Market Performance: Money, Forex, Bond Weekly Evaluation

The market remained awash with liquidity all through the week which is in line with the trend that has been observed in recent time, consequent on the fact that mop up activities by the apex bank have been suspended for the past two months. Given the level of liquidity in the system, the Money market rates reached new year-lows during the week. On the first day of the week, liquidity level opened above N800bn, Open Buy Back (OBB) and Overnight (O/N) rates settled at 0.7% and 1.0% respectively. On Tuesday, liquidity level remained above the N800bn mark despite the provision for the special FX intervention slated for Thursday. However, Money market rates slid to a year low of 0.5% for the OBB and 1.0% for the O/N rate.

On Wednesday, opening liquidity balance contracted to N500bn, which we believe is connected to the placement of funds by DMBs for the Bond auction which took place on the same day. Consequently the OBB marginally rose 13bps to 0.6% while the O/N rate remained flat at 1.0%. On Thursday, an OMO maturity worth N179.6bn hit the system, this increased the available levels of liquidity and resulted in a decline in the OBB rate to 0.5% while the O/N still remained flat at 1.0%. At the close of the week, money market rates settled at 0.7% for the OBB and 1.0% for the O/N rate resulting in 6bps and 8bps W-o-W decline in average money market rates to 0.6%(OBB) and 1.0%(O/N).

The T-bills market remained bullish all through the week driven by the robust liquidity levels. At the start of the week, interest was centered on the medium to long tenured instruments, which resulted in a 45bps decline in rates. This trend continued up until Wednesday when profit taking activities drove rates northwards however, on Thursday, the bullish run rates declined about 120bps across all instruments. In the coming week, T-bills worth N109.6bn is expected to hit the system, hence we anticipate liquidity level to remain robust.

Foreign Exchange Market Review and Outlook
Activities in the forex market all through the week mirrored activities from the previous week. On Monday, the Naira appreciated 2kobo to N196.98/ US $1.0 on Monday and this was maintained till Thursday when the naira depreciated 2 kobo to N197.00 / US$ 1.00 and the CBN also held its currency auction. We posit that the marginal changes we are noticing in the value of the naira can be attributed to some administrative measures taken by the CBN prior to official FX interventions on Thursdays. Similarly at the Interbank market, the Naira appreciated 2kobo on Monday to trade at N199.08/US $1.00 and this was sustained till Thursday when the naira depreciated by the exact same amount to N199.08/US $1.00. Analysis of activities in the forwards market shows traders are pricing the naira within the range of N225.00 and N230.00 (1-year forward) as naira is still believed not to be trading at its true value.

At the parallel market, the naira continued to depreciate against the dollar, trading for as high as N232.00/US $1.00. The increasing activity in at the parallel market has been attributed to the full execution of the BVN requirement for financial transactions. Operators at the BDC have complained to the Apex Bank that the requirement for the provision of a customer's BVN before executing a forex transaction has driven a lot of customers to the parallel market due to fears of their accounts being used for malicious activities. The reduction in activity at the BDC has left the operators with large volumes of unsold foreign currencies. The BDC operators have called on the apex Bank to extend the already passed deadline for the compliance on the use of the BVN. We do not expect the CBN to reverse its stance on the use of BVN for FX transactions and expect the currency to trend at current level next week.
Bond Market Review and Outlook
On Monday, Barclays announced that the Nigerian Sovereign debt would be removed from its emerging local currency government bond benchmark index from February 1, 2016. However, if the performance of the market this week is anything to go by, it is safe to say that investors still remain bullish on the Nigerian fixed income market despite the announcement, given that majority of the players in the market are domestic investors'. The suspension of OMO auction by the CBN has also buoyed liquidity level of banks which has doused the effects of foreign investors exiting the market.

The Bullish performance noticed in the Bond market continued in the week given the high levels of liquidity that has left investors spoilt for choice on fixed income instruments to take position in. Currently most of the Instruments (including non-benchmark bonds) are trading at a premium to par. On Monday, the market opened for the week bullish given liquidity levels of over N800bn as there was increased buying interest across all trading instruments, with the APR 2017, JUN 2019 and FEB 2020 being the most attractive, thus average yields declined 95bps to 10.2%.

On Tuesday, the buying interest persisted as domestic investors increased participation in the bond market with the MAR 2024 which was to be re-opened at the auction on Wednesday witnessing increased activity while the 20 -year benchmark instrument JUL 2034 traded at a premium to par. The DMO reopened Auctions on the FEB 2020 - 5-Year Tenor and the MAR 2024 - 10-year tenor on Wednesday.  As against the sum of N50.0bn offered, both instruments were largely oversubscribed, with the FEB 2020 oversubscribed to the tune of N71.1bn relative to N30.0bn offered and allocated at a marginal rate of 10.25% while the MAR 2024 received a total of N83.9bn subscription relative to N20.0bn offered and allotted at a marginal rate of 10.01%. N20.0bn of the FEB 2020 instrument was also allotted on a non-competitive basis. There was a change in fortunes for the market on Thursday as sell-offs across all instruments drove yields 87bps northwards on the average on speculations that the CBN may start to mop up liquidity in the financial system. The sell-down pressure persisted on Friday as yields rose across all maturities. Despite the sell pressure experienced on the last two trading days of the week, yields still closed down on average by 16bps W-o-W to 11.0%.

Given the high liquidity levels in the market and no official communication yet on the resumption of OMO auctions, our short term outlook for the bond market remains bullish.