Equities still in search of a firm direction

In the past week, despite solid gains in certain value stocks across sectors, the equities markets returned -1.04% on a w/w basis, putting YTD loss at -14.7%. Profit taking in bellwether DANGCEM (-4.6%) was the major driver of negative weekly close. Market activity as measured by average volume and value traded declined on both counts, by 13.8% and 45.7% to 240.4mn and N1.9bn respectively. As one would expect, market breadth also edged lower to 0.6x (previously 0.9x) as 21 stocks appreciated in price compared to 36 decliners.

System liquidity opened at N238.4bn long. Reflective of a relatively liquid market, both the Open buy back (OBB) and overnight rates (O/N) ended the week low at 0.63% and 1.0% respectively. The week also saw T-bills maturity of N142.4bn, although the impact was countered by a primary market auction of an equal amount. This was split into N32.4bn, N30.0bn and N80.0 billion for the 91day, 180day and 364 day bills and results showed stop rates came in at 4.5%, 7.3% and 8.9% respectively.

With the domestic macro terrain still hazy, we think investors will continue to favor a short term approach to equities which will likely see a blend of profit taking and cherry picking this week. That said, we think the appeal for attractive dividend yield will remain strong, which gives a slight edge to the bulls. Hence, we expect the equities market will remain within a tight range for the most part, but close the week marginally higher.  In addition to this, we anticipate liquidity cycle will be the dominant theme in the FI in the coming week, and expect yields to edge lower for both the T-bills and bond markets.

Global and Macro-economic market update

Performance downbeat as markets continue to seek momentum triggers

In the U.S equities market, the Dow and the S&P 500 managed to log their best weekly gains since November also the best weekly gain of 2016, driven by rally in the technology and consumer discretionary sectors which eased a sharp selloff in the energy sector that was fueled by the drop in oil prices earlier on the week. However, sentiments improved slightly as the week progressed, following the decision of Russia and OPEC to peg oil production at January levels. On the data front, the consumer price index was flat in January, ahead of consensus estimate of -0.1%.

In Europe, fears around Brexit were the dominant theme, as investors continue to await the outcome of UK Prime minister David Cameron’s intentions to secure a deal with the EU to change the terms of his country’s membership in the bloc. It is understood that the prime minister wants the agreement in hand before formally launching an in/out referendum on whether the U.K. should leave the EU. This drove uncertainties in the market, with the UK FTSE closing lower on Friday, although it logged its biggest gain in more than four months, on a w/w basis

The week saw the Peoples bank of China (PBOC) continue its moves to stimulate the ailing economy, as it injected an additional 10 billion yuan ($1.5 billion) in short-term loans into the banking system, in a bid to ensure sufficient market liquidity after the Lunar New Year celebrations. In addition, China’s central bank set the yuan weaker by shifting the daily U.S. dollar-yuan benchmark upward, which represented a 0.16% depreciation of the yuan. It is against this background that the Shanghai index returned 4.2% on the w/w, as the world’s second economy continues to seek balance.

On the domestic scene, the National Bureau of Statistics (NBS) reported that, in January 2016, the consumer price index (CPI) rose 9.6%y/y, unchanged from December 2015. A look at the subcomponents showed that food inflation held steady at 10.6%y/y while core index climbed 10bps from the previous month to 8.8%y/y.

Financial Markets Review and Outlook

Profit taking in DANGCEM pushes the equities market 104bps lower w/w

Despite solid gains in certain value stocks across sectors, the equities markets returned -1.04% on a w/w basis, putting YTD loss at -14.7%. Profit taking in bell weather DANGCEM (-4.6%) was the major driver of negative weekly close. Sector performance was more mixed, as the Oil & gas (+3.3%), Consumer (+0.2%) and Banking (+0.04) sectors posted positive weekly returns driven by counters such as Seplat (+20.0%), ETI (+5.8%), UACN (+5.0%), NB(+2.7%) and Nestle(+0.7%). On the other hand, the Industrial goods (-2.4%) and insurance sectors (-2.2%) posted negative returns underpinned by downtrend in prices of the likes of DANGCEM(-4.6%), AIICO(-3.6%) and CONTISURE(-8.0%).

Market activity as measured by average volume and value traded declined on both counts, with both decreasing by 13.8% and 45.7% al to 240.4mn and N1.9bn respectively. Expectedly, market breadth also edged lower to 0.6x (previously 0.9x) as 21 stocks appreciated in price compared to 36 decliners.

With the domestic macro terrain still hazy, we think investors will continue to favor a short term approach to equities which will likely see a blend of profit taking and cherry picking this week. That said, we think the appeal for attractive dividend yield will remain strong, which gives a slight edge to the bulls. Hence, we expect the equities market will remain within a tight range for the most part, but close the week marginally higher.

Robust liquidity level eases money market rates…

System liquidity opened at N238.4bn long. Although FX and CRR refunds momentarily drove liquidity levels, with the former pushing liquidity slightly above N1.0trn in the course of the week, FX funding by banks as well as provisioning for the T-bill auctions combined to moderate liquidity levels, which closed the week at N376.2bn.  Reflective of a relatively liquid market, both the Open buy back (OBB) and overnight rates (O/N) ended the week low at 0.63% and 1.0% respectively. The week also saw T-bills maturity of N142.4bn, although the impact was countered by a primary market auction of an equal amount. This was split into N32.4bn, N30.0bn and N80.0 billion for the 91day, 180day and 364 day bills and results showed stop rates came in at 4.5%, 7.3% and 8.9% respectively. We note that these stop rates were 10bps, 60bps and 50bps lower that stop rates seen at the prior auction. Impact of robust system liquidity also filtered in the interbank market, where 1M, 3M and 6M rates closed at 7.0%, 8.3% and 9.5%, which was 83bps lower on average, when compared to a week earlier. We expect market liquidity to ratchet up this week, to be driven by a tripod of FX refunds, FAAC credits and OMO maturity of c. N258bn. Hence, we see scope for key money market rates to inch further lower from current levels as the week progresses, barring the impact of weekly FX funding by the DMBs and OMO announcements by the Apex bank.

…sets the tune in the FI market

In the past week, bullish sentiments rode on the back of high system liquidity to drive proceedings in the T-bills market, with demand more pronounced in the 180 and 364 day bills in contrast to the preceding week. While the market opened quietly with investors cautious ahead of the PMA auction, activity levels increased later in the week, mostly driven by bargain hunting. While yield on the 90day bills was flattish at c.3.6%, the 180day and 364day bills shed 103bps and 100 bps respectively, to settle at 6.5% and 8.7% respectively. The bond market also saw positive sentiments dominate, although more to the short end of the spectrum, which closed at 9.4%, 90bps below yields levels from a week earlier. The medium and long end of the curve also shed 20bps and 12bps and 15bps, to settle at 11.5% and 12.1% in that order. We anticipate liquidity cycle will be the dominant theme in the FI in the coming week, and expect yields to edge lower for both the T-bills and Bond markets.

Naira flat for the second successive week, but pressure worsens in the parallel market

At the interbank, the naira closed the week at N199.3, for the second successive week, although demand continues to outweigh supply significantly. However, the pressure on the naira in the parallel market increased as the impact of uncertainties around FX continues to resonate. This saw the naira close the week at around 400/US$, up 26.1% on a w/w basis.  We think the current trend will persist, and we will continue to see a large spread between the interbank and parallel markets in the near term