Japan’s industrial production slipped for the second straight month, as output moderated by 0.9% m/m in November. While we do not downplay the negative impact of the increase in VAT on consumer demand, we believe the typhoon that hit the country in October had a significant influence on industrial activities in the period under review. The disappointing run in the first two months in Q4-19 is already raising the likelihood of economic contraction in the last quarter of the year. For Q1-2020, we believe the blend of a low base in Q4-19, together with improved weather conditions should act to support industrial production. Clearly, the still on-going global trade protectionism and weaker consumer demand are expected to place a cap on the growth uptrend.
Separately, the impact of the tax increases implemented in October took a toll on consumers' sentiments in Japan, with retail sales declining by 2.1% y/y in November, relative to a 1.1% decline forecasted by consensus. The foregoing substantiates the fact that Japan’s economy is under intense pressure since consumption constitutes c. 60% of its GDP. Over 2020, we believe that both the fiscal and monetary authorities will remain largely hard-pressed to implement new policies to support growth, especially in the face of the lingering global trade tension.
Global equity indices sustained the positive run from last week as equity investors continue to focus on the prospects of the completion of phase I trade deal between the US and China. Beyond the obvious, Santa Claus rally also supported equity indices as fund managers adjust year-end positions. Against that backdrop, the US stocks (DJIA: +0.6%; S&P: +0.6%), European shares (Euro Stoxx: +0.2%; FTSE 100: +0.9%), and Asia stocks (Nikkei 225: +0.1%; CSI 300: +0.1%) were on the verge of closing in the green at the time of writing. The positive global sentiments for risk assets extended to the emerging and frontier (MSCI EM: +0.4%, MSCI FM: +0.5%) markets.
Relative to the corresponding period of the previous year, Nigeria’s trade surplus position improved markedly by 117.4% to NGN1.39 trillion in Q3-19. The rapid pace of expansion was on account of a significant improvement in export (+9.0% y/y) which ran ahead of import (-7.5% y/y). Dissecting the components, we highlight non-oil export (+561.7% y/y) as the primary driver of the total export, even as oil export – 70.9% of total export – moderated in the period. Further breakdowns revealed manufactured goods (+1415.0% y/y) as the key support for non-oil export. Meanwhile, the decline in imports emanated from the combination of manufactured goods (-3.5% y/y) and other oil products (-54.6% y/y), both of which account for 81.3% of total imports. We see legroom for further improvement in the trade balance, amid the lingering land border closure, which is expected to keep import at bay. To add, a recovery in crude oil price is also expected to lift overall export in Q4-19.
This week, telecommunication data released by the National Bureau of Statistics (NBS) revealed that both active voice subscriptions (+10.6% y/y) and internet subscribers (+19.0% y/y) expanded in Q3-19. For us, this development is hardly surprising as it only substantiates the strong telecommunication GDP (+12.16% y/y) achieved in the same period. In terms of market share, MTNN remains the market leader both in the voice (36.5% of market share) and internet (42.0% of market share) subscribers’ segments. Despite the strong performance thus far in 2019, we believe the ICT sector is yet to run its course. Our view is hinged on the continued innovative capacity of sector players which should further support growth. Already, MTNN has begun the 5G trials. Also, we believe both AIRTELAF and GLO are strategically positioned in the data space.
The equities market sustained its lacklustre performance this week, amidst continued risk-off sentiments and the absence of positive market catalysts. With losses recorded in two of the three trading sessions in the shortened week due to festive season, the All-share index shed -0.41% to settle the MtD and YtD losses at -2.17% and 15.95%, respectively. On Sectoral performances, the Banking (-0.26%) and Industrial Goods (-0.31%) recorded declines, following selloffs of GUARANTY (-2.0%) and CCNN (-3.0%) stocks. Conversely, Consumer Goods (+1.3%), Insurance (+1.0%), and Oil & Gas (- 0.7%) edged higher, driven by gains in NESTLE (+10.0%), NEM (+2.2%) and OANDO (+6.76%)
We see the level of activity and volatility being sustained over the final days of the year, with some pockets of gains expected, as fund and portfolio managers realign portfolios prior to the start of 2020.
Money market and fixed income
The overnight (OVN) rate maintained an uptrend during the week, advancing on two of the three trading days in the week, before settling higher by 164bps at 4.6%. On the first trading day, rate settled at 2.9%, as market liquidity remained buoyant following FAAC inflows. However, on the penultimate trading day, rated increased by 971ppts to 12.6%, as the system liquidity plummeted by 30.4%.
In the coming week, maturities worth a combined NGN405.89 billion – OMO (NGN331.05billion) and PMA maturities (NGN74.83 billion) are expected during the week. Given that, we expect the OVN rate to settle lower.
Activities seem to be winding down for the year in the fixed income market, as the market continues to trade on a quiet note with reduced volumes. Yields at the Treasury bills secondary market pared by 22bps to settle the week at 5.59%. Elsewhere, activities in the OMO market were bearish as the average yield rose by 19bps to settle at 13.3%.
We expect trading volumes to start to taper in the NTB market, as the average yield trends sit in the single-digit terrain. However, the average OMO yield is expected to remain around the same level, with a slight increase in the coming week.
Bonds were actively traded, as local investors still on the hunt for double-digit yield. Consequently, yields trended lowered by 20bps to 10.p%. The average yield declined across all trading instruments in the week, with the largest decline recorded on the 15-JUL-2021instrument (-96bps to 8.2%).
In our view, the continued restrictions on trading in the Treasury bills will continue to drive volumes in the Treasury bonds market. Consequently, we expect the average yield in the market to settle in the single-digit territory by 2019YE.
Amidst continued sell-offs by offshore investors, Nigeria’s FX reserve dipped by USD10.98 million WTD to USD38.82 billion (23rd Dec 2019). Meanwhile, the CBN sustained its weekly FX interventions, selling USD210.00 million across the different segments of the FX market – USD100.00 million to the Wholesale segment, USD55.00 million to the SMEs segment, and USD55.00 million to the Invisibles segment. Nonetheless, the naira weakened at the I&E window by 0.2% WTD to NGN364.57/USD, but strengthened by 0.5% WTD to NGN361.00/USD at the parallel market. Elsewhere, total turnover at the I&E window expanded by 45.70% WTD to USD864.62 million, with trades consummated within the NGN357.50 - 364.00/USD band. In the Forwards market, the naira weakened across all contracts, WTD – 1-month (-0.4% to NGN367.70/USD), 3-month (-0.8% to NGN374.63/USD), 6-month (-1.3% to NGN384.29/USD) and 1-year (-2.2% to NGN409.81/USD).
Despite the rate of decline in FX reserves, which has heightened fears regarding the possibility of a currency devaluation, our model suggests that the CBN has enough ammunition to sustain its naira defense through to at least H1-20.