Weekly Market Review and Outlook –Sept. 23, 2016

Global Market Review and Outlook
Monetary policy decisions by key central banks were the major highlights of the week. The US FOMC held its 6th meeting for the year and elected to keep the Fed Fund rate unchanged despite speculations of a possible hike. Likewise other policy makers across regions - South African Reserve Bank Monetary Policy Committee, Nigerian Monetary Policy Committee and the Bank of Japan (BoJ) all kept their respective rates unchanged. Ahead of the OPEC meeting scheduled to take place next week, the debate between Saudi Arabia and Iran with regards to a cap on production lingers.

Performance across developed markets was broadly positive as all indices closed in the green. The US S&P and NASDAQ advanced 1.8% apiece WTD even as the FOMC decided to keep rates unchanged while the UK FTSE also gained 3.0% W-o-W. In the Euro-Asian region, a positive streak was maintained all through the week with the German DAX advancing the most, up 3.9% W-o-W on account of price appreciation in automobile stocks. The France CAC followed suit gaining 2.9% W-o-W. The Japanese NIKKEI added 1.7% W-o-W, boosted by investors’ reaction to the BoJ decision in the week while the Hong Kong HANG-SENG improved 1.8% W-o-W.

The overhanging positive sentiments filtered into markets within the BRICS classification as all indices improved W-o-W. The China Shanghai Composite added 1.0% W-o-W despite some profit taking by investors during the week. The South African FTSE closed 0.1% higher W-o-W driven by a revised 2016 growth forecast from 0% to 0.4% by the South African Reserve Bank. Similarly, the Russian RTS recorded a 4.2% gain W-o-W likewise the Brazilian IBOVESPA which closed 3.4% higher W-o-W.

Bearish sentiments trailed the African markets as all indices retreated to the negative territory save for the Nigerian All Share Index which rose 1.4% W-o-W. The Kenyan NSE declined the most, down 1.1% W-o-W while the Egyptian EGX 30 for the second consecutive week lost 0.8% W-o-W. Similarly, the Ghanaian GSE fell 0.6% W-o-W.

Equities Market Review and Outlook
The Nigerian equities market closed in the green for the 2nd consecutive week as the broader index appreciated on three days of the week while declining on two. Accordingly, the benchmark index gained 1.4% W-o-W to close at 28,247.11 points. The week started on a negative note, with the All Share Index losing 7bps as investors anticipated the outcome of the MPC meeting. However, the downtrend was bucked on Tuesday as gains in market heavy weight – DANGCEM drove the index 1.3% northwards and further rose on Wednesday (2bps). On Thursday the ASI slid 0.2% while gaining 0.3% on Friday. Market capitalization improved by N133.5bn to settle at N9.7tn while YTD loss trimmed to 1.4%. Activity level strengthened during the week as average volume and value traded rose 43.2% and 48.1% to settle at 291.9m units and N2.7bn W-o-W respectively.

Sector performance was mixed. The Oil & Gas index advanced the most (+6.4%) on account of strong buy sentiment in CONOIL (+33.5%), and TOTAL (+18.0%) while the Industrial Goods index gained 1.6% on the back of gains DANGCEM (+3.4%). On the flipside, the Banking index lost the most, down 0.7% on account of price depreciation in GUARANTY (-7.2%) and ETI (-1.2%). The Consumer Goods Index fell 0.5% on weaker sentiments in NIGERIAN BREWERIES (-1.0%) and UNILEVER (-1.0%) which appreciated in the previous week. Notably, investors sold off on GUINNESS (-7.0%) following the recently released poor FY:2016 result in which turnover slid 13.9% Y-o-Y to N102.0bn while the company recorded loss of N2.0bn for the period. The Insurance index closed flat.

Investor sentiment remained positive, as market breadth -advancers/decliners ratio- stood at 1.3x following 33 stocks that advanced while 25 declined. The best performing stocks for the week were CONOIL (+33.5%), CUTIX (+19.4%), and TOTAL (+18.0%) while CAVERTON (-13.2%), NEIMETH (-13.0%) and BETAGLAS (-9.7%) were the worst performers. Following two consecutive weeks of appreciation in the Benchmark index, we expect some profit taking in the week ahead especially as there are no major triggers to stoke investors’ appetite.
Money Market Review and Outlook
Contrary to deficit opening balances throughout the previous week, aggregate system liquidity improved this week as liquidity levels opened in a surplus position on all trading sessions save for Monday when opening balance stood at a deficit of N123.1bn. Accordingly, Open Buy-Back (OBB) and Overnight (O/N) rates eased 22.8% and 21.7% points W-o-W respectively but remained in double digit levels.

On Monday, aggregate liquidity level in the system was buoyed by a Federal Government bond coupon inflow of over N40.0bn which ensured a 10.1% and 8.2% points decline in OBB and O/N (O/N) lending rates to 26.2% and 28.8% respectively. Rates moderated further to 17.3% and 18.4% respectively on Tuesday and eventually settled at 10.3% and 11.8% by midweek as system liquidity further improved. However, an OMO mop-up worth N201.0bn coupled with T-bills auction debits for Wednesday’s PMA drove OBB and O/N rates 6.5% and 6.3% points higher to 16.8% and 18.1% on Thursday.  Despite the OMO mop-up on Friday (of N207.1bn), OBB and O/N rates moderated on Friday down 3.3% and 2.8% to 13.5% and 15.3% respectively. This could be attributable to circa N200.0bn FAAC inflow which had earlier hit the system.

Notwithstanding improved system liquidity, activities in the Treasury Bills market were largely mixed amid expected outcome of the September MPC meeting as well as primary market issuances. On Monday, average T-bills rate rose 10bps to 17.2% (from 17.1% on Friday). Average rate however dropped 12bps points on Tuesday to settle at 17.0% amid speculation on the outcome of the MPC meeting. At the T-bills auction on Wednesday, N28.1bn of 91-day, N23.6bn of 182-day and N89.1bn of 364-day instruments were issued at stop rates of 14.0%, 17.3% and 18.3% respectively. The auction was oversubscribed by 0.4x with net subscription amounting to N398.1bn against net offered amount of N140.9bn. The impact of Wednesday’s T-bills auction on system liquidity was however offset by a net T-bills maturity of N90.9bn and an OMO maturity of N149.5bn on Thursday. Average T-bills rate closed the week at 17.5% on Friday, down 41bps W-o-W.

In the week ahead, barring any unexpected inflow, we expect money market rates to adjust in tandem to liquidity dynamics as dictated by OMO mop-ups by the Apex Bank.

Foreign Exchange Review and Outlook
The Naira appreciated 0.3% W-o-W at the interbank market as the Monetary Policy Committee (MPC) kept policy rates constant during the week. Interbank market spot rate appreciated on Monday as the local unit strengthened to N307.25/US$1.00 from N308.69/US$1.00 on Friday following a US$1.5m worth of FX intervention by the Apex Bank. Nonetheless, the Naira weakened to N310.08/US$1.00 and N313.07/US$1.00 on Wednesday and Thursday despite further intervention by CBN on both trading days. However, the domestic currency rallied in the interbank to close the week at N307.79/US$1.00 on Friday. Compared to US$25.4bn as at 30th August 2016, Gross External Reserves stands at US$24.7bn as at 22nd September 2016, down 2.8% MTD.  At the parallel market, the Naira opened the week flat on Monday but appreciated to N424.00/US$1.00 on Tuesday. However, parallel market rate tumbled rates tumbled 2.3% W-o-W as the domestic currency closed the week at N435.00/US$1.00 on Friday relative to N425.00/US$1.00 in the previous Friday.

Activities in the futures market however improved as the total value of open contracts rose US$159.3m to US$3.4bn from US$3.2bn in the previous week. Investors were more interested in the NGUS-MAY 2017 instrument as the value of open contract on the instrument increased US$38.53m to US$102.87m. The NGUS-FEB 2017 instrument trailed closely appreciating US$34.61m. Also, the NGUS-OCT 2016 and NGUS-SEPT 2016 instruments recorded US$23.91m and US$20.19 worth of buy interest during the week. The NGUS-APR 2017 and the NGUS-JUN 2017 contracts however saw the lowest patronage with value of open contract rising US$0.51m apiece compared to the previous week where they witnessed the most buying interest.

In the week ahead, the SEP-28 2016 contract will be maturing on Wednesday, we expect the CBN to re-open a new 12 months futures contract as a replacement. We commend the decision of the MPC to maintain policy rates at their current levels during the week as this demonstrates determination of the monetary authority prop up liquidity in the currency market notwithstanding calls for a reduction in MPR.

Bond Market Review and Outlook
Contrary to previous weeks, activity level in the bond market picked up this week amid bullish sentiment, as average yield across benchmark bonds declined on all trading days and by 28bps W-o-W on the back of increased buying interest, particularly at the longer end of the curve.

On Monday, average yield across benchmark bonds dipped 11bps points to close at 14.9% (from 15.0% on Friday) as interest in the JAN 2026 and MAR 2036 instruments increased. This trend was sustained on the second trading session of the week as average yield further declined 7bps to close at 14.8% on Tuesday. Despite the MPC’s decision to maintain status quo on key rates, interest persisted on Wednesday, as average yield shed 17bp across benchmark bonds to close at 14.7%. Average yield further declined to 14.6% on Thursday, eventually settling at 14.7%.

We think improved liquidity level contributed to the drop in yields this week, but anticipate a reversal in next week’s trading sessions as the central bank has maintained its policy tightening stance.