Global Equities Markets Review and Outlook: Protectionist Policy Tail Risk Dampens Sentiment in Global Markets
The Trump administration’s replacement of Gary Cohn with incoming chief economic adviser, Larry Kudlow, signaled alignment with President Trump’s case for a stronger dollar and a hardline position on China. This increased speculation of a trade war between the United States and China, and the equities market responded with selloffs leading to a W-o-W decline across the developed markets. Oil prices also weakened, as Brent Crude Price closed at US$65.08/b, down 0.6% W-o-W from US$65.49/b recorded the previous Friday following improved output in the U.S. crude production which jumped to 10.4mb/d, offsetting the impact of an earlier report by the International Energy Agency (IEA) which warned of an impending shortfall in global supplies following production declines from Venezuela.
Across the developed markets, performance was bearish as all indices trended southwards. The US S&P 500 was down 1.4% following a week-long losing streak stoked by fears of an impending trade war, while the US NASDAQ fell 1.0% and the UK FTSE All Share Index shed 1.1% W-o-W on the back of increased uncertainty on the outcomes of the U.K.’s Brexit negotiations. Relatedly, UNILEVER announced it was moving its headquarters from the U.K. to the Netherlands.
Performance across the Eurasian markets was mixed as France’s CAC was down 0.2% W-o-W as of writing while Germany’s XETRA DAX was flat. On the flipside, Hong Kong’s Hang Seng and Japan’s Nikkei 225 were up 1.5% and 1.0% respectively despite a spike in volatility associated with renewed fears of protectionism and corruption allegations levelled against Japanese Prime Minister Shinzo Abe by party members in parliament.
Across the BRICS markets, all indices under our coverage closed in the red save the India’s BSE Sens which gained 0.3% W-o-W. On the other hand, Russia’s RTS posted a 3.9% W-o-W decline - a possible effect of investor reaction to new US Sanctions and Britain’s decision to cut its gas demand from Russia’s state-owned gas company - Gazprom. Also, South Africa’s FTSE All Share index fell 1.8%W-o-W while Brazil’s Ibovespa was down 1.7%. Similarly, China’s Shanghai Composite also declined 1.1% W-o-W as investors continue to worry about U.S. policy uncertainties.
Performance in the African markets was mixed with Egypt’s’ EGX 30 leading gainers, up 3.2% W-o-W due to growing confidence in the government’s economic policies while Kenya’s NSE 20 posted a W-o-W growth of 1.3% as the International Monetary Fund (IMF) approved the country’s request for a six-month extension to a $1.5bn standby facility. The Nigerian All Share Index (ASI) declined 2.3% W-o-W as the market shed points all week - save for a marginal gain on Tuesday –on the back of selloffs in blue chip stocks which weighed on market performance. Ghana’s GSE Composite also declined 0.9% W-o-W.
Domestic Equity Market Review: Bearish Performance despite Impressive Earnings Releases
The 2-week long bullish performance in the local bourse came to a halt this week as the All Share Index plunged 2.9% W-o-W to settle at 41,935.90 points while YTD return declined to 9.7%. The bearish performance was largely due to sell pressures in bellwethers in the Banking and Consumer Goods sectors - ZENITH, NESTLE and GUARANTY - which all released impressive results for FY:2017. As a result, investors lost N506.0bn in value as market capitalization fell to N15.0tn. Similarly, activity level softened as average daily volume and value traded declined 26.2% and 20.5% W-o-W to 408.5m units and N6.3bn respectively. ZENITH (252.7m), FBNH (161.2m) and REGALINS (102.4m) were the most traded stocks by volume while ZENITH (N7.7bn), NIGERIAN BREWERIES (N3.9bn) and GUARANTY (N2.9bn) led the list of stocks with the highest value traded during the week.
The local bourse unexpectedly traded southwards on all days but Tuesday when it closed the day flattish (ASI rose 4bps). The market began the week bearish, shedding 26ps largely due to sell offs in UBA, UBN and UNILEVER. By Tuesday, our optimism for a positive performance strengthened following a marginal rebound in the ASI (driven broadly by price appreciation in DANGCEM) and the release of an impressive FY:2017 result by ZENITH. Surprisingly, there has been a lag in expected reaction as the ASI fell 0.5%, 1.5% and 0.6% in the remaining days of the week, dragged by losses in Banking and Consumer Goods counters - ZENITH, GUARANTY, NESTLE and DANGSUGAR.
Performance across sectors was largely negative as all indices closed in the red save the Insurance index, which inched 0.3% higher on the back gains in NEM (+11.6%), and MANSARD (+3.8%). The Banking index led laggards, down 8.4% dragged by profit taking in UBA (-13.6%), ZENITH (-10.7%) and ACCESS (-10.4%). The Oil & Gas and Consumer Goods indices trailed, shedding 1.6% apiece as investors sold off positions in CONOIL (-5.1%), SEPLAT (-3.2%), UNILEVER (-14.5%) and DANGSUGAR (-7.1%). Similarly, sell offs in CCNN (-4.9%) and DANGCEM (-0.4%) drove the negative performance of the Industrial Goods index W-o-W (-0.2%).
Investor sentiment measured by market breath (advance/decline) ratio weakened to 0.4x from 1.1x recorded the prior week as 25 stocks advanced relative to 57 stocks that declined. ABCTRANS (+14.3%), JOHNHOLT (+12.5%) and NEM (+11.6%) were the top performing stocks for the week while JAPAUL OIL (-30.9%), FIDELITY (-22.5%) and UNITY (-21.5%) were the least performing stocks. Although the market performed negatively, we believe this has created bargain hunting opportunities. Hence, we expect a rebound in the market as investors take position in fundamentally sound stocks that declined.
Money Market Review and Outlook: Q2:2018 PMA Auction Calendar Fuels Bullish Sentiment in T-bills Market
In the Money Market this week, interbank rates – Open Buy Back (OBB) and Overnight (OVN) rates' fluctuated, rising at the start of the week on the back of CBN OMO and FX auctions before moderating mid-week due to impact of maturing T-bills and SMIS sales refund. At start of the week, OBB and OVN rates inched 5.2 and 5.5 ppts higher to 13.7% and 14.7% relative to 8.5% and 9.2% recorded the prior Friday. This spike in rates can be attributable to the CBN’s routine OMO mop-up in which the 87-day (offered: N30.0bn, sale: N51.0bn, rate: 12.6%) and 227-day (offered: N70.0bn, sale: N88.8bn, rate: 14.4%) instruments were offered. In addition, FX sale of US$210.0m squeezed liquidity, hence the increase in rates.
However, this was reversed by Tuesday as OBB and OVN rates moderated 4.2ppts and 4.6ppts to close at 9.5% and 10.1% respectively consequent on reduced pressure on system liquidity which stood at N221.8bn. Similarly, on Wednesday, rates further declined with the OBB and OVN closing at 5.8% and 6.3% respectively as liquidity improved to N338.7bn on the back of Retail FX auction refunds which hit the system. By Thursday, OBB and OVN rates inched slightly higher (up 0.8ppts and 1.3ppts) to close at 6.7% and 7.5% respectively as system liquidity tightened due to settlement of T-bills PMA held on Wednesday and CBN’s OMO auction which partly offset T-bills maturity (N261.9bn). The 105-day (Offered: N100.0bn, Sale: N2.7bn, Rate: 12.6%) and the 259-day (Offered: N300.0bn, Sale: N443.8bn, Rate: 14.4%) instruments were issued at the auction. Rates trended higher on Friday to close at 11.8% and 12.9%, up 3.3ppts and 3.8ppts W-o-W respectively.
In the T-bills market, performance was largely bullish as rates across benchmark tenors trended lower on 3 of 5 trading days. The trading week started on a bullish note as average rate across benchmark tenors fell 5bps to 13.8% despite the OMO auction by the CBN. This bullish sentiment extended till Tuesday as average rate across benchmark tenors declined 6bps following buying interest in medium tenored instruments (down 24bps) as investors reacted to a 50% cut borrowings in the Q2 PMA Calendar released by the CBN. By midweek, the bullish sentiment persisted as average rates further moderated 45bps, on account of significant buying interest across medium (-21bps) and short term (-27bps) instruments, to close at 13.3%.
The CBN conducted a PMA on Wednesday where the 91-day (Offered: N9.6bn, subscription: N 6.2bn, allotment: N 6.2bn), 182-day (offered: N 47.9bn, Subscription: N 12.5bn, allotment: N 4.0bn) and 364-day (offered: N 38.3bn, subscription: N154.6bn, allotment: N85.5bn) treasury instruments were offered at stop rates of 11.75%, 13.00% and 13.19% respectively. Following the auction, the bullish trend in the market was bucked on Thursday as rates rose 20bps on benchmark tenors on account of sizeable OMO sale by the CBN in which N446.5bn was mopped up. Consequently, average rate closed at 13.5% as sell-offs were recorded across long (+43bps), medium (+5bps) and short (+12bps) tenored instruments. Average rate closed the week at 13.4%, indicating an 31 bps W-o-W decline.
In the coming week, an OMO maturity of N227.5bn is expected to hit the system and we expect the bullish sentiment in the T-bills market to continue as investors continue to aggressively position in the secondary market in anticipation of slowdown in primary market auctions.
Foreign Exchange Market Review and Outlook: Naira Outlook Remains Stable Against the Backdrop of Sustained Interventions
In line with trend, the CBN continued its weekly intervention in the foreign exchange market, injecting US$210.0m across segments in the FX market - Wholesale Secondary Market Intervention Scheme (SMIS) window and special auction for Retail Invisibles. Against this backdrop, rates remained stable, trading within a tight band all week.
The CBN peg remained unchanged at N305.75/US$1.00 - N305.80/US$1.00. At the parallel market, rate opened the week at N362.00/US$1.00 on Monday and maintained this level till midweek before marginally depreciating 1kobo on Thursday to close at N 363.00/US$1.00 and stayed flat on Friday, indicative of a 1kobo appreciation W-o-W.
At the I & E Window, the NAFEX rate opened the week at N 360.03/US$1.00, appreciating 5 kobo from the previous Friday. However, this was reversed by Tuesday as it depreciated 13 kobo to close at N360.16/US$1.00 and remained flat till Thursday before closing the week at similar levels, indicating an 8 Kobo W-o-W depreciation. Activity level in the I& E window improved as total turnover on Thursday stood at US$1.4bn, up 162.3%(US$876.1m) from US$540.0m recorded the same period last week.
In the FMDQ OTC futures market, the total value of open contracts of the Naira settled OTC futures improved by US$167.9m indicative of a 5.0% W-o-W expansion to US$ 3.5bn relative to US$3.3bn recorded the previous Friday. The APR-2018 instrument remained the most subscribed with a total market value of US$659.9m (contract price: N360.59) while the JAN-2019 instrument was the least subscribed with a total value of US$47.5m (contract price: N362.27).
In the coming week, we expect rates to continue trading within tight bands on supportive CBN liquidity and autonomous FX flows.
Bond Market Review and Outlook: More Eurobond Issuances Underway as African Sovereigns Tap into Upbeat Sentiment
The domestic bond market was bullish as average yield declined 20bps W-o-W to 13.6% following the reduction in the amount of Treasury bills to be rolled over in the second quarter and positive inflation surprise. Yields trended lower till midweek, falling to an average of 13.5% before profit-taking took yields up 10bps on Friday. We particularly saw increased demand for long duration bonds as investors near term expectation for monetary policy continues to favour easing. In the coming week, the DMO will reopen 14.5% JULY 2021 and FEB 2028 instruments and offer a new 10-year bond - FGN FEB 2028. With the positive inflation surprise recorded during the week and stabilizing external sector variables, our outlook for the domestic bond market remains bullish.
In the Eurobond market, yield across 11 of 22 Sub-Saharan Africa Sovereign Eurobonds we track trended lower, indicating a largely mixed performance W-o-W. Our near term outlook for sentiment is a bit nuanced due to increasing tail risk of protectionism in developed market and gradual normalization of monetary policy anchoring yield expectations upward. This probably informs increasing pace of primary market issuances, with Ghana, Côte d’Ivoire and South Africa’s governments looking to join other SSA sovereigns which have tapped the market this year - Nigeria, Kenya and Senegal. Ghana raised its issuance target to US$2.5bn on Thursday while Ivory coast is set to seek € 4.7bn from the market. In line with trend, we expect these issuances to be largely successful due to high demand for high yield FCY debts instruments. South Africa will also be approaching the Eurobond market to raise US$3.0bn in April. As investors’ appetite for SSA Eurobonds remain upbeat, we anticipate more SSA issuances in the near term.
In the corporate Eurobond space, independent upstream focused oil & gas company – SEPLAT – became the first Nigerian company to issue an Eurobond in 2018 with a debut 5-year US$350.0m issuance, priced at 9.25%. In the secondary market, sentiment was broadly positive as yields fell on 7 of 12 instruments. FBN 2020 was the most bullish as YTM fell 25bps to 8.8%. On the flipside, FIDELITY 2022 was the most bearish (YTM up 7bps to 9.3%). Year to Date, the best performing instruments are DIAMOND 2019 and FBNH 2021 with YTD returns of 4.0% and 3.6% respectively.