulnerabilities persist. As a result, we expect the Committee to maintain the status quo on all monetary policy parameters at this meeting. However, we expect the underlying tone of the Committee to be neutral, given the still elevated domestic inflationary pressures and imbalances in the external sector.

Capital Markets
Despite the shortened trading week due to the public holidays on Tuesday and Wednesday, the bulls regained dominance of the market. We observed that investors flocked into the shares of (1) TOTAL on the back of the impressive Q2-21 earnings release accompanied with an interim dividend of NGN4.00/s and (2) DANGCEM due to expectation of the second tranche of its share buyback programme. Based on the preceding, the All-Share Index advanced by 1.9% w/w to close at 38,667.90 points. Accordingly, the MTD gain rose to 2.0%, while the YTD loss moderated to -4.0%. However, activity levels were weak, as trading volumes and value declined by -11.1% w/w and -52.1% w/w, respectively. Specifically, investors’ interest in TOTAL (+21.0%), GUINNESS (+9.1%) and DANGCEM (+7.8%) were the primary drivers of the positive performance this week. Performance across sectors was broadly positive. Save for the Insurance (-0.7%) index that closed in the red; the Oil and Gas (+7.5%), Industrial Goods (+4.1%), Consumer Goods (+0.6%), and Banking (+0.4%) indices closed in the green.

In the week ahead, we believe investors will be focused on the outcome of the MPC meeting to gain further clarity on the movement of yields in the FI market. We also expect the NGX floor to be flooded with corporate earnings as more companies publish their unaudited H1-21 numbers, accompanied by dividend declarations. We believe this should provide respite for market performance. Overall, we advise investors to take positions in only fundamentally justified stocks as the weak macro story remains a significant headwind for corporate earnings for corporate earnings.

Money Market and Fixed Income
The overnight rate expanded by 24.00ppts w/w to 28.8%, as debits for CRR, FGN bond (NGN137.97 billion) and CBN’s weekly auctions outweighed system inflows from FAAC disbursements (c.NGN428.14 billion), FGN bond coupon payments (NGN134.74 billion) and OMO maturities (NGN20.00 billion).

We expect the OVN rate to remain elevated in the coming week, as expected inflows from FGN bond coupon payments (NGN53.28 billion) and OMO maturities (NGN16.84 billion) may not be significant enough to saturate system liquidity.

Treasury Bills
The Treasury bills secondary market extended its bullish run this week, following sustained demand for higher yielding OMO instruments. Thus, average yield across all instruments contracted by 28bps to 7.8%. Across the market segments, the average yield at the OMO segment contracted by 73bps to 8.6% in the absence of fresh supply from the CBN. Elsewhere, the average yield at the NTB segment expanded by 20bps to 6.9%, as participants sold off positions to meet short term funding obligations.

In the coming week, we maintain our view of a higher average yield on T-bills, given that we expect system liquidity to remain strained. Also, we expect quiet trading at the NTB market as participants position for the PMA scheduled to hold on 29 July, with the CBN set to roll over NGN216.19 billion worth of maturities.

The Treasury bonds secondary market closed the week on a bullish note, as (1) yields adjusted to reflect the lower rates at Monday’s auction, and (2) market participants looked to the secondary market to fill unmet demand. Consequently, the average yield contracted by 7bps to 12.1%. Across the benchmark curve, the average yield decreased at the short (-7bps), mid (-7bps) and long (-10bps) segments due to investor’s demand for the JAN-2026 (-17bps) and MAR-2027 (-12bps) and JUL-2034 (-39bps) bonds, respectively. At the bond auction, the DMO offered instruments worth NGN150.00 billion to investors through re-openings of the 13.9800% FGN FEB 2028 (Bid-to-offer: 1.13x; Stop rate: 12.35%, previously: 12.74%), 12.4000% MAR 2036 (Bid-to-offer: 1.47x; Stop rate: 13.15%, previously: 13.50%) and 12.9800% FGN MAR 2050 (Bid-to-offer: 3.13x; Stop rate: 13.25%, previously: 13.70%) bonds. We note that the demand was less (subscription: NGN286.11 billion; bid-to-offer: 1.9x) compared to June’s auction (Subscription: NGN417.48 billion; Bid-to-offer: 2.8x). The DMO eventually under-allotted instruments worth NGN137.97 billion, resulting in a bid-to-cover ratio of 2.1x.

In the coming week, we expect investors to take advantage of the increased supply in the market and realign their positioning on the yield curve in anticipation of further decline in bond yields.

Foreign Exchange
Nigeria’s FX reserves recorded its highest weekly accretion in twenty-five weeks, as the gross reserves position increased by USD53.48 million w/w to USD33.17 billion (19th July 2021). Meanwhile, the naira depreciated by 0.3% to NGN411.50/USD at the I&E window (IEW) but appreciated by 0.4% to NGN504.00/USD in the parallel market. At the IEW, total turnover (as of 22nd July 2021) decreased by 59.3% WTD to USD306.01 million, with trades consummated within the NGN403.22 – 420.95/USD band. In the Forwards market, the rate appreciated across the 1-month (+0.1% to NGN413.01/USD) and 3-month (+0.1% to NGN416.55/USD), 6-month (+0.2% to NGN423.20/USD) and 1-year (0.2% to NGN436.29/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.



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