Brent ad­vances 11.82% w/w amidst OPEC+ cuts

Business a.m. - - FINANCE & INVESTMENT -

What shaped the past week?

Global: - It was a mixed week for global mar­kets, as in­vestor op­ti­mism over a po­ten­tial coro­n­avirus vac­cine from drug mark­ers Moderna and As­traZeneca, as well as the eas­ing of the lock­down in the U.S., drove global mar­kets higher. Moderna Inc. an­nounced on Monday, that it is in the early-stage tri­als of a vac­cine de­vel­op­ment, adding that they ex­pect to be­gin the fi­nal test­ing stage in July. Mean­while, U.K. based As­traZeneca an­nounced on Thursday, that it se­cured its first agree­ments for 400 mil­lion doses of a COVID-19 vac­cine it is test­ing, bol­stered by a >$1 bil­lion in­vest­ment from the U.S. Biomed­i­cal Ad­vanced Re­search and De­vel­op­ment Author­ity vac­cine agency. The drug-maker ex­pects to pro­duce and de­liver the vac­cine, start­ing fall 2020. Fur­ther­more, White House eco­nomic ad­vi­sor Kevin Has­sett, stated that he ex­pects “pretty strong” sec­ond half of the year, as U.S. Pres­i­dent Don­ald Trump signed an executive or­der to help the coun­try’s la­bor mar­ket curb the coro­n­avirus im­pact and ensure job growth. On the Euro­pean front, The Euro­pean Com­mis­sion and the Euro­pean Coun­cil agreed on a €100 bil­lion un­em­ploy­ment fund, as na­tions in the re­gion started re­open­ing as well. Re­tail sales in the U.K. for April plunged 18.1%, as the virus in­duced lock­down weighed on con­sumer ac­tiv­ity in the pe­riod. In ad­di­tion, em­ploy­ment num­bers re­vealed a 70% in­crease in un­em­ploy­ment claims by U.K. work­ers, while con­struc­tion ac­tiv­ity in the Eu­ro­zone, plunged 14% in March, driven by a down­turn in man­u­fac­tur­ing ac­tiv­ity in Ger­many. On the Asian front, Ja­pan an­nounced that it will be lift­ing the state of emer­gency in Osaka, Ky­oto and Hyogo on Thursday. Mean­while, the Peo­ple’s Bank of China (PBOC) held in­ter­est rates un­changed at 3.85%, as in­vestors re­mained fo­cused on the on­go­ing dis­pute be­tween the U.S. and China, over how the lat­ter han­dled the out­break.

Do­mes­tic Econ­omy: With the coro­n­avirus dis­rupt­ing global trade and eco­nomic ac­tiv­ity, oil de­mand fell to its low­est level in 21 years. Crude prices are down 60% y/y, as na­tions around the world im­posed mo­bil­ity re­stric­tions to con­tain the spread of COVID-19. Nige­ria, whose econ­omy is largely tied to de­vel­op­ments in the oil space, saw its Q1’20 oil rev­enue fall short of tar­get by 11.77% to &940.91 bil­lion. This was be­cause the na­tion slashed prices on its bench­mark Bonny Light crude grade, as it strug­gled to find off tak­ers. The Fi­nance Min­is­ter, Zainab Ahmed, who briefed re­porters yes­ter­day, high­lighted that the short­fall in oil rev­enue could hin­der the na­tion’s abil­ity to fund crit­i­cal in­fra­struc­ture de­vel­op­ment projects. She also added that a slow­down in eco­nomic ac­tiv­ity could re­sult in a spike in un­em­ploy­ment, ex­as­per­at­ing poverty lev­els, as the econ­omy could con­tract by as much as 8.94% with­out a fiscal stim­u­lus pack­age. How­ever, the Na­tional Eco­nomic Coun­cil (NEC) is work­ing on im­ple­ment­ing mea­sures aimed at cush­ion­ing the im­pact of the down­turn on the econ­omy. In ad­di­tion, a re­bound in oil prices is ex­pected in the sec­ond half of the year, as de­mand picks up with a grad­ual re-open­ing of economies. This should sup­port a mod­er­ate re­cov­ery in eco­nomic growth in Q3’2020, and fil­ter into Q4’2020.

Eq­ui­ties: The bulls dom­i­nated trad­ing ac­tiv­ity in the eq­ui­ties space this week, as a mod­er­ate re­cov­ery in oil prices helped im­prove sen­ti­ment in the mar­ket. The ASI gained 559bps w/w, driven by gains recorded in the Bank­ing (+724bps w/w) and In­dus­trial goods (+15.45% w/w) sec­tors. In the bank­ing space, gain­ers were led by tier-one lenders, ZENITHBANK (+971bps w/w) and UBA (+880bps w/w), while BUACEMENT (+23.42% w/w) led all gain­ers in the In­dus­trial Goods space. A surge in UNILEVER (+29.53% w/w), saw the Con­sumer Goods (+89bps w/w) sec­tor close in the green, while gains recorded in MO­BIL (+20.92% w/w) also pushed the Oil & Gas in­dex over the green line. Out­side of the ma­jor in­dices, the per­for­mance of the mar­ket was fur­ther aided by an uptick in MTNN this week (+502bps w/w). For the week, vol­ume and value trade im­proved 86.05% and 93.00% re­spec­tively.

Fixed In­come: On Wed­nes­day, the Debt Man­age­ment Of­fice (DMO), con­ducted a bond auc­tion where it of­fered N60 bil­lion and sold N296 bil­lion across the three ma­tu­ri­ties at stop rates of 9.20%, 11.70% and 12.60% Mean­while, trad­ing ac­tiv­ity in the se­condary mar­ket re­mained mixed this week, as mar­ket par­tic­i­pants con­tinue to pa­tron­ize OMO notes in lieu of al­ter­na­tive in­vest­ment op­por­tu­ni­ties. In the OMO space, av­er­age yield eased 255bps w/w driven by buy­ing in­ter­est at the mid-long end of the curve. On the other hand, a mod­er­ate re­cov­ery in crude prices was enough to spark in­creased in­ter­est in the bond space, where the av­er­age yield on bench­mark bonds eased 18bps w/w. Fur­ther­more, de­spite the low yield en­vi­ron­ment per­sist­ing in the NTB space, trad­ing ac­tiv­ity was pos­i­tive this week, as yields mod­er­ated 13bps on av­er­age.

Cur­rency: The Naira ap­pre­ci­ated N0.39 w/w at the I&E FX Win­dow to set­tle at N385.94 and de­pre­ci­ated &10.00 w/w to close at &455.00 against the dol­lar in the par­al­lel mar­ket.

What will shape mar­kets in the com­ing week?

Eq­uity mar­ket: Just as ex­pected, we saw a mixed trad­ing session on Fri­day, as in­vestors con­tin­ued to take ad­van­tage of some cheap coun­ters while tak­ing profit on some other tick­ers that has gained sub­stan­tially in re­cent times. How­ever, tak­ing a cue from the im­prov­ing events in the global space as well as the pos­i­tive mar­ket breadth posted (1.80x), we ex­pect the mar­ket to con­tinue on its up­ward trend (though at a slower rate) upon re­sump­tion from the hol­i­day on Wed­nes­day. Fixed In­come mar­ket:

We ex­pect sen­ti­ment in the crude space, to turn bear­ish this week, fol­low­ing China’s plan to not is­sue a guid­ance on its GDP tar­get for 2020 as it bat­tles the eco­nomic shocks of the pan­demic. As such, we ex­pect to see lim­ited in­ter­est in the bond space. How­ever, the level of sys­tem liq­uid­ity and in­com­ing ma­tu­ri­ties will con­tinue to sup­port buy-side ac­tiv­ity in the OMO space.

Cur­rency: We ex­pect the naira to re­main largely sta­ble across the var­i­ous win­dows of the cur­rency space as the CBN main­tains in­ter­ven­tions in the FX mar­ket.

Fo­cus for the week April 2020 In­fla­tion - In­fla­tion ac­cel­er­ates amid pan­demic risk, Ra­madan ar­rival

In the lat­est re­port from the Na­tional Bureau of Statistics (NBS), the over­all con­sumer price in­dex - a mea­sure of the av­er­age change in prices over time of goods and ser­vices pur­chased by con­sumers was up 12.34% y/y in Apr’20 from 12.26% y/y in Mar’20. Re­tail in­fla­tion inched higher on the back of a faster rise in both food and core prices. An­nual food in­fla­tion ac­cel­er­ated to 15.03% y/y in Apr’20 (Mar’20: 14.98% y/y) while core in­fla­tion printed at 9.98% y/y (Mar’20: 9.73% y/y). Prices of food items like bread, fish, tu­bers, veg­eta­bles & fruits and bread & ce­re­als were the main driv­ers of in­fla­tion in Apr’20.

COVID-19 price pre­mi­ums in­flate core prices y/y

Save for the Hous­ing, wa­ter, elec­tric­ity, gas and other fuel sub-in­dex, all the other subindices recorded a faster rise in prices com­pared to Mar’20. How­ever, core prices rose y/y at a faster pace (+25bps) than food prices (5bps). This was due to a faster rise in prices in some COVID-19 prone sec­tors (health, trans­port and restau­rant & hotels) com­pared to food prices. The faster rise in prices in the vul­ner­a­ble sec­tors re­flects price pre­mi­ums for ser­vices, amid steady de­mand, due to in­creased risk associated with ren­der­ing those ser­vices. Specif­i­cally, we note that the prices of health and trans­port ser­vices rose 23bps and 22bps m/m re­spec­tively in Apr’20.

Ra­madan ar­rival, lock­down pres­sure m/m food in­fla­tion

On a monthly ba­sis, in­fla­tion rose by 18bps to 1.02% m/m (Ve­tiva es­ti­mate: 0.82% m/m) on a faster rise in food prices - com­pared to core prices. Food in­fla­tion rose by 24bps to 1.18% m/m (Mar’20: 0.94% m/m) as the de­mand for es­sen­tial food prod­ucts in­creased with the ar­rival of Ra­madan. Across sub-na­tion­als, states that im­ple­mented some form of mo­bil­ity re­stric­tion (in­clud­ing La­gos, Kaduna, Akwa Ibom and Ondo) early in the month recorded steeper rises in food in­fla­tion - above the na­tional av­er­age-, re­flect­ing dis­rup­tion to food sup­ply chains and its at­ten­dant im­pact on food prices.

In­fla­tion­ary pres­sures mount on sup­ply dis­rup­tions

In the cur­rent month, we ex­pect the head­line in­fla­tion to print at 12.43% y/y, due to an an­tic­i­pated rise in both food and core in­fla­tion. We ex­pect food in­fla­tion to rise fur­ther to 15.09% y/y, as mo­bil­ity re­stric­tions per­sisted in May with more states in­volved from the start of the month. We also ex­pect core in­fla­tion to inch higher to 10.07% y/y, as we an­tic­i­pate that the pres­sure on trans­port and health ser­vice prices will per­sist through the month. In 2020, we ex­pect the av­er­age in­fla­tion to inch higher to 11.86% y/y (2019: 11.39% y/y), on the back of a faster rise in both food and core prices. This is stronger than our pre­vi­ous es­ti­mate of 11.44%, as in­fla­tion­ary pres­sures con­tinue to mount on pan­demic-in­duced sup­ply dis­rup­tions and im­pend­ing price in­creases. We ex­pect food in­fla­tion to come in higher at 14.10% y/y (2019: 13.73% y/y) as mo­bil­ity re­stric­tions - aimed at con­tain­ing the spread of the virus - con­tinue to dis­rupt food dis­tri­bu­tion, re­sult­ing in ar­ti­fi­cial scarcity and pres­sur­ing food prices. Also, we ex­pect core in­fla­tion to av­er­age 9.86% y/y in 2020, higher than 9.16% y/y recorded in 2019. Core price pres­sures could stem from the con­tin­ued pres­sure on health and trans­port ser­vice prices, as the lo­cal out­break per­sists. Also, a much stronger re­cov­ery in oil prices could prompt an up­ward re­view of the pump price of Pre­mium Mo­tor Spirit (PMS), con­tribut­ing to in­fla­tion­ary pres­sure across a num­ber of other sec­tors. There are also in­di­ca­tions that elec­tric­ity sub­sidy will be re­moved by Jul’20, fur­ther adding to our ex­pec­ta­tion of ac­cel­er­at­ing core in­fla­tion in 2020. Tak­ing the build-up in in­fla­tion­ary pres­sure into con­sid­er­a­tion, we ex­pect the Mon­e­tary Pol­icy Committee (MPC) of the Cen­tral Bank of Nige­ria (CBN) to main­tain its cur­rent mon­e­tary pol­icy stance, amid a rise in ex­ter­nal and fiscal risks. A rate cut could be coun­ter­pro­duc­tive for in­fla­tion, amid a sour­ing eco­nomic outlook, while a hike could un­der­mine on­go­ing ef­forts to stim­u­late growth. We be­lieve the CBN will be more fo­cused on the trans­mis­sion of its un­con­ven­tional poli­cies to the econ­omy, rather than tak­ing ac­tion.

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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