Equities extend gains, swings YtD into positive territory

The equities market extended on-going positive run, as it added 6.6% w/w to settle at 28,902.25, with YTD position now in the positive territory for the first time in 2016 at +0.9%. The strength of gains seen this week was mostly as a result of the aftermath of the outcome of the MPC meeting, where the committee announced that a more flexible policy around FX will be released shortly while CBN intervention will only be limited to certain critical sectors.

The money market opened at a relatively tight N186.0bn long at the start of the past week, and system liquidity hovered around this level for most part of the week. The week also saw the pattern of FX refunds by the apex bank and subsequent debits for FX funding recur, pushing key money market rates to c.15.0% on Wednesday.

Nevertheless, an inflow of c.N80.0bn worth of OMO maturity as well as weekly CRR maintenance improved system liquidity towards the end of the week, and ensured both Open Buy Back (OBB) and Overnight (O/N) closed the week at 4.8% and 5.5%, higher than 8.5% and 8.9% recorded in the previous week respectively.  This week, we think money market rates will trend lower on our expectations of FAAC inflows.

Following the strength of gains seen over the past 5 weeks, we think the equities market is due for some price correction. Hence, we expect to see some profit taking by investors this week. That said, further clarity around the FX policy will likely be the next major trigger for equities, and specific guidance on this front in the course of the week could drive demand.

Global and Macro-economic market update

Bullish sentiment dominates markets as investors ride on the wave of positive economic data. U.S. stocks closed higher in the past week as investors brushed aside Federal Reserve’s comments that a rate increase may be justified this summer. Specifically, all three main indexes booked their biggest weekly gains in several weeks as traders prepared for a long weekend ahead of the Memorial day holiday.

The gains seen in the US equity indices  was driven by a combination of  factors which include  oil going over $50 a barrel as well as decreased anxiety around Brexit in the Eurozone. On the date front, U.S. first-quarter economic growth was revised up to 0.8% from a previous reading of 0.5%, based on a fresh estimate that shows somewhat stronger home construction.

European equities also brushed aside US rate hike related concerns to post strong weekly gains,  with The Stoxx Europe 600 pushing 3.4% higher for the week which represented the benchmark’s strongest weekly performance since mid – February. Economic numbers however remained mixed as surveys of purchasing managers in the Eurozone released showed that increasing activity in France and Germany in May was more than offset by softness in other parts of the currency area, despite the announcement of a fresh package of stimulus measures by the European Central Bank in March.

Expectations of higher interest rates in the US also boosted key equity indices in Asia, especially the financial services sector because of the potential increase in the gap between what the banks charge on loans and what they pay for deposits.

In Australia, gains came after Fitch Ratings affirmed its ratings on the country’s major banks and said the lenders can manage growing risks linked to rising household debt and higher home prices. The comments follow a similar assessment from Moody’s that the banks’ balance sheets remain solid despite a recent jump in impaired loans.

On the domestic scene, the Monetary Policy Committee (MPC) at the end of its 2 day policy meeting decided the leave key monetary policy variables unchanged. However, it guided that it is about to introduce a more flexible FX policy that will reduce illiquidity and limit its intervention to only the certain critical sectors of the economy.

Financial Markets Review and Outlook

YtD swings into the positive territory as the ASI extends momentum, adds 660bps

In the past week, the equities market extended on-going positive run, as it added 6.6% w/w to settle at 28,902.25, with YTD position now in the positive territory for the first time in 2016 at +0.9%. The strength of gains seen this week was mostly as a result of the aftermath of the outcome of the MPC meeting, where the committee announced that a more flexible policy around FX will be released shortly while CBN intervention will only be limited to certain critical sectors.

Positive sentiment dominated the major sectors with the Consumer index (+8.6%) leading gains, followed closely by the Financial services index (+8.2%). The industrial good sector (+5.2%) also saw positive sentiment dominate, while the Insurance (+3.5%) and the Oil and gas (+2.3%) indices were also up on a w/w basis.

Examples of major counters that drove price appreciation in these sectors include OANDO (+25.0%), NAHCO (+23.6%), DIAMOND (+23.0%), FCMB (+23.0%), ETI (+19.4%), LIVESTOCK FEEDS (+18.8%), STANBIC (+18.0%), TRANSCORP (+17.1%), GUINNESS (+15.5%), NB (+12.7%), WAPCO (+7.2% ) and DANGCEM (+4.8%).

Market activity as measured by average volume and value traded was mixed at the close of the week, with the former decreasing by 4.4% to 467.4m units while the latter rose by 12.5% to N3.0bn. Reflective of increasing demand, market breadth expanded marginally this week, closing at 2.3x (vs. 2.2x in the previous week), as 53 stocks advanced against 23 decliners.

Following the strength of gains seen over the past 5 weeks, we think the equities market  is due for some price correction. Hence, we expect to see some profit taking by investors this week. That said, further clarity around the FX policy will likely be the next major trigger for equities, and specific guidance on this front in the course of the week could drive demand.

System liquidity improves, moderates money market rates w/w

The money market opened at a relatively tight N186.0bn long at the start of the past week, and system liquidity hovered around this level for most part of the week. The week also saw the pattern of FX refunds by the apex bank and subsequent debits for FX funding recur, pushing key money market rates to c.15.0% on Wednesday.

Nevertheless, an inflow of c.N80.0bn worth of OMO maturity as well as weekly CRR maintenance improved system liquidity towards the end of the week, and ensured both Open Buy Back (OBB) and Overnight (O/N) closed the week at 4.8% and 5.5%, higher than 8.5% and 8.9% recorded in the previous week respectively.  This week, we think money market rates will trend lower on our expectations of FAAC inflows.

FI markets bullish as yields trends downward following MPC’s no action

Sentiment in the T-bills market was mostly bullish in the past week, as market players looked to bargain hunt on a combination of improved system liquidity and the decision by the MPC to keep key policy rates unchanged.  At the end of the week, yields on the 91day, 182 day and 364 day bills closed at 7.3%, 9.3% and 11.3%, 60bps, 90bps, and 10 bps lower than the previous week accordingly.

The Bond market also relayed bullish sentiment in the past week, mostly driven by improved investor demand (especially the domestic Institutionals). We note that investors had earlier priced-in the possibility of higher interest rate and plausible monetary policy tightening in the run-up to the MPC meeting, and a “no action” by the MPC created attractive buying opportunities which stoked demand. As a result, yields at the short, mid and long end of the maturity spectrum edged lower by 80bps, 60bps and 90bp w/w, to settle at 13.2%, 13.6% and 13.3% respectively.

With FAAC credits likely to boost system liquidity, we expect bullish sentiments will remain across the FI markets barring aggressive OMO announcements by the Apex bank. That said, we expect overall investor appetite will still remain in the balance, as traders play the waiting game pending further clarity on the dynamics of the flexible FX policy announced at the MPC.

Naira flat at the interbank, volatile at the parallel market

The naira remained flat at the interbank in the past week, closing at N199.1/US$. Pressure in the parallel market however remained, as the impact of a decision by the government to partially deregulate the downstream oil and gas sector which effectively shifted dollar demand by the oil marketers to the parallel market continued to resonate. It is against this background that the naira close the week at c.N360/US$ at the parallel market. We expect pressure in the parallel market will linger this week, as the market awaits further clarity around a more flexible the FX policy.