CBN meeting and NSE in focus

By Lukman Otunuga, Senior Research Analyst at FXTM

Nigerian stocks struggled for direction last Tuesday as investors adopted a guarded approach ahead of the Central Bank of Nigeria’s interest rate decision this week.

After claiming the title as the world’s best-performing stock market in 2020, equity bulls in Nigeria seem to be missing with the NSE All-Share Index down only 0.36% year-to-date. While appetite towards the local stocks was fuelled by a sense of optimism over Nigeria’s economic outlook, the primary driver behind such gains last year revolved around the bond markets. It must be kept in mind that investors were hunting for gains at a time where the country’s fixed income markets offered negative real yields. Given how this has drained demand for Naira bonds, they may remain unloved and depressed over the coming months.

The Central Bank of Nigeria is unlikely to change its monetary policy stance this week with interest rates expected to remain unchanged at 11.5%. While central banks across the globe have embraced looser monetary policy and lower interest rates, the CBN may not have the breathing space. Inflation which accelerated to a 34 month high of 14.9% in November [15.75% in December] is likely to push higher amid dollar shortages. On top of this, the country is still battling with COVID-19 with a new variant emerging a few backs back.

On the bright side, Oil prices are trading to levels not seen since February 2018 amid signs of tightening global supply. For emerging market oil producers like Nigeria, this is a welcome development and could boost optimism over the growth outlook for 2021. While prices could push higher in the near term, surging coronavirus cases and lockdowns across the globe may fuel fears around weak oil demand. Oil is up almost 10% since the start of the year with the commodity’s near-term outlook likely to be influenced by the pending OPEC monthly market report on Thursday.

Away from Nigeria, things are set to heat up in Washington after Democrats introduced a resolution and went on to impeach U.S President Donald Trump for a second time during a vote last Wednesday. The idea of Democrats pushing for the removal of Trump who has less than two weeks left in his term is likely to fuel risk aversion and spur demand for safe-haven assets. The move marked a first in history as no president had ever been impeached twice.