Banks’ stirring Q3 earnings support equities’ positive close

Market sentiment rode on 3rd quarter earnings last week, which drove activities in highly capitalised stocks such as Access, Dangcem, FO, Guaranty, and Oando. The Q3 numbers were however mixed. While we saw some positives from the financials, the non-financials reported relatively weak earnings driving an overall weak sentiment though a few heavyweights traded north, especially the banks. Consequently, the benchmark index traded positive in 2 out of 5 trading days, shoving the week-on-week return to 0.6% while Year-to-date return pared to -13.4%. Market capitalisation added N61.1bn to close at N10.3trn.

Contraction in system liquidity and profit taking on perceived ‘overpriced’ instruments instigated a reversal of the bullish run witnessed in the fixed income market in the past weeks. The Treasury bills market traded on a bearish note all through the week with sell-offs occurring across tenors; thus, average yield increased by 39bps to 8.4%. On the bond space, demand waned last week pushing yields up by 30bps to 14.2%. Investors sold off short to medium tenured bonds last week with demand shifting to longer tenured bonds.

As earnings season gear up, reported numbers and expectations will be the major driver behind market performance. Overall, we do not expect exciting numbers but we look to see decent performance from the banks. On another note, reactions to select weak earnings reported last week will possibly be sustained at the start of the week, while scorecards from non-financials are likely to be tepid, keeping the bears in sight for a better part of the week. Thus, we expect the market to trade sideways this week, tilting towards the negative.

Global and Domestic Macro-Economic Updates

Monetary easing theme dominates, drives positive sentiments across markets

China dominated the Asian markets, following the decision by the People’s Bank of China to cut base rates. The Apex bank cut its one-year deposit rate by 25bps to 1.5%, and also lowered its one-year lending rate by the same amount to 4.35%. The move followed China’s disappointing Q3 GDP numbers, which came in at 6.9%, further hinting that growth in the world’s second largest economy is slowing.

European stocks also finished the week with strong gains, as a surprise cut in interest rates in China added to the market’s cheer after the prospect for more stimulus from the European Central Bank (ECB) had earlier sparked a rally. Mr Draghi, after a two-day policy meeting of the ECB came out to say that the degree of policy accommodation will be examined at its December monetary policy meeting, an announcement the markets took as dovish, hinting that the ECB is open to expanding monetary stimulus in a bid to boost inflation

U.S. stocks ended the week firmly in the positive territory boosted by a mix of strong earnings from heavyweight tech companies such as Amazon and Microsoft as well as investors cheer at a surprise interest-rate cut by the People’s Bank of China

On the domestic scene, the Nigerian  Electricity  Regulatory Commission  (NERC) has come out to say that starting from November, Nigeria plans to increase electricity rates by as much as 40% , as a fall in the value of the naira and rising costs hinder efforts to end daily blackouts in the country.

Equities closed the week positive despite weak sentiment

Market sentiment rode on 3rd quarter earnings last week, which drove activities in highly capitalised stocks such as Access, Dangcem, FO, Guaranty, and Oando. The Q3 numbers were however mixed. While we saw some positives from the financials, the non-financials reported relatively weak earnings driving an overall weak sentiment though a few heavyweights traded north, especially the banks.

Consequently, the benchmark index traded positive in 2 out of 5 trading days, shoving the week-on-week return to 0.6% while Year-to-date return pared to -13.4%. Market capitalisation added N61.1bn to close at N10.3trn. Market activity as measured by average volume and value traded improved by 32.3% and 29.0% to 198.5m units and N2.6bn respectively. Market breadth settled at 0.7x as 26 stocks moved North while 37 stocks moved South.

Based on the NSE indices, the Oil & Gas sector (NSEOILG5) closed positive, returning 3.1% week-on-week driven by 3.6% and 7.1% gains in Forte Oil and Oando in that order. Also, the banking sector (NSEBNK10) returned 1.4% week-on-week driven by gains recorded in Access (6.4%) and Guaranty (4.2%); these gains was steered by exciting Q3 numbers from the banks. Gains recorded in Dangcem (1.2%) shoved the Industrial sector (NSEIND) to close marginal positive (0.1%) week-on-week. On the flip side, the Insurance (NSEINS10) and Consumer (NSEFBT10) lost 0.8% and 0.5% respectively.

As earnings season gear up, reported numbers and expectations will be the major driver behind market performance. Overall, we do not expect exciting numbers but we look to see decent performance from the banks.

On another note, reactions to select weak earnings reported last week will possibly be sustained at the start of the week, while scorecards from non-financials are likely to be tepid, keeping the bears in sight for a better part of the week. Thus, we expect the market to trade sideways this week, tilting towards the negative.

System Liquidity Pressure moves market rates/NIBOR north

System liquidity was somewhat pressured last week, coming lower than levels seen in past weeks. Opening balance touched sub N400bn from N1.08trn levels we saw the preceding week. The pressure on liquidity was driven by TSA remittance, struggle for funds by banks to meet scheduled FX intervention and Primary Market Auction by the CBN. Consequently, the Open Buy Back (OBB) and the Overnight started the week at 0.8% and 1.0% respectively, then rose to 1.1% and 1.0% on Tuesday and touched 5.3% and 5.8% on Wednesday. Rates stayed at that level for the rest of the week. Same was seen in the NIBOR space which advanced during the week as average NIBOR increased by 1.4% week-on-week to settle at 13.1%. Meanwhile, standard lending facility increased 205% week-on-week to N228.7bn (N74.9bn previously) while standard deposit facility dropped by 18.7% to N455.9bn (N561bn previously). OMO Maturities worth N187.01bn (N31.88bn – 146day, N133.99bn – 170day and N21.13bn -171-day) is expected to hit the system on Thursday coupled with FAAC inflows which should come in Friday; on the back of this and barring external shocks to the system, we expect rates to trend down marginally this week.

FI assets hung on the Bears; liquidity pressure and speculation steer the mood

Contraction in system liquidity and profit taking on perceived ‘overpriced’ instruments instigated a reversal of the bullish run witnessed in the fixed income market in the past weeks. The Treasury bill market traded on a bearish note all through the week with sell-offs occurring across tenors; thus, average yield increased by 39bos to 8.4%. On the bond space, demand waned last week pushing yields up by 30bps to 14.2%. Investors sold off short to medium tenured bonds last week with demand shifting to longer tenured bonds.

The CBN conducted a Primary Market Auction last week issuing N138.17bn via 91-day (N36.79bn), 182-day (N35.0bn) and 364-day (N66.39bn) with rates dropping from last auction to 8.68% (10.78%), 10.69% (12.99%) and 12.125% (14.28%) respectively. The auction was oversubscribed with the bid-to-cover ratio measured at 2.91x.  Final phase of FGN bonds removal from the JP Morgan bond index will occur this week which will likely see FPI rebalancing their portfolios thereby pushing yields up. Complementing this will be a sustained profit taking on ‘overpriced’ instruments by domestic investors coupled with relatively low liquidity from previous levels. Thus, bond prices will likely move south this week, pushing yields to the north. However, the slight improvement in liquidity from maturities and FAAC inflow is expected to bode well for Treasury Bills this week, keeping yields at current levels.

Naira extends loss against the Greenback w/w

In line with on-going patterns, activities in the FX market remained relatively calm in the past week, as stakeholders continue to respond to active FX management by the apex body. However, the Naira lost 45bps against the dollar on a w/w basis, to close the week at N197.50, reflecting the impact of on-going portfolio re-balancing by foreign money managers from JP Morgan exclusion of naira FI instruments. We expect recent stability in the USD/NGN to extend into this week, as the Central bank continues to intervene and lend support to the domestic currency.