Weekly Economic and Market Report March 27, 2020-Cordros

March 27, 2020/Cordros Report

Global economy
The magnitude of the economic devastation being wrought by the coronavirus pandemic was laid bare this week, as the US Labor Department reported an unprecedented surge in the number of people seeking unemployment benefits. Specifically, 3.3 million people filed for unemployment insurance – nearly 5x more than the previous record of 695,000 in 1982 – as a result of the city and state lockdowns that have been spreading across the US as a response to try to contain Covid-19. The longer the crisis lasts, the more likely that even good quality businesses will fail and unemployment will climb higher – hence the importance of the agreement on the fiscal package that can provide support for key industries and small businesses. Without it, US unemployment, which was at a historic low of 3.5% as of February could soar to over 20% in just a matter of a few months.
Activity in the U.S. services and manufacturing sectors contracted sharply in March, hitting a record low, as the coronavirus outbreak weighs on economic growth and grinds business operations to a halt. For clarity, the IHS market manufacturing PMI edged down to 49.2 points from 50.7 points in February, recording the fastest deterioration since the depths of the financial crisis. In the same vein, the service PMI further contracted from 49.4 points in February to 39.1 points, as consumer-facing industries such as restaurants, bars, and hotels bear the brunt of the social distancing measures, while travel and tourism have been decimated. The survey underscores that the U.S. economy is likely to contract in the coming quarters, with recession looking inevitable if the pandemic persists.
Global markets   
Global equity markets were bullish this week as a swathe of bumper stimulus measures from around the globe had brought about a modicum of stability in equity markets. US (DJIA: +17.6%; S&P: +14.1%) equities were up, powered by unprecedented policy easing by the U.S. Federal Reserve and hopes of a USD 2.2 trillion government stimulus aid bill. European (STOXX Europe: +6.9%; FTSE 100: +7.5%) shares were mixed. Asian (Nikkei 225: +17.1%; Shanghai SE: +1.0%) stocks closed higher on expectations of further monetary stimulus to mitigate the impact of the coronavirus epidemic on the global economy. Emerging market (MSCI EM: +6.0%) stocks were boosted by the positive showing in South Korea (+9.7%) while frontier market (MSCI FM: +2.6%) equities benefitted from strong gains in Kuwait (+7.7%).
The Monetary Policy Committee (MPC), faced with the choice of reducing or leaving policy parameters unchanged – unanimously elected to maintain the status quo by keeping all monetary policy metrics at current levels – Monetary Policy Rate (MPR) at 13.5%; Asymmetric corridor around the MPR at +200/-500bps; Cash Reserves Ratio (CRR) at 27.5%; and Liquidity Ratio (LR) at 30.0%. As the CBN’s policy responses to tackle COVID-19 were recently announced, the MPC resolved to allow time for the measures to permeate the economy before further policy responses. Our key takeaway is that the committee appears to have lost faith in the effectiveness of a rate cut in tackling economic growth-related problems. Rather, it expressed its confidence in utilizing other expansionary toolkits to limit the impact of COVID-19 on economic activities.
For the third straight month, Nigeria’s composite PMI grew at a slower pace to 50.2 index points. The change in the pace of activities in March (-8.3 points) is the steepest in the history of the survey. The impact of COVID-19 on Nigeria’s economy is now becoming evident. The non-manufacturing sector appears to be the worst hit as the index contracted to 49.2 points, the first time since April 2017. All subcomponents contracted, save for Business Activities (52.2). However, the resilience in the manufacturing segment (51.1 points) was enough to keep the composite PMI afloat. As COVID-19 continues to spread fast across the country, we foresee further headwinds. While the CBN has announced a stimulus package worth NGN3.5 trillion, it’s difficult to argue against the economic recession this year should the outbreak persist for an extended period.
Capital markets
Despite pocket of gains, weak sentiments continued to dominate the domestic equities market, as the All-Share Index plummeted by 1.52% w/w to 21,861.78 points. Consequently, the MTD and YTD returns settled at -15.3% and -18.6%, respectively. Analysing by sectors, significant losses recorded in the Consumer Goods (-8.1%) and Oil and Gas (-2.2%) sectors weighed on the market performance, as both indices declined. The Industrial Goods (-0.5%) index also followed suit. The Insurance (+3.3%) and Banking (+2.1%) indices were the sole gainers.

In our view, the trend witnessed this week is likely to persist, as weakening market sentiment in the face of the fast-spreading coronavirus pandemic and the weakness across global markets are expected to pressure market returns. Nonetheless, we advise investors to take positions in fundamentally justified stocks.
Money market and fixed income
Money market

The overnight (OVN) rate expanded by 11.8ppts, w/w, to 17.10%. The rate expanded at the start of the week (+163bps to 6.9%), as banks provisioned for the CBN’s weekly FX auctions (c. NGN38 billion) before depressing as inflows from OMO maturities (NGN76.22 billion) and FAAC disbursement (c. NGN323.63 billion) came into the system. However, outflows from CRR debits and FGN bond (NGN50.00 billion) auction at the tail end of the week strained system liquidity thereby causing the OVN rate to shoot up. 
In the coming week, inflows from OMO maturities (NGN293.75 billion) are expected to hit the system. Barring any significant outflow for the weekly FX auction or mop-up by the CBN, we expect the OVN to stay around the same level.
Treasury bills
Trading in the Treasury bills secondary market remained bullish as buoyant system liquidity and the absence of any OMO activity by the CBN spurred demand across the OMO and NTB spaces. Thus, the average yield across instruments contracted by 66bps to 11.7%. At the OMO segment, the average yield across instruments contracted by 94bps to 15.5%, while average yield at the NTB segment declined by 31bps to 3.7%.
We expect bullish sentiments to continue in the Treasury bills secondary market as demand for OMO bills persist. In addition, we expect quiet trading in the NTB secondary market this week as market participants shift their attention towards next week’s NTB PMA where the CBN will be rolling over maturing bills worth NGN95.68 billion. 

The Treasury bonds secondary market remained bearish this week, as the market players were on the sidelines ahead of the MPC meeting and Wednesday’s PMA. Consequently, the average yield expanded by 19bps to 12.0%. At this week’s auction, instruments worth NGN50.00 billion were offered to investors  – 12.75% APR 2023 (Bid-to-offer: 1.4x; Stop rate: 10.0000%), 14.55% MAR 2035 (Bid-to-offer: 4.6x; Stop rate: 12.5000%), and 12.98% MAR 2050 (Bid-to-offer: 4.6x; Stop rate: 12.9800%). Despite subscriptions across instruments settling at NGN181.26 billion, the DMO eventually allotted instruments worth NGN50.00 billion, resulting in a bid-cover ratio of 3.6x.
We expect bargain hunting for instruments in next week’s trading, as investors (local corporates) look to reinvest maturities.
Foreign exchange
This week, Nigeria’s FX reserves remained under pressure, declining by USD182.17 million WTD to USD35.71 billion (24 Mar 2020), as offshore outflows intensify and inflows remain benign. At the tail end of last week, the CBN announced a “re-alignment” of the currency, moving the official and IEW rate to NGN366.00/USD and NGN380/USD from NGN307/USD and NGN366/USD, respectively. bringing the naira closer to its fair value (NGN416.42/USD – Cordros’s estimate base on PPP valuation). Consequently, the naira weakened by 2.5% w/w to NGN381.50/USD in the I&E Window and by 6.3% to NGN400.00/USD in the parallel market. In the Forwards market, the naira depreciated across the 1-month (-3.6% to NGN389.65/USD), 3-month (-4.0% to NGN398.75/USD), 6-month (-4.2% to NGN413.82/USD) and 1-year (-4.7% to NGN452.31/USD) contracts
While we acknowledge that the currency still remains under pressure, we believe the CBN’s FX rate alignment and convergence is a laudable move, which should ease pressures on the balance of payment and curtail speculative attacks on the naira. Notwithstanding, the size of the recent adjustment might not be substantial enough to buy the CBN enough time before a full-blown devaluation.

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