Bear pressure trails naira assets

The bearish sentiment which dominated global equities trailed into Nigerian market as investors sold off top stocks in the Banking, Consumer and Industrial sectors. Consequently, the benchmark index lost 1.7% w/w to close at 23,501.87 points, deepening the YtD loss to 17.9%. Reiterating the market’s bearish sentiment is the market breadth which worsened to 0.7x (previously 1.2x) as 28 stocks appreciated in price compared to 40 price decliners.

Treasury Bills market rode on a mixed sentiment with a bearish tilt. Sell-offs was pronounced at the short end of the curve on the back of liquidity strain in the course of the week, this drove average T-Bills rate to 6.5%. The bond market was predominantly bearish as investors booked profit on the back of recent gains and also in preparation for the bond auction this week, driving average bond yields up by 38bps to 11.1%.

Bearish sentiment is expected to persist this week on the back of no expectation of positive news flow to trigger a market rebound.  We expect sell-offs to trail the bond market this week as investors free up cash for the bond auction, while sentiments in the T-Bills market will be largely mixed barring any external shocks via OMO mop-up.

Global and Macro-economic market update

Latest job numbers in the US further cloud the global growth scenario

U.S stocks ended the week with steep losses after two straight weeks of gains investors grappled with a jobs report that although had a weak headline number, also recorded sharp improvements in wage growth and participation rate. Specifically, the pace of hiring in the U.S. tapered off in January, with non-farm jobs coming in at 151,000, which was 16.7% behind consensus. This was despite wages rising sharply even as unemployment rate dipped below 5% for the first time since 2008.  The smaller-than-expected increase added to growing worries about a weakening U.S. economy and in our view further clouds the pace of rate normalization in the course of the year.

Concerns over plummeting crude prices as well as the impact of mixed job numbers in the US also weighed on markets across the Eurozone, leading to choppy trades with markets closing in the red.

In Asia, major markets also closed lower w/w as china’s manufacturing numbers continued to disappoint. The official manufacturing purchasing managers index fell for a sixth month to 49.4 in January from 49.7 in December further compounding worries about China, even as  investors continue to question whether the Chinese government has ample resources to combat a potential financial crisis.

On the domestic scene, data from the DMO has shown that Nigeria’s total debt rose 12.1%y/y to N12.6trn (US$65.4bn) in 2015 relative to 2014. The break down revealed that Federal Government debt accounted for 79.8% while State Governments debt made up 20.2% of the total debt. External debt amounted to N2.1trn, representing 16.8% of total debt stock.

Financial Markets Review and Outlook

Local Bourse sustains bearish trend, lost 1.7% w/w

The bearish sentiment which dominated global equities trailed into Nigerian market as investors sold off top stocks in the Banking, Consumer and Industrial sectors. Consequently, the benchmark index lost 1.7% w/w to close at 23,501.87 points, deepening the YtD loss to 17.9%. Market activity as measured by average volume and value traded increased by 327.9% and 32.9% to 969.3mn units and N2.5bn accordingly. Reiterating the market’s bearish sentiment is the market breadth which worsened to 0.7x (previously 1.2x) as 28 stocks appreciated in price compared to 40 price decliners.

Equity’s performance on a sector basis came in mixed. Share price appreciation in Continsure and NEM shoved the Insurance sector to the positive, returning 0.9% w/w. Also, gains recorded in Mobil (5.1%) and Seplat (25.1%) led to a 4.0% w/w return for the Oil & Gas sector, topping the gainer’s chart for the week. On the flip side, the Consumer goods lost 3.2% w/w due to losses in NB (-4.0%) and Nestle (-5.0%) in that order. Furthermore, losses in Dangcem (-3.6%), Guaranty (-4.8%) and Unitybnk (-12.0%) led to a -2.1% and -0.7% loss in the Industrial and Banking sector respectively.

Bearish sentiment is expected to persist this week on the back of no expectation of positive news flow to trigger a market rebound. However, a stock prices continue to near bottom, investors are likely to resume bargain hunting while position taking for corporate action and reaction to FY guidance may keep the bulls in sight.

Market rates stay volatile as Liquidity seesawed

The system opened the week very liquid as liquidity came in at cN900bn on the back of FX refund by the CBN at the end of the preceding week. This drove rates down on Monday to 0.7% and 1.0% for the Open Buy Back (OBB) and Overnight (O/N) accordingly. Conversely, the robust liquidity was short-lived as provisioning for FX and PMA auction during the week drove rates back to 5.8% and 6.0% for the OBB and O/N, though moderated on Wednesday. FX refund on Friday improved liquidity back to Monday levels with the OBB and O/N closing the week at 0.6% and 1.0% in that order. Markets rates will trail the see-sawing pattern of liquidity levels expected this week.

Liquidity will likely remain robust at the start of the week, though FX intervention and bond auction this week will strain liquidity going into the week.

Profit Booking drives Bond Prices South

Treasury Bills market rode on a mixed sentiment with a bearish tilt. Sell-offs was pronounced at the short end of the curve on the back of liquidity strain in the course of the week, this drove average T-Bills rate to 6.5%. The bond market was predominantly bearish as investors booked profit on the back of recent gains and also in preparation for the bond auction this week, driving average bond yields up by 38bps to 11.1%.

The CBN conducted PMA worth N192.39bn last week via 91-day (N45.17bn), 182-day (N30.0bn) and 364-day (N117.22bn) with stop rates at 5.01%, 8.31% and 10.48% accordingly. This week, the DMO will be issuing the Feb-2020 and Jan-2026 bonds (re-opening) worth N40.0bn and N50.0bn respectively. We think stop rates will be at similar levels to January’s auction with a possibility of 50bps increase.

With expectation of higher rates at the primary market, bearish sentiment is expected to persist in the secondary market this week. Sell-offs will trail the bond market as investors free up cash for the bond auction, while sentiments in the T-Bills market will be largely mixed barring any external shocks via OMO mop-up.

Naira gains w/w, but pressure lingers in the parallel market

At the interbank, the naira gained 18bps to close the week at N199.3. However, the pressure on the naira in the parallel market remained as the impact of recent policy changes by the Apex bank continues to reverberate with the naira closing the week at 306/US$. Barring policy surprises around FX, 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.