Review and Outlook of Global, Nigeria Markets –Week Ended May 20, 2016

Global Market Review and Outlook
As the FOMC meeting in June draws closer, there have been increased speculations as regards the possibility of a rate hike or maintenance of status quo with investors on both sides of the divide. Prior to the week, hopes of a rate hike in June seemed to have faded until the release of the minutes from the US Fed’s April meeting which provided a more positive outlook on the US economy and suggested that if the incoming economic data signal an improvement in economic growth, then a rate hike will be appropriate at the next meeting. Nevertheless, investors still await comments from Fed Chair Janet Yellen in the coming week.

The negative sentiments across global equities markets persisted this week as investors remained bearish on indices under our coverage. In the developed markets, the UK FTSE rebounded from a previous negative close to advance 0.2% W-o-W despite rising uncertainties surrounding the outcome of the BREXIT referendum to be held in June. In the US markets, the S & P 500 and the NASDAQ slid 0.3% and 0.1% W-o-W amidst rising expectations of a rates hike in June. Performance in the European markets was however mixed as the France CAC rebounded from a negative close last week to advance 0.4% W-o-W while the German DAX trended southwards W-o-W, losing 0.6% after the gains recorded in the previous week which were driven by the release of the impressive GDP numbers for Q1:2016. In the Asian markets however, the Japanese Nikkei remained upbeat, gaining 2.0% W-o-W while the Hong Kong Hang Seng reversed the previous week’s performance, improving 0.7% W-o-W as investors sought for bargain positions in the light of the technical indicators tilting towards the oversold region.

In the markets within the BRICS classification, the South African FTSE was the lone gainer, improving 2.3% W-o-W after losses in the previous week. The Brazil Ibovespa depreciated the most, losing 2.9% W-o-W amidst persistent political risk concerns. The Russian RTS followed, down 1.6% W-o-W as there were rising fears as regards a possible renewal of the sanctions placed on Russia while the Indian BSE fell 0.7% W-o-W. The Chinese Shanghai composite slid 0.1% W-o-W as concerns of the health of the economy, remain the order of the day even as the Index remains the worst performing for the year, down 20.2% YTD.

In the African Markets, the Nigerian All Share Index advanced for the 5th consecutive week, up 2.6% W-o-W and standing as the lone in the region. The Kenya NSE chaired declining indices, down 1.2% W-o-W followed by the Ghana GSE (-1.0% W-o-W) and the Egypt EGX (-0.3% W-o-W).

Weekly Equities Market Review and Outlook
The Nigerian Equities market further strengthened this week as investors remained stoked by the developments in the Oil & Gas sector which resulted in increased buying interest across sectors. On Monday, the local bourse opened in the green for the 3rd consecutive week, advancing 1.5% on account of increased buy sentiments in market bellwethers. However, on Tuesday, this uptrend was bucked as investors swung to profit taking, driving the benchmark index 0.6% southwards. On Wednesday, the market returned to winning ways despite the industrial action by the NLC as investors took position in value counters in the Banking sector- the All Share Index then rose 0.4%. The market remained upbeat on Thursday as investors expanded positions in top banking stocks which resulted in the 1.0% increase in the ASI and this trend was sustained on Friday as the index rose 0.4%. Following the gains recorded during the week, the All Share Index appreciated for the 4th consecutive week, up 2.6% W-o-W while trimming YTD losses to 5.3%. In the same vein, investors gained N214.6bn as market capitalization rose to N9.3tn. Similarly, activity level strengthened as average volume and value traded grew 54.8% and 35.2% to 489.1m units and N2.6bn respectively.

Performance across sectors was broadly bullish as all indices save for the Insurance and Oil and Gas indices which lost 1.7% and 0.1% W-o-W respectively, closed in the green. The Banking sector index appreciated the most, up 6.6% W-o-W following renewed buying interest in UBA (+22.6%) and ZENITH (+8.5%). Similarly, the Industrial goods index improved 3.9% W-o-W against the backdrop of price appreciation in WAPCO (+8.7%) and DANGCEM (+1.3%). The Consumer goods index also advanced 1.9% W-o-W on account of gains in NIGERIAN BREWERIES (+6.8%).

Investor sentiments measured by market breadth, weakened this week albeit still positive, settling at 2.2x (from 3.7x in the previous week) as 53 stocks advanced while 24 declined. UBA (+27.1%), CONOIL (+26.7%) and OANDO (+25.0%) topped the weekly gainers’ chart while VITAFOAM (-20.8%), IKEJAHOTEL (-17.9%) and NCR NIGERIA (-14.1%) declined the most during the week. As positive sentiments have thrived in the market on account of government reforms which have been implemented, investors now look forward to the outcome from the deliberations at the MPC meeting in the coming week and this is expected to drive market performance.

Money Market Review and Outlook
Financial system liquidity in the week opened at N118.7bn, lower than the previous week’s liquidity level of N183.6bn. Liquidity levels worsened throughout the week until Friday when it rose to N141.7bn amidst constraints in the system as inflationary pressures mount. The OBB and OVN rates settled at 8.5% and 8.9% on Friday. This week, we expect money market rates to be determined by system liquidity dynamics.

The CBN auctioned a total of N110.9bn in 91 day, 184 day and 364 day instruments at marginal rates of 8.1%, 9.2% and 12.5%. The result of the auction shows investor sentiments still favour short dated tenor instruments than the longer ones as the offered amount was fully allotted as against the DMO’s auction last week which showed only 50.0% allotment rate on the average. Average treasury bills rate settled at 9.7% on Friday as against 8.5% in the previous week. The decision of the MPC regarding MPR will likely determine the direction of rates in the coming week.

Foreign Exchange Review and Outlook
Contrary to speculations of a likely devaluation of the local unit last week, Apex bank held its weekly intervention window at N197.00/US$1.00 and the interbank market remained at N199.10/US$1.00 for more than a year now. Conjectures of a likely adjustment arose last week following the announcement by the NNPC that fuel marketers are to source FX from autonomous sources at an estimated Naira to Dollar exchange rate of N285.00/US$1.00.

At the parallel market this week, the Naira appreciated on Monday by 1.4% to close at N355/US$1.00 as against the previous Friday level of N360/US$1.00. This trend continued all through the week as the currency depreciated continuously against the greenback before settling at N346/US$1.00 on Friday - implying a W-o-W appreciation of 4.0%.

In our view, the market may have fully digested the news flow on the liberalization of downstream petroleum sector that fixed PPPRA exchange rate at N285/US$1.00 – the reason for which parallel FX rate depreciated by 10.3% in the previous week. We expect the parallel market rate movement in the coming week to be determined by the decision of the MPC.

Bond Market Review and Outlook
Ahead of the MPC meeting scheduled for next week, sovereign bond yields have been on the rise as investors expect a possible upward repricing of the MPR on the back of the rising inflationary pressures. The MPC had guided the market on the need to maintain a positive interest rate in its March-2016 meeting when it increased MPR to 12.0% from 11.0% in order to give a spread on inflation rate which was at 11.4% in February. Inflation had risen to 12.8% and 13.7% in March and April respectively (post the MPC meeting), expectation of MPR at possibly 14.0% or 15.0% has dictated bond yields dynamics in the last two weeks.

Average bond yields in the week settle at 13.4% with a steady rise in all trading days of the week. We noticed increased buying appetite for longer dated bonds with term to maturity of three years and above as bond yields (excluding Aug 2016, April 2017 and Jul 2017) currently converge around 14.0%. The bearish mood in the market led to further dip in prices as most instruments are currently trading at discount, presenting a cautious opportunity in the horizon, post the next MPC meeting. Consequently, the sovereign bond yield curve shifted upward W-o-W with the normality of the curve noticed at the short end of the curve while the medium to long term end shows a near flatness with the yields converging at 14.2%.

In the week ahead, the major determinant of yields movement will be premised on the decision of the MPC about MPR. Whilst we somewhat hold a view that interest rate does not necessarily have to go up to correct the rising inflation, we suspect that the MPC may stick to its real interest rate target to increase the rate. Hence, bond yields will likely respond with a price correction as the current levels already factored in this expectation.