Weekly Market Review and Outlook

Photo L-R: Nikhil Rathi, CEO, London Stock Exchange; Chinelo Anohu-Amazu, DG,  National Pension Commission; Greg Hands, UK Minister for International Trade; Kemi Adeosun, Nigeria’s Minister of Finance; Bukar Kyari, MD, Central Securities Clearing System Plc; Oscar Onyema, CEO, The Nigerian Stock Exchange (NSE); Haruna Jalo-Waziri, ED of NSE’s Capital Markets Division, at the Opening Bell Ceremony of the London Stock Exchange.

Global Market Review and Outlook
Global markets performance was overwhelmingly positive this week as investor sentiment was broadly bullish across major equity markets in our coverage. The optimism was underpinned by stronger oil prices, better than expected earnings releases by US-listed companies and commitment of the European Central Bank (ECB) to an easy monetary policy. Also, the Dollar rose against the Euro during the week to hit a 7-month high, the highest since March, while the Euro was at its lowest since March after the ECB left its accommodative monetary policy unchanged. Within the developed markets, all indices were positive W-o-W as of writing, with the US S&P and NASDAQ leading the pack, up 0.2% and 0.6% W-o-W respectively while the UK FTSE marginally improved to close the week 0.1% higher.

In the BRICS markets, performance strengthened as all indices closed in the green. The Russian RTS advanced 4.7% W-o-W following a recommendation by JP Morgan which rated the countries stocks Overweight from Neutral. The Brazil IBOVESPA inched 3.4% higher W-o-W while the India BSE SENS and South African FTSE/JSE gained 1.5% and 1.1% W-o-W respectively.

The Euro-Asian markets was broadly positive with all indices recording gains. The Japanese Nikkei (+1.9%) led the gainers list despite the 6.6 magnitude earthquake that struck the country. The France CAC 40 trailed performance, up 1.4% W-o-W while the German DAX improved 1.1% W-o-W. The Hong Kong HANG-SENG gained 0.6% W-o-W despite a natural disaster - “Typhoon Haima”- which resulted in temporary shutdown of the Country’s stock exchange.

However, against the trend in the global markets, sentiments across the African space were mixed. The Egypt EGX 30 lost the most, down 2.7% W-o-W amid a weakening currency. The Kenyan NSE and the Ghanaian GSE recorded gains of 2.0% and 1.3% W-o-W respectively while the Nigerian All Share Index declined 0.9% W-o-W, unable to sustain marginal gains recorded in the prior week.

Equities Market Review and Outlook
Trading sentiment in the Nigerian equities market was bearish this week as the main benchmark index slid 0.9% W-o-W; thus, YTD loss surged to 3.6%. The All Share Index (ASI) trended southwards from Monday to Wednesday, declining 81bps, 29bps and 28bps in the first three trading sessions before rebounding on Thursday (+0.4%) due to bargain hunting in Banking Sector Giant – GUARANTY - which released its Q3:2016 earnings report. The index closed the week negative, shedding a marginal 1bps on Friday. Accordingly, market capitalization trimmed N90.7bn to settle at N9.5tn. Activity level also waned during the week as average volume and value traded fell 42.0% and 17.2% W-o-W to 134.9m units and N1.5bn respectively.

Overall sector performance remained poor with the Industrial Goods index being the sole gaining index as it advanced 0.5% W-o-W on account of bargain hunting in WAPCO (+1.2%). The Oil & Gas index nose-dived 3.0% on the back of sell pressure on FORTE (-12.3%) and OANDO (-2.1%). In the same vein, the Consumer Goods index lost 1.9% against the backdrop of losses in CADBURY (-16.2%), VITAFOAM (-6.9%), DANGSUGAR (-4.6%) and DANGFLOUR (-3.8%). LAWUNION (-4.1%) and MANSARD (-3.5%) ensured the Insurance index (-0.6%) closed lower W-o-W while the Banking index lost 0.5% as weak sentiment in ETI (-9.1%) and ZENITH (-1.7%) offset gains in GUARANTY (+3.3%).

In line with equity indices weak performance, investor sentiment remained negative, as reflected by the market breadth which settled at 0.4x (from 0.5x the previous week); 16 stocks advanced while 37 stocks declined. The best performers for the week were CAVERTON (+13.2%), NEM (+5.0%) and NEIMETH (+4.9%) while CADBURY (-16.2%), GLAXOSMITH (-14.2%) and AGLEVENT (-12.9%) were the worst performers for the week. With the expectation of more Q3:2016 earnings reports, market performance will be closely tied with investors’ view of the results. However, as seen from the bearish sentiment that dominated trading this week alongside soft activity level, investors remain cautious and are conservative on earnings. Hence, we expect equities to continue to underperform in the near term.

Money Market Review and Outlook
The drag in system liquidity on the back of Deposit Money Banks (DMBs) provisioning for FX forwards auction kept Open Buy Back (OBB) and Overnight (O/N) lending rates at triple digits at the start of the week. However, the refunds for unsuccessful bids at the auction in addition to inflow from maturing Treasury Bills improved system liquidity levels. Thus, OBB and O/N rates moderated towards the end of the week, eventually closing the week at 14.0% and 14.5%, down 89.3 and 97.3 percentage points  W-o-W respectively (from last Friday’s 103.3% and 111.8%).

With aggregate system liquidity at N84.0bn deficit at the start of the week, OBB and O/N rates rose 21.7 and 16.7 percentage points to close at 125.0% and 128.5% respectively on Monday, remaining at last week’s triple digits close. Liquidity remained tight on Tuesday with rates at high levels; however, OBB and O/N rates reversed uptrend by mid-week as both declined significantly by 132.8 and 133.0 percentage points to 18.9% and 20.5% respectively due to impact of the refunds for unsuccessful bids at the FX forwards auction which bolstered financial system liquidity. In addition, the inflow of net N138.2bn in T-bills maturities on Thursday further improved system liquidity, resulting in a 4.1% and 5.0% decline in OBB and O/N rates to close at 14.8% and 15.5% on Thursday, eventually closing the week at 14.0% and 14.5% on Friday respectively.

Activities in the Treasury bills market started the week on a bearish note as sell sentiment was evident on the back of pressured financial system liquidity. Average T-bills rate moved in similar mode to interbank money market rates as it inched higher in the first two trading sessions of the week but declined towards the end of the week on the back of a T-bills maturity of N138.2bn, closing at 17.0% on Friday, down 62bps W-o-W. On Wednesday, the Apex Bank offered N138.2bn in 91-days, 182-days and 364-days T-bills at a primary market auction. Against the backdrop of low system liquidity, the auction was undersubscribed by 0.2x and consequently under allotted by N22.9bn. The CBN allotted N20.9bn of the 91-days, N28.2bn of the N182-days and N32.4bn of the 364-days T-bills at stop rates of 14.0%, 17.1% and 18.3% respectively.

In the week ahead, we expect the inflow of circa N200.0bn in FAAC allocation to improve system liquidity and expect money market rates to moderate from current levels. However, there is a high probability the CBN will react by mopping up excess liquidity through OMO auctions in pursuance of its tightening objective.

Foreign Exchange Review and Outlook
In a move similar to the special secondary market intervention auction of US$4.1bn in forwards commitment held in June to clear pent-up FX demands, the CBN sold circa US$313.0m worth of two months forwards at rates ranging from N310.00/US$1.00 to N350.00/US$1.00 in a special intervention auction last Friday. The dollar forwards auction was targeted at clearing backlogs of FX demands from agriculture and agro-allied businesses, airlines and manufacturers amongst others. In line with past trend, the naira remained stable at the interbank market this week as it firmed 1.2% W-o-W, strengthening to N304.75/US$1.00 on Friday from N307.77/US$1.00 in the previous week. Nonetheless, persistent interventions by the CBN with dollar sales at the interbank segment as well as tight foreign inflows continues  to pressure the external reserves as it currently sits at US$23.9bn from US$26.4bn as at H1:2016.

At the parallel market, the Naira/Dollar exchange rate remained stable at N455.00/US$1.00 on all trading days of the week save for Tuesday when it appreciated to N453.00/US$1.00 as Travelex continues to provide an alternative source of dollar supply for travelers and licensed Bureau-De-Change operators.

In the futures market, the OTC FX Futures contracts calendar as at October 21, 2016, showed value of open contracts at US$3.7bn from US$3.5bn in the previous week as investors continue to take advantage of the attractive prices of instruments on offer.

In the week ahead, the Central Bank will be settling US$270.6m in open futures contracts maturing 26th October 2016. We expect the Apex Bank to open a new October 2017 futures contract with a total value of $1.0bn to replace the maturing instrument. However, we believe rate at the parallel market will be pressured in the weeks ahead on the back of the Apex Bank’s decision to maintain status-quo on the suspension of 19 banks from dollar sale to BDCs, suspension of Naira debit cards for FX transactions and Travelex’s inability to meet the rising foreign currency demand from BDC operators.

Bond Market Review and Outlook
Sentiment in the domestic bonds market was mixed but largely bearish this week as investors reacted to the release of September inflation numbers last Friday - which indicated a 17.9% Y-o-Y rise in Headline Inflation - in addition to decreased system liquidity. The market started off the week bearish but sentiment turned bullish mid-week following improvement in liquidity. Weakened sentiment for long-duration bonds on Friday however sent prices down at the long end of the curve. On W-o-W basis, yields on benchmark bonds trimmed 1bps on average to 15.1% on Friday driven mainly by a rally on short and medium tenor bonds, while yields rose at the long end of the curve. In the short term, we imagine that investors in the local bonds market will continue to price in current inflation and inflation expectations in their valuation of bonds instrument; as such, expecting yields to remain at current level as inflationary pressure subsides and MPC holds off on further hike in interest rate.

In a sharp turn from last week’s performance, sentiment across the Sub-Saharan Africa Sovereign Eurobond instruments was largely bullish as yields on all SSA sovereigns fell save for the South African 2017 instrument which rose 58bps W-o-W. The strong buying interest is in line with the rally in bonds and equities globally following the ECB’s commitment to policy easing during the week. Average yield on the Nigerian sovereign Eurobonds declined 13bps W-o-W whilst average yield on Ghana Eurobonds dipped 41bps W-o-W. The best YTD performers amongst the SSA sovereigns are the 8.5% Zambia 2024 (+24.5%), 7.9% Ghana 2023 (+22.5%) and the 8.1% Ghana 2026 (+24.0%).

Performance in the Nigerian corporate Eurobonds market was mixed. Investors hunted for bargain in the 6.9% Fidelity 2018 bond with YTM down 402bps to 16.6% contrary to previous weeks when sell sentiment was evident on the instrument. In the same vein, 7.3% Access 2017 and 6.3% Zenith 2019 instruments continued to enjoy buy sentiment as yields on both bonds dropped 21bps and 82bps W-o-W to 5.0% and 7.0% respectively. Similarly, yield on the newly issued Access 2021 instrument fell 82bps W-o-W to 9.9%.