Review and Outlook of Global, Nigeria Markets –Week Ended June 3, 2016

Global Market Review and Outlook
The European Central Bank held a meeting on Thursday, and as was widely expected, decided to maintain status quo on all its key rates while opting to delay until the full effects of its on-going monetary stimulus and quantitative easing programme reverberates across markets within the Eurozone. Going forward, investors will now look towards the upcoming FOMC meeting as well as the referendum on a possible BREXIT in order to make appropriate investment decisions.

Performance of global equities markets under our coverage remained mixed this week across regions. In the developed markets, the US S &P 500 and NASDAQ advanced 0.3% and 0.2% W-o-W respectively amid expectations of an improvement in jobs number which will be released Friday. Contrarily, the UK FTSE declined 1.2% W-o-W as the losses suffered at the earlier trading days of the week outweighed the gains on the last day of the week. In the European markets, the sentiments were broadly bearish as the France CAC and the German DAX depreciated 1.9% and 1.6% W-o-W respectively following the decision of the ECB at its meeting on Thursday, to keep rates unchanged. Across the Asian markets, the Japanese Nikkei reversed gains from the previous week as the index slid 1.1% W-o-W. On the flipside, the Hong Kong Hang Seng improved for the 2nd consecutive week, up 1.8% W-o-W riding on the bullish wave in the mainland Chinese market.

In the markets under the BRICS classification, the Chinese Shanghai bucked a 6-week losing streak as the index improved 4.2% W-o-W. The gains recorded in the market were broadly driven by increased expectations of an inclusion of some mainland Chinese stocks in MSCI benchmarks. Sentiments in the Brazilian market also improved as the Ibovespa grew 2.5% W-o-W amid optimism emanating from changes in the political scene. The India BSE and the South African FTSE also followed suit, improving 0.7% and 0.1% W-o-W respectively while the Russian RTS fell 0.9% W-o-W.

Across the African markets, the Egypt EGX was the only advancing index, up 1.2% W-o-W on account of a new listing on the exchange during the week, which performed strongly. On the flipside, the Nigerian All Share Index, depreciated the most, losing 4.4% W-o-W, followed by the Kenyan NSE (-1.8%) and the Ghana GSE (-1.1%).

Weekly Equities Market Review and Outlook
The bullish trend in the Nigerian equities market which has been sustained for 5 consecutive weeks was bucked this week as investors sold off across board, following the delay in the release of the modus operandi of the proposed flexibility in the FX market and the renderings from the democracy day speech. Consequent on the aforementioned, the market suffered the biggest daily decline in record time, down 4.3% on Tuesday. The bearish sentiments persisted on Wednesday as the benchmark index fell 2.8% following increased sell-offs in market bellwethers. However, on Thursday, the negative performance was reversed as investors took position in some market bellwethers that had declined significantly, driving the broader index 1.0% northwards, nevertheless, investor sentiments remained soft as stocks that declined outnumbered the appreciating stocks. This trend was sustained on the last trading day of the week as the All Share Index improved 1.7%. As a result of the massive losses recorded in the week, the All ShareSector performance for the week was broadly negative as all sector indices closed in the red. The Banking sector index plunged 7.7%

Index depreciated 4.4% W-o-W to close at 27,634.48 points, dragging YTD performance back into the negative region of -3.5%. In the same vein, market capitalization reduced by N435.4bn to settle at N9.5tn. Activity level weakened as average volume traded fell 33.3% to 311.6m units while average value traded declined by 4.8% to N2.8bn.followingsell offs in ZENITH (-9.8%), ETI (-9.0%) and GUARANTY (-6.8%). Similarly, the negative performance of the Oil & Gas index (-5.3%) was majorly due to losses in OANDO (-17.3%) and FORTE (-5.0%) while the Insurance index fell 4.1%. The Industrial Goods and Consumer Goods indices also followed suit, losing 3.4% and 3.0% respectively on account of price depreciations in DANGCEM (-3.2%) and GUINNESS (-7.1%).

Investor sentiments this week significantly weakened as seen in the market breadth of 0.3x from 2.3x in the previous week, as 16 stocks advanced while 58 declined. The Best performing stocks for the week were ETRANZACT (+25.9%), CADBURY (+22.0%) and TRANSEXPRESS (+20.1%), while OANDO (-15.6%), NEIMETH (-15.05%) and UACN (-13.6%) were the worst performing counters for the week. The bearish trend in the market is expected to continue in the coming week as investors await guidelines on the proposition to implement some flexibility in the FX market, hence we suggest that investors trade cautiously and take position in fundamentally sound stocks.

Money Market Review and Outlook
The financial system liquidity opened the week on Tuesday higher at N463.2bn relative N277.4bn closing balance in the previous week. Thus, money market rates, OBB and OVN settled at 3.1% and 3.4% respectively prompting an OMO auction of N50.0bn by the CBN. Consequently, system liquidity moderated to N412.5bn on Wednesday but did not materially impact on rates as the OBB rates dropped to 2.8% while O/N steadied at 3.4%. On Thursday, system liquidity received a boost as it further inched higher to N439.4bn while OBB and OVN rates moderated to 2.7% and 3.3% in that order. As at Friday, OBB and OVN rates closed 2.0% and 2.3% lower W-o-W to settle at 2.8% and 3.2% as the system liquidity had improved 51.4% to close the week at N408.3bn.

At the Treasury Bills market, investors continue to show interest in the short dated T-bills instruments as against the 364 Day instruments that traded at yields in excess of 11.0% throughout the week. Average T-bills yield opened higher on Tuesday at 10.1% in response to system liquidity dynamics but moderated at 9.3% on Wednesday and Thursday. The CBN on Wednesday conducted a total of N143.9bn treasury bills auction for the 91-Day, 182-Day and 364-Day instruments at respective marginal rates of 8.0%, 9.1% and 11.1% with the three instruments more than 100.0% oversubscribed. Amidst the weighty macroeconomic risk factors in the system, we expect investors to remain cautiously in favour of shorter term instruments; hence, we expect the T-bills market to trade bullish in the week.

Foreign Exchange Review and Outlook
The foreign exchange market in the week remained pressured by the uncertainty around the anticipated flexible exchange rate policy which was communicated to the market at the end of the last Monetary Policy Committee (MPC) meeting of the CBN. The market had expected that the guidelines for the new flexible exchange rate regime would be communicated early enough to restore normalcy to the foreign exchange market. But the delay by the CBN on the specifics of the new FX policy further fuelled speculation within the BDC/parallel segment of the FX market as the Naira depreciated by 1.4% against the Dollar to close at N355.00/US$1.00 relative to previous week’s close of N350.00/US$1.00.

At the official/interbank segment however, the Naira remained stable for the week as the CBN again intervened at the official rate of N197.50/US$1.00. This makes the third consecutive auction the CBN conducted at the rate of N197.00/US$1.00 or N197.50/US$1.00 after the market had anticipated that the Apex Bank would adjust its intervention rate (in order to save the external reserves) subsequent to NNPC’s announcement of a guided deregulation of the downstream petroleum sector that pegged the FX rate for petroleum importers at N285.00/US$1.00. We analyzed the movement in foreign exchange reserves for the month of May-2016 and found out that it closed 2.6% (US$26.4bn) lower relative to the level (US$27.1bn) in April-2016, implying that an approximate average of US$0.7bn was used in defending the currency in May. In the interim, pending the clarity on the new FX policy, we opine that the pressure at the parallel segment will persist.

Whilst we reiterate our stance on the need to standardize the foreign exchange rate determination to a single market price as the CBN finalises the modality for its flexible FX regime in the coming days, we believe the Apex Bank needs to be wary of intervening at the rate of N197.00/US$1.00 which is clearly misaligned and also expands opportunity for arbitrage as well as other forms of market distortions.

Bond Market Review and Outlook
The bullish intensity noticed in the domestic bonds market in the periods leading to the last MPC meeting had reduced further, waning during the concluded week. The T-bills auction conducted by the CBN also affected bonds market sentiments for the week. Average bonds yield for the 4-day week had opened lower at 12.4% on Tuesday relative to the close of 12.5% it closed in the previous week. Sell momentum across term structure but more on the longer end of the curve brought average yields higher at 12.5% on Wednesday but lower again as at Thursday at 12.4%. At the close of trade on Friday, average bonds yield retracted to 12.5% as dampened sentiments spurred sell pressure. The sovereign yield curve (a curve showing different government bonds with their yields and term to maturity) in the week improved marginally shifting 10bps higher on the average as month-end portfolio rebalancing by fund managers impacted considerably on market activities.

Investors continue to favour shorter tenured bonds instruments as the yield curve simply shows morebuyIn expectation of the CBN’s release of FX policy which may signal safety for foreign investors, we think some sovereign bonds instruments around the longer term maturity offer attractive buy opportunities as they currently trade activities at the short and medium end of the curve. The yield curve is also showing near normality as lower tenured instruments attract lower yields while medium to longer tenure command higher yields at significant a discount to their respective par values. Benchmark instruments JAN 2026, JUL 2030, JUL 2034 and MAR 2036 which are trading at N95.7, N78.0, N89.3and N93.0 respectively as well as attractive coupons are recommended. We expect the bonds market to remain calm in the coming week.