Mixed sentiments trails naira assets

The Local bourse moved south last week as negative trading occurred in four (4) out of five (5) trading days. As a result, the benchmark index (NGSE INDX) returned -1.4% and -13.0% w/w and YTD respectively; market capitalization lost N145.4bn to moor at N10.4tn. In the same vein, market activity as measured by volume and value traded declined 33.2% and 30.7% and 278.1mn units and N2.4bn. Market breadth came in at 0.5x as 23 stocks appreciated in price against 47 decliners.

The surge in system liquidity encouraged buy bias in FI assets as domestic investors were heavy on treasury bills and bonds. Buying interest in treasury bills was seen across all tenors, throughout the week. However a jagged spin was seen at the close of the week following the directive that banks make all outstanding TSA remittance to the CBN, as massive sell-off ensued across the curve especially on shorter term bills. Average yield declined 250bps to 12.5% w/w.  Domestic investors continued to bargain hunt on bond instruments with the bond yields declining for most of the week. The benchmark Apr-2017, Feb-2029, Jan-2022 and Mar-2024 recorded the steepest decline in yields; average bond yields declined 69bps to close the week at 14.3%.

Third quarter earnings expectation will steer market mood this week. We note the gains recorded in banking stocks at the close of the week and do expect this to be sustained in the early part of this week. However, we look to see the profit taking activities being upheld this week.

Global and Domestic Macro-Economic Updates

The US remains the focal point, as optimism from weaker than expected job numbers drives markets.

Bullish sentiments dominated trading in the US markets which drove the S&P 500 to post its best weekly gain of 2015, while the Dow Jones Industrial Average notched its best week since early February. The market fed off an overall positive take on the economy from the Fed, combined with the poor jobs numbers which suggested that interest rates may remain low for a while. On the data front, U.S. import and export prices dipped in September, underlying continued weakness in demand. The prices the U.S. paid for imported goods fell by a seasonally adjusted 0.1% in September, much smaller than the 1.6% plunge in the prior month. The price of U.S.-made goods exported to other nations declined by 0.7%.

European markets also finished firmly higher last week, a day after minutes from the Federal Reserve’s September policy meeting confirmed the U.S. central bank’s reluctance to lift interest rates amid slowing global growth and stubbornly low inflation. For the week, the pan-European benchmark climbed 4.3%, the largest since July, when Greece agreed on a bailout deal with international creditors. The optimism in European stock markets followed surprisingly weak U.S. labor market, which fueled expectations the Fed won’t start to tighten monetary policy this year.

To complete a cycle of global contagion, Markets across Asia rallied in the past week, after details from the U.S. central bank’s latest meeting cast further doubt on the prospect of higher interest rates in 2015. Hopes for easier monetary policies from global central banks also supported emerging-market currencies that had earlier pummeled on fears of capital flight.

Domestically, Barclays has announced its intention to consult with its index users on whether Nigeria’s sovereign debt should remain in its emerging market local currency government bond benchmark. This followed the recent move by JP Morgan which saw Nigerian fixed income instruments removed from its Emerging market indices.

Liquidity surge depresses market rates

Money market rates trended south this week on the back of a surge in liquidity; opening balance for the week started the week at N314.5bn and hit N1trn at the close of the week. This was on the back of CRR remittance of N700bn and CBN’s intervention refund which came in during the week. As a result, the Open Buy Back and Overnight hit new lows of 0.7% and 1.1% accordingly, even as the overnight NIBOR fell to a five year low of 0.5%. Given the current liquidity in the system which is expected to be further fuelled by OMO maturity worth N137.1bn, we will likely see a steady mop-up via OMO by the CBN, which will inch rates up this week.

Bullish bias tempers in FI market

The surge in system liquidity encouraged buy bias in FI assets as domestic investors were heavy on treasury bills and bonds. Buying interest in treasury bills was seen across all tenors throughout the week. However a jagged spin was seen at the close of the week following the directive that banks make all outstanding TSA remittance to the CBN as massive sell-off ensued across the curve especially on shorter term bills. Average yield declined 250bps to 12.5% w/w.

The CBN conducted PMA worth N126bn last week via 91-day, 182-day and 364-day with stop rate at 10.0%, 12.2% and 12.5% respectively. Rates printed at the auction were lower than the last auction’s with 91-day, 182-day & 364-day shedding 50bps, 99bps & 130bps in that order.

Domestic investors continued to bargain hunt on bond instruments with the bond yields declining for most of the week. The benchmark Apr-2017, Feb-2029, Jan-2022 and Mar-2024 recorded the steepest decline in yields; average bond yields declined 69bps to close the week at 14.3%.

The DMO will auction a total of N80.0bn this week via the Feb-2020 and Mar-2024 instruments. Given the prevailing liquidity in the market and increasing participation by domestic investment managers, we expect increasing participation in the bond auction.  Sentiments in the FI market will be largely mixed this week, we expect liquidity to trim which will likely spark some sell-offs. However, we expect to see some level of bullish bias going into the week.

Naira gains against the Greenback w/w 

Activities in the FX market remained relatively calm in the past week, much in line with recent trading patterns. The naira firmed against the dollar on a w/w basis, gaining 35bps to close the week at N198.3.  The parallel market also closed the week at N217.0 to the dollar. We expect that the on-going trend of relative stability will the sustained this week, as the Apex Bank continues to offer support for the domestic currency.