Global Markets: Following two consecutive sessions of decline, U.S. and European stocks rebounded mid-week on speculation that Central Banks would continue monetary support even as the looming threat of deflation in the Eurozone reinforced the case for further stimulus. Momentum was however lost at week close following weak wage growth in U.S. December jobs report.
Domestic Economy: The Debt Management Office (DMO) released the first quarter provisional bond issuance calendar in the past week. The calendar suggests issuances could rise to as much as NGN305billion in Q1’2015 – a potential 67% QoQ and 15% YoY increase. We note that the increase in borrowings could be associated with the need to bridge a potentially wider fiscal deficit given the pressure on government revenues. If the trend is maintained, the 2015 fiscal deficit could widen to c.1% of 2015 GDP, slightly higher than the 0.79% estimated in the budget proposal.
Equities: Stretching losses from the last sessions of 2014, equities kicked off the year on a bearish note as continued declines across weighty sectors further weighed on the NSE ASI. With crude oil prices taking further hit during the week (Brent: Below $50/bbl intraday mid-week), the sell-offs accelerated with the ASI shedding over 4% for two consecutive sessions. Despite, a positive turnaround in the Consumer Goods and Financial Services sectors at week close, the ASI recorded further losses Friday due to sustained sell-offs in Industrial Goods. Overall, the index lost 13% WoW to record its worst year start performance ever.
Fixed Income: Following OMO maturities over the holidays and in the past week (NGN433billion), the money market witnessed a couple of OMO sales by the Central Bank with a total of NGN241billion mopped up in the process. At Wednesday’s PMA, the DMO sold a total of NGN156billion across the 91-DTM, 181-DTM and 364-DTM bills with auction yields rates pegged at 11.52%, 15.51% and 17.64% respectively – higher than market levels of 11.41%, 14.40% and 16.33%. Consequently, trading in the T-bill market was considerably active with yield direction mixed. Whilst market liquidity fuelled demand at the short end of the curve, the long dated bills witnessed some sell pressure particularly across bills with closest duration to the bills offered at the auction. Trading in the bond market got off to an upbeat start as yields headed south c.23bps across the benchmark bonds at the first few trading sessions. Momentum however softened subsequently following the release of the bond auction circular for January, with expectations of higher yields across the re-openings on increased supply volumes and pricing-in the risk of the continued pressure on crude oil price.
Currency: Despite offering $400million at the RDAS, the Central Bank eventually sold a total of $629million this past week amidst strong market dollar demand, though the marginal rate was unchanged at NGN168/USD. Dollar demand was equally strong in the FX interbank market with the naira depreciating 369kobo week to Wednesday. The naira however gained some ground towards week close following dollar sales by NNPC and other oil companies to close at NGN181.23/USD – 178kobo appreciation WoW.
What will shape markets in the coming week?
Noting the softening losses in last sessions of the past week and the first positive market breadth in 8 sessions, we expect the ASI to close in the positive in the next trading sessions as investors re-enter the market to take advantage of attractive market valuations .
Considering the excess system liquidity, we expect additional OMO sales by the CBN even as more maturities are expected over the course of the week. We also expect the bond market to open the week on a cautious note as traders look forward to the bond auction on Wednesday.
Focus for the week:
Nigeria: Q3 Trade surplus widens y/y, but shrinks q/q
Nigeria’s trade surplus increased 78.6%y/y to NGN2.65 trillion, owing to a 25.4%y/y rise in exports to NGN4.47 trillion, and a 12.7%y/y pull back in imports to NGN1.82 trillion. From a quarterly perspective however, the country’s surplus declined 1%, with exports 4.3% lower and imports down by 7.9%. Crude oil exports fell by 10%q/q (5%y/y) to account for 65% of total exports (81% in Q1’2014), recording its worst showing in five quarters.
Oil exports contract on lower production volumes
Crude oil export growth contracted after two consecutive quarters of positive growth as oil exports declined 10%q/q and 5%q/q to NGN2.93 trillion. We believe this underperformance was influenced largely by the c.5%y/y and c.3%q/q decline in Q3’2014 average crude oil production to 2.1mbpd as reported in the third quarter GDP numbers. As seen in previous quarters in 2014, India, Netherlands, Spain, Indonesia and Brazil accounted for 71% of Nigeria’s crude oil exports, with India as the single largest recipient at 24%. On a regional basis, Europe accounted for 38% of Nigeria’s total exports, followed by Asia at 31%. Exports to Africa which historically contributed least to total exports surpassed exports to America, with the former accounting for 15% of exports and the latter at 11%.
Imported intermediate inputs for manufacturing decline
Imports declined 12.6y/y and 7.9%q/q due to a drop in mineral fuel and inputs for manufacturing purchases which accounted for c.58% of total imports. We recall the Department of Petroleum Resources (DPR) in the third quarter allocation for petrol imports reduced the number of licensed petrol importers to 27 (Q2: 40). In addition, the volume of allocation dropped from 1.85MT to 1.7MT. As such, we are not surprised by the 14%y/y and 27%q/q decline in imports of mineral products. We are however concerned about the y/y and q/q decline in inputs for manufacturing such as chemicals, plastics, rubber, and paper making material, particularly if this decline is associated with the demand for capital goods as history does not suggest this as a trend in Q3 imports. The impressive performance of the industry sector (ex-crude petroleum and gas) in the Q3 GDP report however suggests otherwise, although this could be interpreted as a leading indicator of what to expect in the quarters ahead. Imports of vehicles, aircraft parts and vessels also contracted 22%y/y and 20%q/q, possibly a reflection of Government’s recent automotive policy which imposes a 35% duty and 35% levy on imported vehicles (previously: 20%)