Weekly Market Review and Outlook

This week, the Nigerian Equity market was generally driven by the Q3:2015 earnings releases as well as activities in DANGOTE CEMENT which is the most capitalised stock on the bourse. Consequently, the All Share Index gained on 2 out of the 5 trading days of the week bringing W-o-W return to +0.6% and paring YTD loss to -13.4%. Market capitalization equally added N61.1bn W-o-W to settle at N10.3tn. Market activities also improved as investors staked an average of N2.6bn (+29.0% W-o-W) daily on 198.5m units of shares (+32.3% W-o-W). Equally, OANDO emerged the most traded stock by volume with 121.2m units (21.1% of total volume traded) whilst NESTLE topped the value chart with N2.0bn (15.0% of total value traded) respectively.

Sector indices closed in a mix this week. Against the backdrop of the sustained rally in the Oil & Gas index, the sector was highest gainer with 3.1% W-o-W attributable to bullish sentiment in OANDO (+7.1%) and FORTE OIL (+3.6%). Also following the release of impressive 9M:2015 results by ACCESS BANK and UBA, sentiment improved towards Banking stocks as the index added 1.4% W-o-W consequent on appreciations in ACCESS (+6.4%) and GUARANTY (+4.2%). The Industrial Goods index also rose 0.1% W-o-W. Contrary to the Insurance sector performance of the previous week, the index shed points on 4 trading days this week to settle at 0.8% (loss) W-o-W on the back of sell downs in CONTINSURE (-5.0%) and AIICO (-4.4%). The Consumer Goods sector also declined 0.5% W-o-W.

Market breadth stayed negative at 0.7x (26 advancers' vs 37 decliners). The gainers' chart was led by HONYFLOUR (+9.4%), NEM (+8.8%) and GLAXOSMITH (+8.2%) while the OKOMU OIL (-14.2%), RT BRISCOE (-11.7%) and ACADEMY (-9.2%) topped the laggards. In coming sessions, we expect sideways trading as market continues to mirror Q3:2015 earnings performance of listed companies.

Money Market
Liquidity levels remained robust all through the week which is in line with the recent trend, although lower than the levels in the previous two weeks. Hence, interbank money market rates remained at their low levels at the start of the week - 0.8% for the Open Buy Back (OBB) and 1.0% for the Overnight (O/|N) - majorly due to the robust liquidity level in the system (over N800.0bn). On Tuesday, rates rose marginally as the OBB advanced 29bps to 1.1% and the O/N rate up 50bps to 1.0%. The increase in rates was due to the scheduled FX intervention sales on Thursday for which deposit Money Banks were required to provide funds 48-hours in advance.

Against this backdrop, we observed a contraction in liquidity opening balance of DMBs to N384.2bn on Wednesday, which led to a spike in money market rates, as the OBB settled at 5.3% while the O/N stood at 5.8%. There was also a T-bills maturity worth N138.2bn, however the CBN conducted a Primary Market Auction (PMA) of the same amount on that day. On Thursday, market liquidity further fell to N329.2bn and this resulted in a marginal increase in money market rates. The OBB and O/N averaged 3.5% and 3.9% this week, which signifies a 2.7% and 2.9% W-o-W increase relative to the previous week.

The T-bills market started the week on a bearish note and this persisted all through the week as sell offs were observed across board which pushed up average rate from 8.1% in the previous week to 8.4% on Friday. W-o-W, rates rose 39bps across tenors, which is attributable to the tighter liquidity in the money market. In the coming week, liquidity level are expected improve slightly as OMO maturity of N120.0bn will hit the system on Thursday, 29th October, 2015. Hence, we expect interbank money market rate to continue to trade at single digit in the coming week.

Foreign Exchange Market
In the interbank market this week, the naira experienced some slight movements. On Monday, the naira traded at N199.10/ US $1.00 but appreciated by 2kobo on Tuesday (N199.08/ US $ 1.00) after the CBN reduced its intervention rate by 2kobo to N196.98/ US $1.00. This was sustained on Wednesday and held till the end of the week. At the BDC, the naira appreciated N2.00 at the start of the week (N224.00/ US $1.00) however, with increased pressures on the naira, there was a N1.00 depreciation to N225.00/ US $1.00.

Despite the CBN's position that the naira is appropriately priced at current official rate, the N28.02 spread between interbank and parallel rates, as well as the current pricing of the naira at forward market (6 month forward: N226.00/US$1.00) suggests a high likelihood of adjustment in interbank pricing if administrative curbs on trading are removed. Nevertheless, we do not expect the CBN to make a significant re-adjustment in its intervention rate or administrative management of FX. Demand restrictive policies has already resulted in lower utilization of FX by DMBs and stabilization of external reserves. Data from the CBN indicated that FX utilization by DMBs for valid transactions fell by 30.1% in Q2:2015 to US$9.9bn from US$14.2bn in Q1:2015, while external reserves has stabilized within the US$30.0bn region in the past two months. This have however come at the expenses of slower economic activity and capital inflows.

The CBN Governor had hinted at the Financial Times Africa Summit earlier this month that the bank considers the naira appropriately priced and would continue to control imports, a position that has also further been reinforced by the fiscal authorities. The current level of external reserves can cover approximately 6.8 months of import but with oil prices not expected to recover before 2017, the CBN's resolve to aggressively defend the naira will be tested in months to come. Faster implementation of structural reforms to diversify fiscal revenue and external reserves, as well as reduced dependency on imports for petroleum product and other manufactured products imports will greatly enhance the capacity of the CBN to maintain the foreign exchange balance.

In the coming week, we believe the naira will continue to trade at current levels but in a broader view, as the yuletide season approaches, pressures on the naira are expected to increase as demand for FX to fulfill monetary obligations intensifies.

Bond Market
In recent weeks, investors have been very bullish on the fixed income space as the bond market has been on a bullish run for some weeks now with increased participation from domestic investors as majority of the foreign investors have exited the market due to FX related uncertainties. Furthermore the robust liquidity levels in the financial system have also given investors the capacity to increase their stakes in the domestic FGN bond market. Accordingly, the bond market sustained its bullish run at the start of the week with increased buying interest in the some short to mid-term tenured instruments (FEB 2020, JAN 2022, MAR 2024) with yields down 56bps, 61bps and 57bps respectively while the yield on the 20-year benchmark instrument JUL 2034 was down 12bps.

On Tuesday, this bullish run was sustained however, there was reduced interest in short to medium term instruments from the previous day as investors interest shifted to the longer tenured instruments with decline in yields on the MAR 2024 and JUL 2034 instruments driving average yields southwards. On Wednesday however, there was a reversal in trend as the market turned bearish majorly due to the contraction in liquidity levels in the financial system as well as profit taking activities which drove yields northwards (average yields up 50bps) . On Thursday, the bearish run was sustained as reduced activity coupled with increasing profit taking led to an increase of about 20bps across all instruments.. Given the mixed performance in the market during the week average yields across benchmark instruments climbed 30bps to 14.2%. We anticipate liquidity level in the financial system to improve in the coming week which may buoy activity.

Global Market
General performance of global indices within our coverage remained upbeat at close of market this week. Similar to the US Fed's decision on interest rate, at the close of the ECB's meeting on Thursday, the Bank's president (Mario Draghi) announced that it would keep its policy rates unchanged at 0.05%. Amidst concerns of slow economic growth and weak inflation in the Eurozone region, Draghi also mentioned the likelihood of an extension of the ECB's bond purchase program beyond 2016 even as the Bank has promised to contemplate other policy options at its December meeting.

Consequent on this, stocks within this zone -- and other developed markets - rallied to close green at week's end, with Germany DAX leading gains with 7.3% whilst the UK FTSE advanced 1.3%. Equally resulting from events in Europe and the impressive earnings releases from McDonald, Dow Chemicals and eBay, the US markets put a halt to earlier losses to close the week higher. Consequently, the US S&P 500 and NASDAQ gained 2.1% and 2.8% W-o-W respectively.

Within the BRICS region, the Brazil Ibovespa led gains with 3.1% W-o-W closely followed by the South Africa JSE All Share which advanced 2.1% W-o-W.  Just a day after the ECB's announcement, today, the China monetary authority for the fourth time this year cut its interest rate by 25bps to 4.35% and reduced CRR by 50bps 17.5% in a bid to jump-start its economy. This further excited markets as all Asian markets within our coverage ended the week positive. W-o-W, the Japan Nikkei 225 and China Shanghai Comp closed 2.9% and 0.6% higher respectively. Although YTD return of all indices within our Africa markets coverage remain in the red, most indices closed in green W-o-W. The Kenya NSE 20 was the best performing in our basket, posting a 1.3% W-o-W gain.

Despite the fractious global growth estimate, monetary stimulus by central banks in the advanced world will in the short to medium term, continue to support equities market in developed market. However, the low commodity prices remain a headwind to capital market performance in the developing markets.