Year-end rally buoy equities

This past week saw the equities market post gains on a continuous position-taking ahead of possible January rally. As such, at 26,874.6 points, the ASI closed the week 1.5% higher w/w, trimming YTD losses to –6.2%. The money market was relatively buoyant, with key rates edging lower. Specifically, the Open Buy Back (OBB) and Overnight (ON) rates closed the week at 8.8% and 9.6% respectively vs. 19.2% and 20.7% in the previous week, as maturing bills worth c.N136.2b hit the system.

The equities market closed the week bullish on optimism around January rally, although the YTD return was –6.2%, which was within the range of our bear case scenario for the year. As investors gradually return from the long weekend, we expect a broadly quiet start to the week, with a mix of bargain hunting and mild profit booking. We expect activities within the FI space to be largely quiet as investors gradually return from holidays, with eyes set on the direction of planned government borrowing for Q1-17 as well as December 2016 CPI print.

Global and Macro-economic market update

Rising US oil-rig count, a threat to OPEC’s pact?

The US oil rig count increased by two to 525 in the final week of 2016, rising to the highest level in a year, according to Baker Hughes. The gas rig count increased by three to 132. With one miscellaneous rig remaining in use, the total count rose by five to 658. In 2016, the oil rig count staged a comeback not seen since the most recent oil crash. Last week’s increase put it just 11 rigs short of where it started the year, but well off pre-crash levels. After oil prices bottomed in February and started rising, producers gained confidence to increase activity. We expect the recent OPEC pact to be accentuate shale production, thus capping crude oil rally.

The FTSE 100 index rose 0.2% to close at 7,120.26. As of Thursday, the benchmark was on track for a 14% yearly gain, the biggest among major European stock markets. Thursday’s gain came as oil companies advanced after U.S. government data showed a smaller rise in domestic inventories than had been signaled by an industry estimate. Oil prices briefly moved into positive territory, but had slipped back into the red at the time of the European market close.

Japanese industrial production rose 1.5% m/m in November on a seasonally adjusted basis, suggesting that activity in the world’s third-largest economy continues to pick up. The rise was slightly smaller than the 1.7% increase on consensus estimate, and came after output stayed flat in October, according to data released by the Ministry of Economy, Trade and Industry last week. The increase is a sign that Japan’s economy is slowly improving on more demand for Japanese electronics overseas and a rebound in demand for items such as cars at home.

On the domestic scene, the CBN sold about $1 billion on the forward market last week to clear a backlog of dollar obligations in selected sectors, its largest special auction since a currency peg was removed in June. Expectedly, the naira marginally appreciated before the end of the year. Outstanding dollar demand was about $4b before the removal of the peg in June. Efforts to cut dollar demand have been largely unsuccessful due to low oil prices.

Domestic Financial Markets Review and Outlook

Equities: market bullish as the ASI posts w/w gains

This past week saw the equities market post gains on a continuous position-taking ahead of possible January rally. As such, at 26,874.6 points, the ASI closed the week 1.5% higher w/w, trimming YTD losses to –6.2%.

A closer look at the sectoral performance revealed that sentiment was largely mixed, albeit with a bullish undertone. Specifically, the Consumer Goods sector closed the week higher to top the gainers’ chart with a positive weekly return of +3.7%. The Banking and the Insurance indices also posted weekly gains of 2.8% and 2.7% respectively. Positive momentum in these sectors was driven by NEM (+19.3%), UNION (+17.0%), LEVENTIS (+14.3%), NASCON (+12.6%) and NB (+7.6%). However, the Oil and Gas and the Industrial Goods sectors posted losses of –1.5% and –0.2% respectively. These sectors were largely weighed by losses in FO (-18.7%) and PORTLAND (-9.1%).

Compared to the previous week, overall market sentiment inched higher with market breadth settling at 1.8x (relative to 0.7x in the previous week) as 37 stocks appreciated against 21 decliners. Activity level during the week also increased as the average value traded rose by 11.6% w/w to N1.5bn, just as average volume traded increased by 12.7% w/w to 148.0m units.

The NGSEASI closed the week bullish on optimism around January rally, although the YTD return was –6.2%, which was within the range of our bear case scenario for the year. As investors gradually return from the long weekend, we expect a broadly quiet start to the week, with a mix of bargain hunting as well as mild profit booking.

Money Market rates ease w/w on maturing bills

In the past week, the money market was relatively buoyant, with key rates edging lower. Specifically, the Open Buy Back (OBB) and Overnight (ON) rates closed the week at 8.8% and 9.6% respectively vs. 19.2% and 20.7% in the previous week, as maturing bills worth c.N136.2b hit the system. We expect c.N125.9b worth of  maturing bills towards the end of the week which could further lower the money market rates. However, aggressive OMO calls by the apex bank may likely offset the inflow.

FI Market: Yields trend higher

In the past week, yields trended higher at the fixed income market, as OMO calls more than offset liquidity inflow from maturing bills, thus driving a bearish close to FI asset prices w/w. Specifically, OMO call by the apex bank, which mopped up c.N70b from the system, ensured the T-bills market close the week  largely bearish with average yield inching higher by 38bps, to stand at 18.5%. In the same vein, the bonds market was bearish, on profit-booking in the long dated instruments. At the end of the week, average yield moved 232bps north, to end the week at 19.5%. This week, we expect activities within the FI space to be largely quiet as investors gradually return from holidays, with eyes set on planned government borrowing for Q1-17 as well as CPI print for December 2016.

Naira appreciates marginally

At the spot market, the USD/NGN closed at 305.0 in the past week, strengthening by 9bps on previous close. In the same vein, the parallel market saw the domestic currency appreciate by 101bps w/w, to close at 486. Oil prices rose by 300bps to close at US$56.8pb, buoyed by production cut expectations. In the week ahead, we expect pressure on the naira to linger especially at the parallel market as unmet demand from the official market continues to stoke imbalances. That being said, renewed rally in oil prices indicates that the market appears positive on OPEC and it partners’ ability to deliver on their agreement to stabilize the market. This is expected to provide further support for the naira in the coming weeks.