Markets reflective of cautious investor mood

FI assets rending on robust liquidity, what next for equities?

The bears continue to make a showing in the market despite pockets of bargain hunting seen in 3 out 5 trading days, with the losses knocking out the gains and pushing the benchmark index (NGSE INDX) further in the red. Consequently, the local bourse lost -1.3% week-on-week while Year-to-date return moves further south to -21.3% (from -20.3%). Market capitalization also lost N146.2bn in the week to close at 9.4trn. The loss in the overall market can be largely attributed to sell bias in Zenith (-7.8%), Guaranty (-5.0%), and DANGCEM (-0.7%).

The Treasury Bills market sustained its bullish run last week due to the buoyant system liquidity. However, sentiments became mixed during the week as traders took profit on their positions while investors continued to seek bargain buys where possible; average Treasury Bills yield dipped by 219bps to 3.9% week-on-week. Also, bullish sentiment trails the bond market, driven by healthy liquidity. Buy bias was more pronounced in the short to medium tenured bonds as the Jul-2034 and the Nov-2028 bond recorded price decline thus pushing yields up. Average yields pared by 75bps, settling at 9.5%.

Studying the market trend in the last few weeks, it seems the market is hovering around what can be termed its support level (27,004.50 – 27,289.89pts). Despite fundamental and technical justification of an oversold market and attractive valuation which suggests a reversal, sentiments remain largely weak. Furthermore, expectation of a US FED rate hike may weaken sentiments marginally. Thus, we think sentiments will be majorly weak in the sessions ahead, though mild pockets of gains will likely be seen.

Global and Macro-economic update

Crude oil oversupply concerns stoke bearish sentiments across markets

Bearish sentiments set the tune across markets in the past week majorly driven by fears around crude oil prices which hovered around $38 per barrel amid global oversupply overhang. Furthermore, uncertainties around the US rate hike decision rocked markets, as investors shifted focus to the FOMC’s 2 day policy meeting slated for December 16th – 17th. It is against this backdrop that US equities closed the week lower, as the markets fully expect rate normalisation to commence upon the conclusion of the meeting.

European stocks also sank last week, as further rout in oil prices (mentioned above) knocked sentiment over and drove the benchmark index to its largest weekly loss since August. The Stoxx Europe dropped 2%, marking a fourth straight session of losses and the lowest closing level since early October. For the week, the pan-European index pulled back 4% for a second consecutive weekly loss. On the data front, German consumer prices rose 0.1% in November m/m, but still remained below the European Central Bank’s medium-term inflation target because of continued pressure from weak energy prices. Italian industrial production rose 0.5% in October, beating expectations.

Asian stocks also sank at the close of the week, as regional central banks came into focus with less than a week before the U.S. Federal Reserve decides whether to raise interest rates. The week also saw South Korea’s central bank keep its policy rate on hold for the sixth straight month as had been widely expected, choosing to wait and see how markets react to an expected U.S. rate increase. An improvement in the Korean economy over recent months has given the Bank of Korea more scope for holding off on additional action to support the economy, prompting a cautious stance ahead of the Federal Reserve decision.

On the domestic scene, the Federal executive council has decided on N6trn ($30bn at current interbank rates) budget for 2016. The headline figure for total spending is significantly higher than N4.6trn approved for 2015. The benchmark oil price was set at US$38/b, 28% lower than the benchmark in 2015 of US$53/b, and the fx rate at the CBN’s official rate of N198/US$.

Financial Markets Review and Outlook

All Share Index touches 3-Year Low: -1.3% week-on-week returns

The bears continue to make a showing in the market despite pockets of bargain hunting seen in 3 out 5 trading days, with the losses knocking out the gains and pushing the benchmark index (NGSE INDX) further in the red. Consequently, the local bourse lost -1.3% week-on-week while Year-to-date return moves further south to -21.3% (from -20.3%). Market capitalization also lost N146.2bn in the week to close at 9.4trn. The loss in the overall market can be largely attributed to sell bias in Zenith (-7.8%), Guaranty (-5.0%), and DANGCEM (-0.7%). We also think the more bearish outlook for oil price following OPEC meeting last week must have compounded the apathy towards equities. Market activity as measured by average volume and value traded dropped by 3.6% and 5.7% to 234.8mn units and N2.8bn. Market breadth (0.7x) skewed in favor of the stock losers , with 37 stocks posting price declines, as against 25 price gainers.

Aside from the Oil & Gas sector which closed in the positive, all other sector traded in the negative. Bargain hunting in Seplat and Mobil which drove the counters by 5.0% each drove the Oil and Gas sector up by 9bps week-on-week. The banking sector topped the loser’s list, returning 4.3% as Zenith and Guaranty posted losses at the close of the week. With four (4) stocks (Cutix, CCNN, Wapco and Dangcem) closing the week negative as against two (2) stocks (Portpaint and Berger) which gained, the industrial sector trailed market performance, losing 1.3% during the period. In the same manner, losses in Honyflour (-11.6%) and Tigerbrand (-9.5%) shoved the consumer goods sector south by 15bps.

Studying the market trend in the last few weeks, it seems the market is hovering around what can be termed its support level (27,004.50 – 27,289.89pts). This is to say that despite fundamental and technical justification of an oversold market and attractive valuation which suggests a reversal, the sentiments is largely weak with nothing to trigger a buy sentiment. Furthermore, expectation of a FED rate hike may weaken sentiments marginally. Thus, we think sentiments will be majorly weak in the session ahead, though mild pockets of gains will likely be seen.

Market rates remain low despite drop in liquidity

At the start of the week, system liquidity was over N1.0trn which persisted for the first two days of the week, this was due to absence of major debit from the system seeing that the CBN did not conduct Open Market Operation (OMO) auction during the week. However, debit from CBN’s FX weekly intervention and the DMO bond auction led to a significant drop in system liquidity of 31.7% to N729bn at the close of the week. Conversely, market rates remained low though the overnight (O/N) rate upped by 8bps to 1.0% in the week; the Open Buy Back (OBB) rate was flat at 0.5%. Average NIBOR declined by 0.2% to close the week at 8.6%. Barring any shocks to system liquidity, rates are likely to remain at these levels. Though, a possible mop-up via OMO, though unlikely, will push rates up marginally.

Buoyant liquidity sustain BUY bias in Treasury Bills

The Treasury Bills market sustained its bullish run last week due to the buoyant system liquidity. However, sentiments became mixed during the week as traders took profit on their positions while investors continued to seek bargain buys where possible. Average Treasury Bills yield dipped by 219bps to 3.9% week-on-week. Healthy system liquidity will sustain bargain buys in the Treasury bill market this week, though we still expect to see profit taking on positions while sentiments around a possible mop-up may cause caution till the next PMA in optimism of clearer market direction.

Last week, the CBN today published the Nigerian Treasury Bills Issue Programme for First Quarter 2016 as presented below.

Bond market stays largely bearish; DMO auction was oversubscribed

Bullish sentiment trails the bond market driven by healthy liquidity. Buy bias was more pronounced in the short to medium tenured bonds as the Jul-2034 and the Nov-2028 bond recorded price decline thus pushing yields up. Average yields pared by 75bps, settling at 9.5%.

At the bond auction last week, the DMO re-opened the Feb-2020 and the Mar-2024 bonds for N30bn and N20bn respectively. Hinged on buoyant liquidity, auction result signified oversubscription of N86.8bn for the Feb-2020 and N59.0bn for the Mar-2024. The instruments were allotted at a marginal rate of 10.95% (Feb-2020) and 11.0% (Mar-2024).

Sentiments regarding an upward re-pricing of bond yields hinged on the expected doubling of domestic borrowings, habitually from bond issuance may send a little bit of caution in the bond space this week. Nevertheless, healthy liquidity will sustain buy bias in the secondary market.

Naira sustains free fall

At the interbank, the local currency depreciated slightly by 0.002% week-on-week to peg its mid-quote at N199.05/US$. At the parallel segment, the Naira lost 3.3% to close at N254/US$ from N2.46/US$.  The loss was largely driven by inadequate supply in that segment coupled with CBN’s adjustments to capital requirements of the BDCs. The external reserve lost 0.8% w/w to US$29.7bn. Interbank rate will remain stable this week while pressure on the parallel segment will be sustained, hence pushing the Naira lower.