December 6, 2019/Cordros Report
China’s factory activities unexpectedly soared in November, as the manufacturing PMI expanded to 50.2 points (Oct: 49.3 points) – which was the first growth in 7-month. For clarity, yuletide induced demand spurred strong readings in the new order (+1.7 points) and import order (+2.9 points) sub-index, the impact of which had a positive pass-through to production (+1.8 points). Elsewhere, with the recent developments underscoring rising uncertainties in the trade conflict, which bodes ill for external demand, new export orders fell for the 18th consecutive months, albeit at a slower pace, with the sub-index rising to 48.8 points from 47.0 points in the prior month. Whilst we highlight that China’s economy is not out of the woods, however, we still expect PMI to remain strong in December, driven by festive demand.
US manufacturing activities continued its downward spiral for the fourth consecutive months In November, as the ISM manufacturing PMI reading fall below the consensus estimate of 49.2 points, printing 48.1 points (Oct: 48.3). For evidence, significant declines recorded across the new order (-1.9 points), employment (-1.1 points) new export order (-2.5 points), pressured production activities, which contracted, although at a slower pace (49.1 points), while new export order remains subdued. With the Manufacturing activities stuck in a mild recession with little prospect of recovery in the near-term, there are indications of a soft patch in Q4-19
Following President Trump’s tariffs on steel and aluminum imports from Brazil and Argentina, as well as possible delay in trade deal until after the 2020 election, market sentiment in the US (DJIA: -1.3%; S&P: -0.7%) dampened. Thus, accumulated losses at the start of the week wiped out gains recorded in the latter part. Meanwhile, while the European stock (Euro Stoxx:-1.2%; FTSE100: -2.2%) markets traded broadly softer, the Asian market (Nikkei 225: +0.3%; CSI 300: +1.9%),) gained on the account of positive phase-one trade deal progress. Consequently, positive outturn in China (+1.9%) and Kuwait (+2.2%) supported overall performance in the emerging (MSCI EM: +0.3%) and frontier market (MSCI FM: +0.7%) Indices respectively
According to data from the National Bureau of Statistics’ (NBS) Selected Banking Sector report for Q2-19, commercial bank credit to the private sector expanded by 6.89% to NGN16.53 trillion, the highest since Oct-2018, and thus, reflecting the impact of CBN’s LDR policy. Elsewhere, the non-performing portion of total loans (NPL) dipped by 23.1% q/q, thereby setting the stage for a 264bps decline in the sector’s NPL ratio to 6.7% (Q2-19: 9.0%) – the lowest in 15 quarters. Whilst the recent positive trend for the sector may be maintained through the rest of 2019 and also 2020, we are cautious about our outlook for NPLs given the expectation of increased risk ass creation in the face of the LDR policy action which will induce continuous credit extension.
In our last PMI note, we argued that the blend of festive induced spending and FX stability is expected to strengthen business performance and sentiments. True to our prognosis, Nigeria’s composite PMI (59.7 points) printed the best November reading historical. To start with, the manufacturing PMI rose by 1.1 points to 59.30 index points – the highest since December 2019, following significant increases recorded across the production level (+0.8 points), new order (+1.5 points), and employment level (+0.9 points). Similarly, the growth recorded in business activities (+0.7 points) and a new order (+1.0 point) had a positive pass-through to the non-manufacturing PMI, which grew significantly by 1.9 points to 60.1 index points. Elsewhere, sustained closure of land borders continued to mount pressure on prices, as both input (+0.9 points) and output (+0.6 points) prices increased. For December, we still maintain our view of a strengthened PMI, induced by festive spending and FX stability.
This week, the domestic equities market shook off the CBN’s policy-induced rally, as sentiments turned negative after four consecutive weeks of gains. With losses recorded across the 5 trading sessions of the week, the All-share index shed 0.54% to settle the YTD loss at -14.56%. Analysing the performance by sectors, significant losses recorded in the industrial Goods and Banking sector dampened the market performance, after the indices respectively slid by -1.27% and -1.16%. Also, the insurance (-0.87%) and Oil and Gas (-0.43%) indices closed negative. Conversely, gain of +1.71% was recorded in the Consumer Goods sector.
In our view, given the risked off sentiment dominating the domestic market, we expect the market to shed points in the coming week, except we see a policy-driven catalyst. Nevertheless, valuations remain attractive, hence we expect pockets of gains over the final month of the year as fund and portfolio managers realign portfolios prior to the start of 2020.
Money market and fixed income
The overnight (OVN) rate trended lower by 143bps, closing the week at 3.07%, as the market remains inundated, following inflows from OMO bills maturities (NGN507.60 billion) and retail FX refunds (NGN370.00bn), which offset the outflow from OMO bills auction (NGN190.82 billion).
In the coming week, OMO maturities (NGN102.33 billion) are expected on the 12th of December, 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.
Activities in the Treasury bills secondary market were bullish with the average yield paring marginally by 1bp to 7.28%, as demand remained strong in the face of a shallow market. Elsewhere, yields on OMO bills widened by 11bps to 14.0%. With market players pushing for higher yield, the OMO bills auction was under-subscribed, with Bid-to-Offer at 2.11x, as the CBN offered instruments worth NGN400.00 billion – NGN50.00 billion of the 96DTM, NGN100.00 billion of the 187DTM, and NGN250.00 billion of the 362DTM –at respective stop rates of 11.50% (same as the previous) and 13.50% (same as the previous). However, no sale was recorded on the 187-day bills.
We expect trading volumes to start to temper in the NTB market, as the average yield trends sit comfortably in single-digit terrain. However, the average OMO yield is expected to remain around the same level, with a slight increase in the coming week.
Bonds were actively traded, as local investors remain on the hunt for double-digit yield. Consequently, the average yield pared by 42bps to settle at 11.63%. Yields declined across all trading instruments in the week, save for on one instrument – FEB-2020 bond (+3bps), which recorded expansion. The MAR-2024 bond (-1174 bps) recorded the largest decline in yield.
We expect trading to be bearish in the coming week as investors continue to seek higher-yielding instruments.
Amidst continued sell-offs by offshore investors, Nigeria’s FX reserve dipped by USD44.15 million WTD (4 Dec 2019) to USD39.66 billion. Meanwhile, the CBN sustained its weekly FX interventions, 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 weakened by 0.07% WTD to NGN363.14 /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 43.27% WTD to USD923.78 million, with trades consummated within the NGN310.00 – 363.83/USD band. In the Forwards market, the naira weakened across all contracts – 1-month (-0.1% to NGN366.27/USD), 3-month (-0.1% to NGN373.02/USD), 6-month (-0.3% to NGN381.02/USD) and 1-year (-2.9% to NGN396.56/USD).
Despite the rate of decline in FX reserves orchestrating fears of possible currency devaluation, our model suggests that the CBN has enough ammunition to sustain its naira defense over 2019 and H1-20.