Review and Outlook of Global, Nigeria Markets –Week Ended Sept. 2, 2016

Global Market Review and Outlook
Activities in the global equities market were broadly positive as the US Fed kept the possibility of a rate hike this year on the table. Also, the week saw investors await the US monthly employment data report as well as personal consumption and inflation report. In the European market, performance was driven by expectations surrounding unemployment and business sentiment readings which were expected to show the impact of the UK’s vote to leave the EU. Meanwhile, oil prices witnessed a late rally, shaking off losses earlier in the week as the Russian President, Vladimir Putin urged oil-producing countries to halt production levels save for Iran which he deemed “unfair”.

Performance in the developed markets was broadly bullish as all indices closed in the green. The US S&P and NASDAQ rose 0.7% apiece W-o-W amid speculation on the timing of Fed Fund rate hike. Likewise, the UK FTSE climbed 0.4% W-o-W, erasing a two week losing streak, despite a drag in mining stocks. The Euro-Asian markets also closed higher with the Japanese NIKKEI recording the highest return, up 3.5% W-o-W as weaker Yen drove the index to close in the green. Hong Kong HANG-SENG followed suit, up 1.7% while the France CAC 40 and German DAX improved 1.6%and 0.5% W-o-W respectively.

Performance within the BRICS classification was mixed with the China SHANGHAI COMP index and the South African FTSE depreciating 0.1% and 1.0% W-o-W respectively. On the flip side, the Russian RTS gained 0.4% W-o-W while the Brazilian IBOVESPA, closed 0.9% higher despite developments in the political scenery.

The positive performance filtered into the African markets as the Ghanaian GSE led advancers, rising 4.0% W-o-W. The Nigerian All Share Index followed suit, up 1.1% W-o-W as market Heavy weight- DANGCEM - boosted performance. The Egypt EGX 30 snapped its 2 weeks losing streak to close 0.1% higher. Contrarily, the Kenyan NSE closed the week 0.6% lower.

Equities Market Review and Outlook
The Nigerian equities market ended the month of August on a negative note (down 1.5%) as unimpressive H1: 2016 earnings releases as well as attractive yields in the fixed income market further dampened investors’ appetite for equities. However, performance for the week disregarded poor economic data published by the NBS, as the All Share Index (ASI) appreciated 1.1% W-o-W bringing YTD loss to 3.1%. Uptrend was driven by price appreciation in market heavyweight – DANGCEM – which published a press release during the week that ex-factory price of cement in Nigeria (its largest market) will be hiked by N600/bag while switching to coal as a source of energy for its production lines (scheduled to begin in November). This is expected to trim operating cost and boost profit margins. In the same light, market capitalization advanced by N106.6bn to settle at N9.5tn. Activity level however declined as average volume and value eased 0.7% and 0.2% to settle at 223.0m units and N2.8bn W-o-W respectively.

Overall performance across sector indices was mixed. The Industrial Goods index plunged 5.3% W-o-W on account of profit taking in WAPCO (-2.8%) as well as end of the week sell pressure on DANGCEM which tumbled 7.8% on Friday after surging 8.6% in the previous session.  Likewise, the Insurance index slipped 0.1% due to losses in NEM (-7.8%). On the flipside, the Oil & Gas Index advanced the most up 1.1% W-o-W due to renewed appetite for SEPLAT (+15.6%) and MOBIL (+5.0%).The Banking Index also closed in the green, up 1.0% following gains in WEMA (+17.2%), SKYE (+8.5%), ETI (+3.1%) and GUARANTY (+2.9%), while gains in 7UP (+28.2%), CADBURY (+4.3%), NIGERIAN BREWERIES (+1.2%) and GUINNESS (+1.2%) ensured the Consumer Goods index (+0.2%) closed higher.

Despite the improved market performance, investor sentiment softened, as market breadth -advancers/decliners ratio- stood at 0.9x (against a previous 1.1x) on account of 28 stocks that advanced while 29 stocks declined. The best performing stocks for the week were 7UP (+28.2%), WEMA (+17.2%) and SEPLAT (+15.8%) while MAYBAKER (-19.8%), UNITY (-10.7%) and JBERGER (-9.7%) declined the most. In the week ahead, performance is expected to remain weak on back of frail macroeconomic activities and waning investor sentiment for equities.

Money Market Review and Outlook
Performance in money market was expectedly dictated by system liquidity dynamics during the week. Aggregate system liquidity opened the week at N76.1bn. Despite an OMO auction floated by the CBN where N127.0bn was mopped up on Monday, Open Buy Back (OBB) and Over Night (O/N) rates  dipped by 7.9% and 7.2% to settle at 10.3% and 11.7% respectively on the back of a N443.7bn July 2016 FAAC allocation inflow. Accordingly, system liquidity opening balance rose to N211.7bn on Tuesday. However, the CBN mopped up N145.4bn on the same day, thus OBB and O/N lending rates surged to 20.0% and 22.0% at the end of Tuesday’s trading session but moderated to 16.0% and 17.7% on Wednesday on the back of a N212.9bn net T-bills maturity. Nonetheless, the impact of the debit for the rollover of the net T-bills maturity on liquidity levels triggered a 1.5% and 2.2% increase in OBB and O/N rates, settling at 17.5% and 19.9% respectively on Thursday and eventually closing at 13.0% and 15.3% on Friday, up 5.2% and 3.6% W-o-W.

Performance in the Treasury bills market was fairly bearish this week as average T-bills rates increased 0.1% W-o-W to 17.0%. During the week, a net T-bills maturity worth N212.9bn matured into the system.  This included N45.9bn, N62.0bn and N105.0bn of the 91-day, 182-day and 364-day T-bills respectively. However, a rollover of net maturing amount was auctioned by the CBN at the primary market on Wednesday. The auction was oversubscribed by 2.4x whilst the 91-day, 182-day and 364-day instruments were allotted at 14.4%, 17.5% and 18.4% respectively.

In the week ahead, we expect money market rates to remain in double digits, barring any unexpected inflows as we expect the CBN to continue mopping up liquidity in pursuance of its tightening policy.

Foreign Exchange Review and Outlook
The foreign exchange market continued to writhe from the impact of the Apex Bank’s decision to suspend some banks from interbank market, with the impact felt more at the parallel market. Accordingly, parallel market rate depreciated all week, from N413.00/US$1.00 on Monday to N420.00/US$1.00 by midweek and a low of N425.00/US$1.00 on Thursday. At the interbank, the spot rate traded within a tight range, hovering between N318.83/US$1.00 at the start of the week and N313.31/US1.00 by Thursday, an appreciation from last week Friday’s N314.95/US$1.00 on the back of CBN’s interventions during the week as well as US$327.00m worth of FX inflow, out of which US$270.00m was channelled into the local debt market.

Nonetheless, the derivatives product launched by the CBN on the FMDQ OTC platform has continued to gain traction, particularly the Naira Settled OTC Futures. The total value of futures contract as at Thursday, 1st September stood at US$2.8bn, rising US$1.1bn M-o-M. During the week, there was noticeable interest in the JULY 19 2017 instrument as the value of open contract rose from US$95.75m to US$398.89m. This is not unsurprising as the instrument commands the lowest price (N231.00/US$1.00) on the calendar.
The Apex Bank reportedly readmitted the suspended banks into the Forex market, and also issued operating licenses to 11 international money transfer operators (IMTOs), some of which were earlier barred from FX transaction. We laud the CBN’s decision to readmit the nine banks into the interbank market and also imagine that the reported US$327.00m inflow recorded during the week may encourage similar funds into the Nigerian market going forward.

Bond Market Review and Outlook
Activities in the bonds market remained soft this week as investor interest in the debt market remains skewed to short dated instruments given the attractive yield at the shorter end of the curve. Average yield across benchmark bonds fell 0.1% on Monday to close at 15.2% (from 15.3% in the previous Friday) as buying interest remained weak. Average yields across benchmark bonds remained around Monday’s levels till midweek. However, average yield eased 0.1% on Thursday on increased buying interest in JULY 2034 and MAR 2036 instruments, thus average yield eventually settled at 15.0% on Friday, down 0.1% W-o-W.

In the Eurobonds market, performance across Nigerian corporate Eurobonds was mixed. Bargain hunting in the FBN AUG 2020 and JUL 2021 instruments saw yields drop 2.7% and 0.3% W-o-W respectively. However, sell sentiment persisted in the ACCESS JULY 2016 (+0.3%), DIAMOND MAY 2019 (+0.2%) instruments whilst recent bargain hunting in the FIDELITY MAY 2018 Eurobond (Flat W-o-W) eased. Similarly, bearish sentiments persisted in the Sub-Saharan sovereigns, as yields rose on all sovereign Eurobonds in the region save for the Senegal 2024 instrument which declined 1bp. Yields on the Nigeria 2018 and 2021 sovereign Eurobonds declined 0.2% apiece whilst yield on the Nigeria 2023 instrument dipped 0.1%. Nonetheless, the Zambia 2024 sovereign Eurobond commands the highest YTD return at 22.5%.

The sell sentiment during the week may not be unrelated to fresh speculations of a Fed Fund rate hike as this may dampen sentiments in emerging market assets. We expect activities in the bonds market to remain soft in the interim.