Weekly Market Review and Outlook

Global Market Review and Outlook
For first time since 2009, the Bank of England (BoE) slashed its policy rates on Thursday from 0.5% to 0.25% and guided further rate cuts before the end of the year. According to Governor Mark Carney, “this was to help make BREXIT a success”. The BoE also downgraded growth expectation for 2017 from 2.3% to 0.8%. Consequently, sentiment across global markets improved week on week (W-o-W).

The UK FTSE index advanced 1.1%W-o-W as investor sentiment strengthened on BoE’s 0.25% rate reduction. The US NASDAQ was up 1.1% W-o-W while the S&P 500 index appreciated 0.3%. Performance in the European and Asian markets were mixed with the Honk Kong HANG SENG and German DAX indices rising 1.2% and 0.1% respectively, while the France CAC and Japan NIKKEI depreciated 0.6% and 1.9% respectively.

The Russian RTS and the Brazilian IBOVESPA led the gainers in the BRICS markets, up 1.7% and 0.6% W-o-W. The Indian BSE SENS also added 0.1%. On the flipside, China Shanghai Composite and the South African FTSE/JSE slipped 0.1% and 0.2% respectively.

In Africa, the Nigerian All Share Index led decliners, tumbling 2.1% W-o-W amid poor Q2:2016 earnings numbers. The Kenyan NSE index followed with a 0.2% decline. Contrariwise, the Egyptian and Ghanaian markets closed higher, advancing 2.8% and   0.1% W-o-W respectively.

Weekly Equities Market Review and Outlook
Bearish sentiment in Nigerian stocks persisted as the local equities market declined four out of five trading days this week. Performance stayed soft amid poor Q2:2016 earnings which littered the market throughout the week. The local market was down 0.6% on Monday and extended downtrend on Tuesday (-0.2%) and Wednesday (-0.5%) on increased sell-offs in large-caps. However, sell sentiment paused on Thursday as bargain hunters ensured a 0.2% uptick in the market. The Nigerian bourse declined 1.2% on Friday thus the NSE ASI depreciated 2.1% W-o-W to settle at 27,425.86 points. Similarly, market capitalization shrank by N200.6bn W-o-W settling at N9.4tn. Activity level also waned significantly as average volume and value traded declined 37.6% and 20.3% W-o-W to close at 120.8m units and N1.3bn respectively.

Performance by sectors was also bearish with all indicators closing in the red. The Banking index led sector decliners, down 4.5% W-o-W on losses in ETI (-7.2%), ZENITH (-5.2%), DIAMOND (-13.8%) and FIDELITY (-14.6%). The Industrial Goods index followed closely, tumbling 3.4% W-o-W on account of WAPCO (-8.7%) and PORTPAINT (-4.9%). Similarly, the Consumer Goods and Oil & Gas indices declined 2.7% and 1.9% respectively against the backdrop of sell pressure on 7UP (-9.6%), VITAFOAM (-6.7%), SEPLAT (-18.5%) and CONOIL (-5.0%). CONTINSURE (-6.5%) and MANSARD (-2.8%) ensured the Insurance index closed 1.8% lower W-o-W.

Sentiments improved slightly albeit soft, as market breadth settled at 0.5x (from 0.3x in the previous week). 20 stocks advanced while 39 declined. The best performers for the week were TOTAL (+33.3%), AIRSERVICE (+22.9%), and ETERNA (+14.5%) while SEPLAT (-18.5%), FIDELITY (-14.6%) and DIAMOND (-13.8%) were the worst performers. Overall performance in recent weeks can be tightly linked to influx of corporate announcements as well as largely unimpressive Q2:2016 results. This is unsurprising given extreme macroeconomic and challenging operating environments. In the week ahead, we expect further earnings announcements, most especially from the Tier-1 banks to drive market performance.

Money Market Review and Outlook
The week opened with aggregate financial system liquidity at N253.6bn. Open Buy Back (OBB) and Over Night rate (O/N) trended upward throughout the week as OMO and T-bills Primary Market Auctions took a drag on liquidity levels. On Monday, OBB and O/N lending rates rose 4.3% apiece as system liquidity declined as a result of OMO auctions conducted by the CBN, where N170.3bn was mopped up from the system. The auctioned instruments were the 353-days and 185-days bills at marginal rates of 18.5% and 18.0%. At the start of Tuesday’s trading session, aggregate system liquidity stood at negative N10.1bn thus reducing OBB and O/N rates to 15.5% and 16.6% respectively. On Wednesday, liquidity remained at low levels as OBB and O/N rates increased to 18.7% and 19.6%, further increasing to 19.8% and 20.8% on Thursday. OBB and O/N rates eventually closed the week at 19.5% and 20.6%, Up 16.3% and 15.9% W-o-W respectively.

Activities in the Treasury Bills market were majorly dictated by financial system liquidity levels which was dragged by the CBN’s activity in the primary market. The Apex Bank sold N245.2bn in Treasury Bills at Wednesday’s primary market auction. The auctioned instruments were the 91-day, 182-day and 364-day instruments at stop rates of 15.4%, 18.1% and 18.5%. The T-bills auction was 2 times oversubscribed. Average T-bills rate for the week settled at 17.4%, up 0.2% W-o-W.

In the week ahead, we expect rates in the money market to remain in the double digits consequent on current liquidity levels.

Foreign Exchange Review and Outlook
The foreign exchange market remains pressured at both the interbank and parallel markets as a result of the lingering FX liquidity crunch. Contrary to last week when the exchange rate was relatively stable at the parallel market, the naira depreciated all week and hit a low of N400.00/US$1.00 on Thursday. The illiquidity in the interbank, pressure from 41 items termed inadmissible for FX at the interbank window, increased dollar demand by summer vacationers and students returning to school abroad, has kept the naira pressured on the street. The interbank market was however less volatile this week as the naira traded at a week-high of N311.06/US$1.00 on Wednesday and a low of N318.91/US$1.00 on Friday, a 0.7% appreciation W-o-W. The naira has depreciated 12.4% since the launch of the new interbank market.

In the futures market, the current total value of subscribed CBN’s naira settled futures contracts for 12 different maturities stood at US$1.7bn with the NGUS APR 26 2017 as the most subscribed at a value of US$658.6m. This is unsurprising as the instrument was previously trading at N210.00/US$1.00 before it was recently reviewed to N260.00/US$1.00. Until the supply of FX improves significantly at the interbank market, the mounting demand may continue to pressure rates downwards.

We expect naira exchange rate to the dollar to remain driven by the supply-demand realities in the coming week.

Bond Market Review and Outlook
Activities in the bonds market were largely minimal this week. On Monday, average yield across benchmark bonds declined 0.2% to 15.2% (from 15.4% on Friday) with some buying activities at the longer end of the curve. However, as demand slowed down, average yield increased albeit marginally, up 4bps to 15.3% on Tuesday, settling at 15.3% by mid-week. This quietness in the local bonds market continued till the end of the week as average yield across benchmark bonds closed the week at 15.3%, down 0.1% W-o-W.

In the Eurobonds market, the Nigerian Corporate Eurobonds also experienced bearish performance save for the Zenith Bank 2019 instrument with a 0.2% W-o-W decline in yield. Similar to last week, buying interest in the Nigerian sovereign Eurobonds continued to slow down as the FGN 2023 and FGN 2018 sovereign Eurobonds instruments rose 1bp apiece W-o-W while the FGN 2021 sovereign Eurobond yield declined 5bps W-o-W. The Ghana 2023 and 2026 sovereign instruments witnessed buying interest with yields down 0.6% and 0.4% W-o-W respectively.

Higher yields on money market instruments continue to discourage interest in bonds. We expect activity to remain soft in the interim until the next bond auction scheduled for August 17, 2016 where the Debt Management Office (DMO) plans to raise at least a total of N95.0bn in JULY 2021, JAN 2026 and MAR 2036 instruments.