November 8, 2019/Cordros Report
The impact of trade tensions and weakened global demand continued take a toll on trading activities in China. From a year ago, export shrank by 0.9% y/y, printing the third consecutive month of declines. Perusing the breakdown provided, exports to the US, which constitutes 19.2% of total China’s exports fell by 16.2% y/y. Furthermore, exports to Japan and Australia also declined by 7.8% y/y and 0.6% y/y, respectively. Similarly, for the sixth consecutive month, imports dipped by 6.4% y/y. Imports from the US dropped by 14.3% y/y. Looking ahead, we expect the possible trade deal between the US and China to lift existing trade tariffs to support improved trade position in coming months.
According to the Federal Statistics Office, Germany’s trade balance for September printed +15.9% y/y, the largest expansion in three months, providing some respite for Europe’s largest economy which has suffered from the indirect impact of the U.S-China trade war. Exports swung from a negative terrain in the prior month to +4.7% y/y, the largest expansion in five months. Improved exports were largely driven by increased demand from EU member states, which absorbed 59.9% of the total exports. In the same vein, imports widened by +2.2% y/y, the first growth recorded in five months, driven by improved domestic consumption. While we don’t believe the export-reliant economy is completely out of the woods, the reading underscores a possibility of improved economic growth in Q3-19. Furthermore, festive induced demand in November and December is expected to boost export and overall trade position in last quarter of the year.
For a third straight week, appetite for risk assets across the globe has been consistently encouraging. This is hardly surprising, given the growing optimism that the US and China will roll back some of the tariffs currently in place should the phase 1 trade deal get a nod. More so, monetary policy accommodation across developed markets, which continues to boost equity valuations, has inspired renewed hope among equity investors, in our opinion. For clarity, equity markets across our coverage universe were set to close the week in the green – US (DJIA: +1.2%, S&P: +0.8%), Euro Area (FTSE: +1.0%, Euro Stoxx: +2.1%), and Asian (CSI 300: +0.5%, Nikkei: +2.4%) markets. Furthermore, even as the frontier market (MSCI FM: +0.0%) stocks were flat, Emerging market (MSCI EM: +2.3%) equities posted a strong return, supported by solid outturn in South Korea (+1.8%), Taiwan (+1.3%), and Brazil (+1.3%).
EconomyAs part of the FGN’s policy surrounding the closure of all land borders in Nigeria, it was announced that the FGN has suspended the supply of petroleum products to filling stations within 20km of all land borders. Cross border smuggling of PMS, which is solely imported by the NNPC, has aggravated pressure on Nigeria’s finances via higher petrol importation, and thus, greater subsidy payments. In September and October, domestic PMS consumption declined by 0.4% and 11.7% m/m, respectively. This, we believe is linked to a reduction in illegal exportation of PMS to neighbouring West African countries where PMS is sold at more than a 2x premium. Data from Global Petrol Prices, shows that PMS sells for USD0.40 in Nigeria, when compared to Benin (USD0.91), Togo (USD0.96), Chad (USD0.88) and Cameroon (USD1.07). Against that backdrop, if border closure is sustained, our estimates suggests an annual subsidy saving of NGN105.55 billion.
Amidst recent CBN’s policies directed towards stimulating growth, the impact of which has significantly softened fixed income yields to just above inflation levels, buying interest in stocks with attractive dividend yields, and sizeable upsides, led the Nigerian equities market to a positive close for the first time in eight weeks. Gains in trading sessions at both ends of the week drove the All-Share Index up by 0.1% w/w to 26,314.49 points, and reduced the YTD loss to 16.3%. On sectors, the Banking (+8.5%) index recorded its highest gain since the week ended 23 August 2019 driven by interest in Tier I Banks stocks. The Industrial Goods (+2.1%) index followed suit with CCNN gaining 10.6% w/w on the announcement of its merger with Obu Cement; the Insurance (+0.4%) index also closed positive. Conversely, the Consumer Goods (-5.9%) and Oil & Gas (-0.4%) indices closed in the red.
In our view, the market is a reflection of investors’ views about the expectations for the economy given the still uninspiring macro story. Nonetheless, we expect the market might benefit over the short-term from recent policy directions as investors seek alpha-yielding opportunities in the face of lower yields in the fixed income market.
Average system liquidity, although still robust, declined slightly this week (NGN409.33 billion vs. NGN421.33 billion last week), following outflows from FX and OMO (NGN232.45 billion) auctions which offset the inflows from OMO maturities (NGN403.85 billion) towards the end of the week. Consequently the overnight (OVN) rate rose by 150bps w/w to close at 5.57%.
In the coming week, OMO maturities (NGN405.92 billion) are expected on the 14th of November, which should support system liquidity and keep the rate tethered. Also, the substantial liquidity position of the market (NGN737.55 billion) further substantiates our expectations for the coming week.
Trading in the Treasury bills market was bearish, as the effects of the CBN’s directives on OMO bills continued to reverberate in the market. Trading volumes were very sparse, with total volume traded declining 23.0% to NGN1.03 trillion. Foreign investors remained net sellers of Treasury bills, as they opted to go for the more attractive OMO bills at the auction. Consequently, the average yield widened by 68bps to 13.1%.
Amidst the persisting illiquidity in the NTB market, we expect yields to pare next week as local players seek to reinvest significant maturities expected. At the NTB PMA, the CBN will offer NGN125.24 billion worth of bills to investors.
Activities in the bond market remained bullish as local PFAs and Asset Managers sought to re-invest OMO maturities and other excess funds amidst the illiquidity of the NTB market. Consequently, the average yield pared by 27bps to settle at 12.9%. Also, there were yields declines across all trading instruments in the week, signal to the increased interest from investors, with the APR-2023 instrument (-99bps) recording the largest decline in yield.
We expect recent developments in the Treasury bills space to provide active trading at the bond market as investors’ look for alternatives. Additionally, market players will look to invest an expected NGN59.12 billion in coupon payments. In effect, yield are expected to trend downwards.
Foreign exchangeNigeria’s FX reserves continued its descent, declining by USD20.24 million WTD (06 Nov 2019) to USD40.23 billion, the lowest since 23 January 2019. Meanwhile, the CBN sustained its weekly FX intervention, selling USD210.00 million across the different segments of the FX market – USD100.00 million to the Wholesale segment, USD55.00 million to the SMEs segment, and USD55.00 million to the Invisibles segment. Nonetheless, the naira depreciated by 0.18% WTD to NGN362.75/USD at the I&E window but closed flat at NGN360.00/USD at the parallel market. Elsewhere, total turnover at the I&E window increased by 28.85% WTD to USD1.19 billion, with trades consummated within the NGN357.00 – 362.75/USD band. In the Forwards market, the naira weakened across all contracts – 1-month (-0.1% to NGN361.12/USD), 3-month (-0.3% to NGN369.67/USD), 6-month (-0.5% to NGN384.49/USD) and 1-year (-0.3% to NGN410.70/USD).
Looking ahead, we expect sustained CBN’s intervention to keep the naira resilient in the short to medium term. Thus, our estimate suggests no naira devaluation in 2019.