What shaped the past week?
Global Markets: Global markets were mixed this week, with investors focused on corporate earnings, down trending commodity prices and economic data. U.S. markets opened the week strong, with the Dow closing higher on news of M&A activity across select large cap stocks. However, the market retreated shortly after, as energy stocks dipped on a new IEA study which slashed 2018 oil demand projections by 100,000 barrels. Positive sentiment however re-emerged in the market on Thursday amidst better-than-expected corporate earnings from heavyweights, Walmart and Cisco. Meanwhile, European markets started the week bearish and sustained losses through midweek as basic resources stocks slumped in reaction to lower commodity prices. Tides eventually turned on Thursday as investors reacted to better than expected corporate earnings. Asian markets were however mixed with a bearish bias through the week amidst contrasting economic and corporate announcements such as Japan announcing that the Trans-Pacific Partnership deal was being concluded, Alibaba reporting a record sales figure and China’s Industrial production & retail sales figures missing consensus estimates.
Domestic Economy: Mohammad Barkindo, Secretary-General of the Organization of Petroleum Exporting Countries (OPEC), reiterated that the joint output curb is succeeding at rebalancing the global oil market. This comes straight after OPEC raised its estimates for the amount of crude it would need to produce to meet demand by 0.4 mb/d to 33.4 mb/d in October, nearly 0.8 mb/d above the group’s Q3’17 production. Amid this, OPEC expects global crude stockpiles to diminish quicker than earlier anticipated, but will meet on the 30th of November to agree on the fate of the current output cut post-March 2018. It remains to be seen whether Nigeria would retain its exemption from the agreement at that time, as OPEC data shows the country’s production stabilizing just below 1.8 mb/d (exlc. Condensates). We recall that Nigeria’s State Oil Minister tentatively backed the proposition of Nigeria’s production being capped at 1.9 mb/d (excl. Condensates) once that level is reached. Overall, we see firm producer action from OPEC supporting global oil prices in 2018 – particularly in the first quarter – which would, in turn, buoy Nigeria’s oil earnings.
Equities: The Nigerian Equity Market started the week mixed as key sectors closed the first trading session of the week in opposite directions However, positive closes across select stocks pushed the market to a green close. At midweek however, tides turned as a flurry of negative news such as the downgrade of GUINNESS, PZ and FBNH from the MSCI Frontier Market Index to the MSCI Small Cap Index, the deletion of FO from the Index and the downgrade of credit ratings of some Nigerian banks. At the close of the week, positive sentiment returned to the bourse with the NSE ASI gaining 19bps on Friday. However, this did not to soften the losses made at mid-week as the index returned -112bps w/w.
Fixed Income: Buoyed by the liquidity inflow from the previous week, the T-bills market started the week on a positive note, with healthy demand observed across the space up till midweek. By midweek, trading sentiment turned cautious as investors awaited the results of the PMA, where the CBN offered and sold N120 billion at stop rates of 13.00% (91DTM), 15.25% (182DTM) and 15.60% (364DTM) (effective yields: 13.44%, 16.51% and 18.46%). Following this, trading turned mixed with a slightly bearish bias till week close. Overall, the T-bills market moderated 21bps w/w pointing to an overall bullish performance for the week. In contrast, whilst the bond market started the week on a quiet note, buying activity picked up pace on Tuesday following Senate’s approval of the $5.5 billion Eurobond loan. The buying sentiment persisted across the space for most of the week but turned mixed on Thursday, however with a slightly bullish tilt. Yields across the bonds space moderated 16bps w/w.
Currency: The CBN sustained its FX interventions through the week, carrying out a spate of currency spot and forward sales. Overall, the naira depreciated N1.00 in the parallel market to close at N362.50 against the dollar, but remained unchanged at N360.40 at the I&E FX Window.
What will shape markets in the coming week?
Equity market: We note the mostly-sideways trading pattern on the exchange this week, indicated by mixed closes across sectors and erratic market breadth. Barring any fundamental news flow this coming week, we anticipate another week of varied trading.
Fixed Income market: We expect to see sustained demand across the bond market at week open and expect the anticipated N201 billion OMO auction (due next Thursday) to support demand in the T-bills space
Currency: We expect the CBN to continue with its FX injection which should in turn support the value of the Naira.
Focus for the week
PRE-MPC COMMENTARY – “Hold” anticipated, in line with forward guidance
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) sits for its final meeting of the year, and we expect it to maintain the monetary policy status quo heading into 2018. Forward guidance from the September MPC meeting suggests the MPC has adopted a wait-and-see approach to economic developments until Q1’18, a decision vindicated by the stickiness of economic variables between its September and November meetings. Particularly, inflation is little changed in the last few months, giving the MPC little room to tilt away from its tight monetary policy stance. Nevertheless, the CBN itself has subtly signaled lower interest rates in the near-term – particularly through its interventions in the fixed income market – as it looks to support economic recovery.
Inflation restricts move, but outlook more positive
Annual inflation has been sticky in recent months (June: 16.1% y/y, October: 15.9% y/y) but the month-on-month trend has been declining at a pace that would please the MPC (June: 1.6% m/m, October: 0.8% m/m). We expect annual inflation to remain sticky till year-end (December forecast: 15.6% y/y) but moderate at a quicker pace in Q1’18 as base effects from high 2017 inflation kick in (March 2018 forecast: 14.7% y/y). Therefore, we foresee abating inflation providing more room for the MPC to perhaps look towards monetary easing after Q1’18, as hinted by the Central Bank Governor in his September MPC speech.
Q3’17 GDP should not distract MPC
On Monday, the National Bureau of Statistics will release Nigeria’s Q3’17 GDP figures. We expect growth to come in much stronger than in Q2’17 – 2.47% y/y vs. 0.55% y/y – primarily driven by a strong recovery in oil volumes – 2.03 mb/d in Q3’17 vs. 1.87 mb/d in Q2’17 – and deeper gains from improved foreign exchange market liquidity. We note that Purchasing Managers’ Index (PMI) numbers were particularly high in Q3’17, with average manufacturing PMI and non-manufacturing PMI at 54.3 and 54.5 respectively. Continued economic recovery aside, the underlying economy is unlikely to have improved significantly, with growth concentrated around agriculture and oil. This presents a case for monetary stimulus to propel growth in 2018, without sacrificing gains in price and foreign exchange stability.
Fixed income yields signal lower rates
Between September and November, there has been notable change in the fixed income market. In particular, rates on all but the shorter dated maturities have moderated during the period. For example, at Primary Market Auctions, the stop rate on the 364DTM bill declined from 17.0% on September 20th – less than a week before the September MPC meeting – to 15.6% on November 15th. Along with a moderation in bond yields, this development was partly driven by the CBN’s decision to concentrate its liquidity mop ups on the shorter-dated maturities, in turn lowering yields on the other parts of the curve. At the same time, short-term yields have been sticky – 91DTM stop rate little changed from 13.25% to 13.00% – as the CBN looks to keep short-term interest rates high to tackle inflation. Taking a cue from this signal, and rhetoric at the September meeting, we are of the view that the MPC is likely to lower the policy rate in the coming months, in line with market interest rate direction.
Disclaimer
Whilst reasonable care has been taken in preparing this document to ensure the accuracy of facts stated herein and that the ratings, forecasts, estimates and opinions also contained herein are objective, reasonable and fair, no responsibility or liability is accepted either by Vetiva Capital Management Limited or any of its employees for any error of fact or opinion expressed herein.
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