February 14, 2020/Cordros Report
Beating analyst expectations, China’s consumer price index jumped by 90bps in January to 5.4% y/y, the highest level in eight years, as pork prices soared due to the coronavirus epidemic and stronger demand over the Lunar New Year period. Food inflation expanded by 20.6% y/y, the highest in since April 2008, as pork prices rose for the 11th consecutive month. Also, non-food inflation expanded by 1.6% y/y, following pressure from clothing, healthcare, and transport inflation. In our view, the virus outbreak has altered the supply and demand dynamics in China, with supply staying at a relatively low level except for the medical sector. Against that backdrop, we expect inflation to maintain its upward trajectory.
Economic activities were benign in Germany in Q4-19, as the export-oriented industry’s woes continued to weigh on growth. The economy grew slower by 0.4% y/y (vs Q3-19, revised growth of 0.6%), as the weaknesses in global demand continue to take a toll on export. Also, private and state consumer spending lost significant momentum in the period under review. From a quarter ago, the economy recorded no growth. With export to China accounting for 3% of Germany’s GDP, economic performance in Q1-2020 will largely depend on the impact of the coronavirus on Chinese demand. Similarly, with industrial and manufacturing activities still weak, the economic outlook is uninspiring in our view.
Global equity markets were mixed as market players sorted through contrasting data from China on how quickly the coronavirus is spreading and whether the outbreak would cause long-lasting damage to the global economy. US (DJIA: +1.1%; S&P: +1.4%) equities were up as investors in the area anticipate a possible V-shaped economic recovery from the virus while European (Euro Stoxx: +1.2%; FTSE 100: -0.5%) shares were mixed. Asian markets were mixed as Japanese (Nikkei 225: -0.6%) stocks fell on the news of the first virus related death in the country, while Chinese (CSI 300: +2.3%) stocks surged on expectations of further monetary stimulus to mitigate the impact of the coronavirus epidemic on the global economy. Emerging markets (MSCI EM: +1.3%) were boosted by the positive showing in China while frontier markets (MSCI FM: -1.4%) equities eased as weak corporate earnings continue to weigh on investor sentiment.
The FDMQ Securities Exchange Limited announced the introduction of long-term monthly naira-settled OTC futures contracts, which provide a FX rate hedge of up to 5 years. This is against the current market structure where the longest tenor offered by the CBN is over 13-months. The new monthly futures contracts apply to new foreign inflows; foreign transactions executed prior to this require the CBN’s approval. Theoretically, the new longer-term contracts should ordinarily increase foreign inflows into the economy and shore up FX reserves. However, the key concern for us is the availability of long term investible and highly liquid instruments with high yielding returns. Increased inflows into the bond market would have been likely, however, foreign traction in the bond market has dipped significantly following Nigeria’s removal from JPMorgan Government Bond Index-Emerging Markets Index (GBI-EM) in 2015.
The trajectory of consumer prices in January was in line with our thoughts. From our price checks, we note that the festive-induced demand, which contributed immensely to the price surge witnessed in December (0.85% m/m), has moderated. Beyond that, the initial price acceleration which greeted the closure of land borders has also waned. In fact, FEWSNET alluded that market supplies of tubers, millet, rice, and maize are enormous despite the conclusion of the main harvest season. Thus, we modeled a 13bps decline in food inflation to 0.85% m/m. Elsewhere, we believe the slight increase in the core basket in December, which was driven by diesel prices (+2.10% m/m), has run its course. Thus, we have cut our m/m core inflation forecast by 2bps to 0.80% (previously: 0.82% m/m). Tying it all together, we expected headline m/m to print 0.84%. However, given the unfavourable base effect, headline y/y is projected to rise by 13bps to 12.12%.
Weak sentiments continued to dominate the domestic equities market, as the All-Share Index plummeted by 1.11% to 27,755.87 points – the third consecutive weekly decline, as investors dumped NESTLE, MTNN, and GUINNESS stocks. Consequently, the YTD and MTD returns settled at 3.4% and -2.7%, respectively. Analysing by sectors, significant losses recorded in the Consumer Goods (-6.5%) and Insurance (-2.2%) sectors weighed on the market performance, as both indices declined. The Oil and Gas (-0.7%) and Banking (-0.2%) indices also followed suit. The Industrial Goods (+0.78%) index was the sole gainer.
In our view, the trend witnessed this week is likely to persist, as weakening market sentiment and the absence of positive catalysts are expected to pressure market returns. Nonetheless, we advise investors to take positions in fundamentally justified stocks.
Fixed income and money market
The overnight (OVN) rate contracted by 308bps, w/w, to 3.3%. The rate surged to double-digit levels at the start of the week following outflows for the FX auction and CRR debits. However, significant inflows from OMO maturities (NGN516.85 billion), FGN bond maturities (NGN606.43 billion) and bond coupon payments (NGN47.14 billion) on Thursday boosted system liquidity and drove the OVN down.
In the coming week, liquidity is expected to remain buoyant, supported by inflows from OMO maturities (NGN627.22 billion) on the 20th. However, outflows for the upcoming bond auction, FX auctions and OMO auctions are likely to squeeze system liquidity towards the end of the week. In effect, we expect an expansion in the OVN rate.
Activities in the treasury bills market turned bullish as the average yield across all instruments contracted by 26bps to 10.2% amidst buoyant system liquidity. The average yield in the OMO segment of the market contracted by 28bps to 13.3% ; average yield in the NTB market also contracted by the 6bps to 3.8%. At week’s NTB primary auction, the CBN fully allotted NGN154.38 billion worth of bills – NGN4.38 billion of the 91-day, NGN10.00 billion of the 182-day and NGN140.00 billion of the 364-day – at respective stop rates of 3.00% (previously 3.50%), 4.00% (previously 4.50%), and 6.54% (previously 6.50%).
With liquidity still buoyant, we expect trading volumes to increase in the coming week. Thus we expect yields in the treasury bills market to contract.
Trading in the FGN bond secondary market was bullish as investors sought to reinvest their inflows from OMO and FEB-2020 bond maturities. Consequently, the average yield across instruments contracted by 6bps to close at 10.1%. Buying interest was seen across the mid (-5bps) and long (-15bps) segments, with yields on the APR-2029 (-5bps) and APR-2037 (-31bps) recording the largest expansions, respectively. The DMO will hold a PMA on the 19th of February wherein NGN140.00 billion across three instruments will be offered to investors, all through re-openings – 12.75% APR 2023, 14.55% APR 2029, and 14.80% APR 2049 bond.
We expect sustained demand next week across the bond yield curve, as market players seeks to re-invest excess monies from maturities.
Nigeria’s FX reserves declined by USD362.11 million WTD to USD37.30 billion (12th Feb 2019) as the CBN maintained its support for the currency via its weekly FX interventions; USD210.00 million was sold 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. Despite this, the naira weakened by 0.1% w/w at the I&E window to NGN364.37/USD but closed flat at NGN360/USD in the parallel market. In the forwards market, the naira weakened across the 1-month (-0.1% to NGN367.42/USD), 3-month (-0.1% to NGN372.57/USD) and 6-month (-1.0% to NGN380.10/USD) contracts, while the rates on the 1- year (0.1% to NGN399.38/USD) contract appreciated.
Despite the rate of decline in FX reserves, which has heightened fears regarding the possibility of a currency devaluation, our model suggests that the CBN has enough ammunition to sustain its naira defense through to at least H1-20.