Sentiments Remain Weak as NSE-ASI Dips -0.1% Week-on-Week

July 10, 2020/Cordros Report

Sentiments remained weak in the domestic equities market, as the All-Share Index declined by 0.1% w/w, to 24,306.36 points. The index was weighed down by NESTLE (-6.5%), BUACEMENT (-2.5%) and DANGCEM (-0.8%).

Global economy

According to Labor Department data, US weekly initial jobless claims – the number of individuals who filed for unemployment insurance for the first time – came in a little lower than expected at 1.31 million for the week of July 4th (consensus: 1.38 million), but remained more than double the level seen during the Global Financial Crisis. Continuing claims – the total number of Americans claiming ongoing unemployment benefits in state programs – declined to 18.06 million (consensus:18.95 million). Overall, a record 32.9 million people were still collecting unemployment checks. So far, extended unemployment benefits, including the USD600 per week Federal boost, are supporting incomes and consumer spending. With the program set to expire at the end of the month, a significant drop in incomes is expected for many as COVID-19 containment measures are reinstated and opportunities for finding work are limited. August unemployment rate could potentially push above 15.0% – the highest since de-mobilisation after World War 2.

China’s factory-gate prices (PPI) fell for a fifth straight month in June as the coronavirus pandemic weighed heavily on industrial demand, although signs of a pickup in some parts of the sector suggest a slow economic recovery remains intact. According to China’s National Bureau of Statistics, the producer price index (PPI) in June fell 3.0% from a year earlier (consensus: -3.2%), slower than the 3.7% decline in May. Meanwhile, inflation (CPI) data also showed consumer prices rose 2.5% from a year earlier, in line with forecasts and slightly faster from 2.4% growth in May. Orders for infrastructure materials and equipment have helped industrial output recover faster in China than most places emerging from COVID-19 lockdowns, but further expansion will be difficult to attain without stronger broad-based demand and exports.

Global markets

Global equities were mixed as record-breaking new coronavirus cases in several U.S. states, and fresh outbreaks elsewhere in the world stoked concern about economic recovery. US (DJIA: -0.5%; S&P: +0.7%) and European (STOXX Europe: -0.6%; FTSE 100: -2.1%) stocks looked set to record weekly losses. Asian (Nikkei 225: +0.1%, SSE: +7.3%) markets closed higher as signs of an economic rebound in China boosted stocks of shippers and steelmakers. Emerging (MSCI EM: +4.5%) and frontier markets (MSCI FM: +0.2%) stocks were also set to close higher, as investors continued to bet on more fiscal and monetary stimulus to steer the global economy out of the healthcare crisis.

Nigeria

Economy

This week, reports from the FMDQ suggest that the CBN took a giant leap towards exchange rate unification in Nigeria by allowing the naira, at the official rate, to slide by 5.5% to NGN381.00/USD. While the apex bank is yet to confirm the preceding, we understand that the bank has guided bidders at its Secondary Market Intervention Sales (SMIS) window to increase their bidding price to NGN380/USD floor. For us, the foregoing essentially signals the FGN’s resolve towards complying with the World Bank’s loan conditions of (1) unification of the various exchange rate windows and (2) a more flexible exchange rate regime. We understand that the World Bank is set to take its final decision on its initial USD1.50 billion loan disbursement to Nigeria, from a package of USD2.50 billion. In terms of immediate impact, we estimate that the 5.5% currency devaluation could deliver up to the tune of NGN90.00 billion in exchange gains from the oil revenue leg. Meanwhile, incorporating the new USD1.50 billion loan into the CBN’s cashflow, our model suggests that the FX reserves should end the year at USD27.23 billion (previously: USD25.60 billion).

According to the March 2020 Monthly Financial and Operations Report by the NNPC, Nigeria’s crude production (oil and condensates) declined slightly by 0.2% m/m to 2.07 mb/d in February – 15.0% higher than the 2020 budget estimate of 1.80mb/d. We also highlight that (1) NGN37.66 billion was deducted for under-recovery for the oil lifted in December 2019 against the FAAC distributed in March 2020, and (2) over Q1-20, the NNPC recorded a total of NGN101.65 billion (+79.1% y/y) in fuel under-recovery. While the recent collapse in oil prices forced the FGN to bow to the pressure of “subsidy” removal, we still expect to see, in future reports, that under-recovery was deducted against the April and May 2020 FAAC disbursements, both of which should correspond with crude oil lifted in January and February 2020. By June, under-recovery should have hit zero, as the FGN sustained its resolve towards achieving market-determined fuel prices.

Capital markets

Equities

Sentiments remained weak in the domestic equities market, as the All-Share Index declined by 0.1% w/w, to 24,306.36 points. The index was weighed down by NESTLE (-6.5%), BUACEMENT (-2.5%) and DANGCEM (-0.8%). Accordingly, the Month-to-Date and Year-to-Date losses increased to -0.7% and -9.4%, respectively. Sectoral performances were negative, as all sector indices save for the Banking (+5.8%) index recorded weekly losses. The Consumer Goods (-4.0%) index recorded the biggest loss, followed by the Industrial Goods (-2.1%), Insurance (-0.7%) and Oil & Gas (-0.7%) indices.

In our opinion, risks remain on the horizon due to a combination of the increasing number of COVID-19 cases in Nigeria and weak economic conditions. Thus, we continue to advise investors to trade cautiously and seek trading opportunities in only fundamentally justified stocks.

Money market and fixed Income

Money market

In line with our expectations, the overnight (OVN) rate contracted by 940bps w/w, to 14.1%. Though remaining elevated for the better part of the week, and pushed higher following AMCON charge debits, the OVN declined towards the end of the week following inflows from CRR refunds (NGN300.00 billion) and OMO maturities (NGN92.53 billion).
In the coming week, we expect a compression in the OVN, as a combined NGN113.23 billion comes into the system from OMO maturities (NGN72.55 billion) and FGN bond coupon payments (NGN40.68 billion).

Treasury bills

Trading in the Treasury bills secondary market was bearish as average yield across all instruments expanded by 38bps to 4.6%. This was primarily influenced by the subdued activity in the OMO segment (+50bps to 5.7%) following the liquidity fix local banks were in. Similarly, the average yield at the NTB segment expanded slightly by 2bps to 2.1%, as market participants steer clear of the low yields in the space.

With liquidity conditions expected to improve next week, we should see a pick-up in demand for instruments in this space. At the NTB segment, we expect most of the activity at the primary market, as the CBN will roll over instruments worth NGN107.05 billion via auction.

Bonds

The Treasury bonds secondary market continued to trade with bullish sentiments, amidst a lack of attractive alternative investible assets, as average yield in the market contracted by 17bps to 7.9%. Across the curve, duration aversion drove interest at the short (-73bps) end, as investors demanded the APR-2023 (-135bps) bond. Conversely, yields at the mid (+9bps) and long (+12bps) segments expanded due to sell-offs of the FEB-2028 (+20bps) and JUL-2034 (+38bps) bonds, respectively.

We still expect the Treasury bonds secondary market to remain bullish due to the relatively more attractive yields in the space.

Foreign exchange

The CBN’s foreign reserves continued to decline as FX outflows outpaced inflows, dipping by USD22.01 million w/w to USD36.13 billion. Nonetheless, the naira weakened against the US dollar by 0.3% WTD to NGN387.00/USD at the I&E window, and by 0.9% to NGN465.00/USD at the parallel market. In the forwards market, the naira weakened against the US dollar across the 1-month (-0.4% to NGN388.64/USD), 3-month (-0.7% to NGN392.20/USD), 6-month (-1.4% to NGN398.22/USD) and 1-year (-1.2% to NGN413.10/USD) contracts.

Despite the CBN’s stronger commitment towards exchange rate unification, we still see legroom for the currency to depreciate further, at least towards its REER derived fair value. Our prognosis is hinged on (1) the widening current account (CA) position, (2) currency mispricing, which could induce speculative attacks on the naira, and (3) the resumption of FX sales to the BDC segment of the market which should place an additional layer of pressure on the reserves as the CBN funds the backlog of unmet FX demand.

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