Market Review and Outlook

–Week Ended May 18, 2018

Global Equities Market: Rising US Bond Yield… A threat to Emerging Market Performance?
Following the release of impressive US retail sales report on Thursday coupled with other strong economic data released earlier, bond yields in the US have been on a steady rise. The yield on the US benchmark 10-year Treasury bill hit a 7-year high to 3.1% (as of writing) thus putting a strain on the performance of most global indices in which foreign investors are heavily vested. This alongside expectation of a rate hike by the US Fed is expected to further push yields higher thus weakening appetite for equities in the short term. Furthermore, Oil price rallied to as high as US$80.00/b yesterday (highest level since June 2014), supported by falling inventory levels driven by OPEC’s production cut deal as well as Venezuela’s collapsing oil industry. In addition, the US exit from the Joint Comprehensive Plan of Action (JCOPA) is also expected to push prices even higher, which will be positive for most oil exporting economies.

Against this backdrop, the performance of most global indices we track was largely bearish as 11 of 16 indices closed in the red W-o-W. In the developed markets, the US S&P and NASDAQ declined 0.5% and 0.6% respectively as the impact of rising bond yields weighed heavily on sentiment towards equities. However, the UK FTSE gained 0.7% W-o-W, driven by price appreciation of stocks in the oil & gas sector.

In markets across our Europe and Asia classification region, all indices save Hong Kong’s Hang Seng advanced W-o-W. France’s CAC 40 and Germany’s XETRA DAX inched 1.4%and 0.7% higher W-o-W as energy stocks traded higher. Similarly, Japan’s Nikkei 225 rose 0.8% W-o-W as weaker Yen buoyed investor appetite for shares of exporters. Hong Kong’s hang Seng however closed the week in the red, down 0.2% W-o-W.

In the BRICS region, performance was largely bearish. China’s Shanghai Composite was the lone gainer, rising 0.9% as investors perceive the sustained trade talks between the US and China could potentially ease trade tensions. On the flipside, Brazil’s Ibovespa, Russia’s RTS and India’s BSE Sens reversed gains from the prior week, to fall 3.4%, 1.7% and 1.9% respectively this week. Similarly, South Africa’s FTSE All Share shed 0.8% W-o-W dragged by profit taking in the week. We opine that sentiment on oil exporting economies could potentially be boosted in the coming week.

In Africa, all indices under our coverage closed in the red for the second consecutive week. Kenya’s NSE 20 declined the most, down 3.0% largely on account of foreign investors exiting the local bourse. Ghana’s GSE Composite and Egypt’s EGX 30 were also plagued by foreign investor repatriation falling 1.8% and 1.6% W-o-W respectively. In the same way, profit taking in bellwethers dragged Nigeria’s All Share Index 1.3% southwards.

Domestic Equities Market: Bears Drag Local Bourse into the Red
Performance of the local Bourse was largely negative this week as the All Share Index (ASI) declined on 4 of 5 trading sessions. As a result, the benchmark index closed the week in the red as investors continued to sell off positions.

The week started off on a negative note, closing lower on the first two trading sessions (down 84bps and 15bps respectively) - as investors continued to take profit in large caps across sectors. By Wednesday, the All Share Index rebounded 93bps largely due to gains in DANGCEM, NIGERIAN BREWERIES and NESTLE. However, gains were reversed on Thursday and Friday down 83bps and 44bps as investors quickly booked profit in previous advancers.

Consequent on this, the ASI declined 1.3% W-o-W to settle at 40,472.45 points while the YTD return fell to 5.8%. In the same vein, market capitalization decreased by N199.2bn to N14.7tn. Weekly activity level also declined as average volume and value traded fell 8.1% and 9.0% W-o-W to 291.3m units and N4.7bn respectively. The top traded stocks by volume were ZENITH (221.7m), UBA (108.3m) and DIAMOND (82.9m) while ZENITH (N6.1bn), GUARANTY (N3.6bn) and NESTLE (N2.5bn) were the top traded stocks by value.

Sector Performance was bearish as 4 of 5 indices under our coverage declined W-o-W. The Banking index declined the most, down 2.5% W-o-W on account of price depreciation in ZENITH (-3.1%), UBA (-5.1%) and GUARANTY (-0.6%). The Industrial Goods index followed closely, shedding 1.1% W-o-W as a result of sell offs in CCNN (-17.2%) and WAPCO (-2.1%). Similarly, the Insurance and Oil & Gas indices fell 0.5% and 0.3% respectively due to losses in NEM (-5.4%), AIICO (-1.4%), TOTAL (-4.4%) and 11PLC ( -3.7%). On the flipside, buying interest in NESTLE (+1.3%) and DANGSUGAR (+1.6%) drove the Consumer Goods index 0.4% higher.

Market breadth (advance/decline ratio) which measures investor sentiment weakened to 0.4x (against 0.7x recorded last week) as 19 stocks advanced against 85 that declined. The best performing stocks were SOVRENIN (+30.0%), MBENEFIT (+17.9%) and NPFMCRFB (+10.2%) while JAPAULOIL (-25.0%), SKYE (-19.1%) and DIAMOND (-18.4%) were the worst performers. As the MPC is scheduled to hold its 2nd meeting for the year, we believe market will likely trade sideways pending the outcome of the meeting.

Money Market: Treasury Bills Market Ends Bearish Run; Money Market Rates Trend Southwards
In the money market, the Open Buy Back (OBB) and Overnight (OVN) rates declined W-o-W due to changes in system liquidity attributable to OMO and primary market repayments in the system. System liquidity significantly fell at the start of the week from a surplus of N579.6bn in the prior week to a deficit of N68.9bn. Resultantly, the OBB and OVN surged at the start of the week, up 85.0ppts and 90.8ppts to settle at 150.0% and 164.2% respectively relative to 65.0% and 73.4% on the preceding Friday. However on Tuesday, the OBB and OVN rates crashed to 15.3% and 16.4% respectively even as system liquidity deficit expanded to N80.1bn.

By midweek, OBB and OVN rates inched 8.0ppts and 8.3ppts higher to 23.3% and 24.7% respectively as a result of a reduction in system liquidity deficit to N62.9bn while OBB and OVN rates trended southwards on Thursday to settle at 13.3% and 13.7% following OMO (N262.6bn) and T-Bills (N67.7bn) maturities which offset the impact of respective auctions held. At the OMO auction on Thursday, the CBN issued 112-day (Offered: N58.14m, Sale: N58.14m) and 182-day (Offered: N88.6bn, Sale: N40.9bn) instruments at 11.1% and 12.2% respectively. OBB and OVN rates closed the week at 7.8% and 9.0%, down 57.2ppts and 64.4ppts respectively W-o-W. Given moderating yield environment as well as the impact of the downward trend in inflation, we expect investors’ appetite in longer tenored instruments to be sustained.

Performance in the Treasury Bills Market was largely bullish this week, reversing a 2-week bearish run as average rate across tenors trended lower on 4 of 5 trading sessions. The week began on a bearish note as average rate across benchmark tenors rose 45bps to 13.4% from 12.9% recorded in the prior week. However, this trend was reversed by Tuesday with average rate falling 47bps to 12.9% and this was sustained on Wednesday (-2bps) and Thursday (-8bps) to settle at 12.8% on Friday; indicative of a 19bps decline W-o-W. During the week, the CBN carried out a Primary Market Auction (PMA) in which the 91-day (Offered: N3.4bn, Subscription: N3.7bn, Allotted: N3.4bn), 182-day (Offered: N16.9bn, Subscription: N20.9bn, Allotted: N16.9bn) and 364-day (Offered: N13.5bn, Subscription: N48.6bn, Allotted: N13.5bn) instruments were issued at stop rates of 10.0%, 10.5% and 10.7% respectively. All instruments were oversubscribed and allotted as offered.

In line with our short term outlook, the Treasury Bills Market posted a bullish performance this week as investors continue to take position in longer dated instruments and we expect this to be sustained in the short term.

Foreign Exchange Market: Naira Trades within Tight Band as Foreign Reserves Decline
This week, the CBN continued with its weekly FX intervention sales, offering US$210.0m - on Monday, 14th May, 2018 and US$293.0m on Friday, 18th May, 2018 via the Wholesale Secondary Market Intervention Scheme (SMIS) window in a bid to sustain liquidity levels and maintain stability in all segments of the market. However, the external reserves declined for three consecutive days in the week to settle at US$47.8bn on Thursday.

Based on the aforementioned, the Naira traded at similar level all through the week. The CBN Spot rate opened the week at N305.80/US$1.00, unchanged from previous week’s close. However by midweek, it depreciated 5kobo to N305.85/US$1.00 and maintained this level till the end of the week. Similarly, the naira remained flat at the parallel market, trading at N362.00/US$1.00 throughout the week. At the Investors’ & Exporters’ (I&E) FX Window, the NAFEX rate opened the week at N361.18/US$1.00 and subsequently traded at this rate till the end of the week. Activity level in the I&E Window waned in the week as total turnover declined by 21.7% to US$1.0bn (On Thursday) from US$1.3bn recorded in the previous week.

In the FMDQ OTC futures market, the total value of open contracts of the Naira settled OTC futures increased by US$110.4m to US$3.8bn relative to US$3.7bn recorded the previous Friday which implies a 3.0% increase in market size. The APRIL 2019 instrument (contract price: N362.44) is the most subscribed with a total value of US$42.0m while SEPT 2018 instrument (contract price: N361.39) is the least subscribed with a total value of US$507.0m.

Whilst we believe increased demand for the US dollar could weigh on foreign reserves, we expect the impact of CBN weekly intervention in the FX market to keep rates at similar levels across market segments.

Bond Market: CBN’s Hawkish Actions Constrain System Liquidity
The bearish sentiment in the local bond market was sustained this week, as average yield rose on 3 of 5 trading sessions. Average yield opened the week at 13.4% (48bps higher than the preceding Friday) as investor sold off across tenors. However on Tuesday, average yield slid 21bps to 13.2% on the back of buy interest at the longer end of the curve. The bullish performance was short lived as sell offs persisted on Wednesday (+1bp), Thursday (+2bps) and Friday (+14bps) to close the week at 13.3%. Average yield rose 44bps W-o-W. In the coming week, we expect market activities to be largely determined by decisions made at the MPC meeting as speculations of policy easing continue to mount.
Similarly, performance of SSA Sovereign Eurobonds this week was largely bearish as yield on 24 of 25 instruments under our coverage advanced W-o-W. The only instrument with a W-o-W decline in yield was the NIGERIA 2018 (down 10bps to 3.2%). Average yield on Nigerian Instruments (ex-NIGERIA 2018) increased 8bps W-o-W as GHANA and KENYA rose 20bps and 17bps respectively W-o-W. Similarly, average yield on the GABON (up 21bps), IVORY COAST (up 11bps) and SOUTHAFRICA (up 5bps) also increased in the week. Sustained profit taking by offshore investors in emerging market Eurobonds has continued to drag performance. However we do not rule out the possibility of increased buy interest in the near term on the back of improving domestic macroeconomic fundamentals of the respective countries.

Sentiment towards Nigerian Corporate Eurobond was mixed during the week, as yield on 6 of 11 instruments declined W-o-W. During the week, ACCESS 2021 enjoyed the most buy interest (YTM down 21bps to 9.1%) while DIAMOND 2019 experienced the most sell off (YTM up 91bps to 8.2%). The best performing instruments YTD are DIAMOND 2019 and FBNH 2021 - up 4.2% and 2.8% respectively.