Equities roll back strong gains as macro backdrop weakens further

When will the tide turn?

In the past week, Nigerian equities swung lower to lock-in a weekly loss as the market reversed prior gains, shedding 4.4% w/w to settle at 27,634.42. YTD returns are once again back in the negative territory at -3.5%. Losses seen during the week were mostly as a result of sell-off by investors amid macro uncertainties and a lack of clarity around the CBN’s flexible FX policy regime promised by the Monetary Policy Committee (MPC) at the end of its policy meeting in the past week.

Rates in the money market closed the week lower on the back of slightly elevated system liquidity. The market opened the week long at N463.2bn, (vs. N277.4bn previously) following FAAC inflows at the close of the prior week. Thus, money market rates, OBB and Overnight (OVN), settled at 3.1% and 3.4% respectively. After a mid-week OMO sale by the CBN, system liquidity moderated to N412.0bn. However, OBB and OVN rates inched down to 2.7% and 3.3% respectively relaying mixed market sentiment. As at Friday, OBB and OVN rates closed 2.0% and 2.3% lower W-o-W to settle at 2.8% and 3.2%.

This week, we think current uncertainty rocking the equities market will linger as investors continue to wait on the Apex bank to make good its promise of a clear announcement around a more flexible FX policy. Barring such an announcement, we expect the bears to dominate proceedings which will likely see the equities market end the week lower.

Global and Macro-economic market update

Disappointing US labor numbers weigh on global equities, drive markets lower

The US equities market finished the week sharply lower, as investors weighed implications of a dismal jobs report on the Federal Reserve monetary policy decision in two weeks.The U.S. economy created just 38,000 jobs last month, the weakest level of hiring in nearly six years. In our view,  the weak jobs report coupled with other data, pointing to relative weakness in the economy, likely squelches prospects for a rate increase by the Federal Reserve later this month.

European equities also closed lower, as negative surprises in U.S. jobs report stoked worries about global growth. The week also the European Central Bank (ECB) holds its policy meeting, and in line with consensus expectations, the Draghi led Bank made no changes to official interest rates. Specifically, the bank left interest rate on its main refinancing operations at 0.0% and the deposit rate it charges banks to hold money overnight at -0.4%. The rate on the ECB’s marginal lending facility was also maintained at 0.25%.

Asia equities also ended the week lower, although data released by the National Bureau of Statistics showed that China’s official purchasing managers’ index (PMI) for manufacturing remained at 50.1 in May, holding steady from the previous month. The May PMI reading represents the third consecutive month the index kept above 50, the line separating expansion from contraction, as aggressive monetary stimulus in the first quarter cushioned the downdraft in the world’s second-largest economy.

On the domestic scene, data released by the National Bureau of statistics (NBS) showed Nigeria  recorded a negative trade balance of N184.1bn at the end of Q1-16, the country’s first negative trade balance since data collection began in 2008. The NBS stated that the development arose due to a sharp decline in both imports and exports, with the latter declining by N671.1bn (-34.6% q/q), while the former was down by N122.4bn (-7.8% q/q).

Financial Markets Review and Outlook

Equities market claws back recent gains, loses 4.4% w/w

In the past week, Nigerian equities swung lower to lock-in a weekly loss as the  market reversed prior gains, shedding 4.4% w/w to settle at 27,634.42. YTD returns are once again back in the negative territory at -3.5%. Losses seen during the week were mostly as a result of sell-off by investors amid macro uncertainties and a lack of clarity around the CBN’s flexible FX policy regime promised by the Monetary Policy Committee (MPC) at the end of its policy meeting in the past week.

Negative sentiment dominated the major sectors with the Banking index (-7.7%) leading losses, followed by the Oil and Gas index (-5.3%). The Insurance sector (+4.1%) also saw a decline, while the Industrial (-3.4%) and Consumer goods sector (-3.0%) indices were also down on a w/w basis.  Examples of major counters that drove price depreciation in these sectors include OANDO (-17.9%), AXAMANSARD (-13.8%), STANBIC (-11.1%), HONEYWELL (-10.2%), ZENITH (-9.8%), CCNN (-9.6%), NAHCO (-9.5%), UACN (-9.1%),ETI (-9.0%), GUINNESS (-7.1%), GUARANTY (-6.8%), FORTE (-5.0%) and DANGCEM (-3.2%).

Market activity as measured by average volume and value traded weakened at the close of the week, with the former decreasing by 33.3% to 311.6m units while the latter was also down by 4.8% to N2.8bn. Reflective of a strong fall in demand, market breadth contracted sharply, closing at 0.3x (vs. 2.3x in the previous week), as 16 stocks advanced against 58 decliners.

This week, we think current uncertainty rocking the equities market will linger as investors continue to wait on the Apex and bank to make good its promise of a clear announcement around a more flexible FX policy. Barring such an announcement, we expect the bears to dominate proceedings which will likely see the equities market end the week lower.

Uneven liquidity dynamics push money market rates sideways

Rates in the money market closed the week lower on the back of slightly elevated system liquidity. The market opened the week long at N463.2bn, (vs. N277.4bn closing balance in the prior week) following FAAC inflows at the close of the previous week. Thus, money market rates, OBB and Overnight (OVN) rates, settled at 3.1% and 3.4% respectively. After a mid week OMO sale by the CBN, system liquidity moderated to N412 to N439.4bn with OBB and OVN rates moderating to 2.7% and 3.3% respectively. As at Friday, OBB and OVN rates closed 2.0% and 2.3% lower W-o-W to settle at 2.8% and 3.2%.

Trends in the T-Bills market were rather mixed as investors continued to show interest in the short dated T-bills instruments while the 364-day instruments continued to sell off with yields within sight of 11.0% throughout the week. Although average T-bills yield opened higher on Tuesday at 10.1% in response to system liquidity dynamics, rates steadied at 9.3% on Wednesday and Thursday. Mid-week, the CBN on Wednesday conducted a total of N143.9bn treasury bills auction for the 91-Day, 182-Day and 364-Day instruments at respective marginal rates of 8.0%, 9.1% and 11.1% with the 3 instruments oversubscribed. The week also saw the pattern of FX refunds by the apex bank and subsequent debits for FX funding recur, although impact on key money market rates was mostly muted. At the end of the week, both Open Buy Back (OBB) and Overnight (O/N) closed the week at 2.8% and 3.2%, higher than 4.8% and 5.5% recorded in the previous week respectively.

This week, we think a relatively liquid market raises the possibility of OMO calls by the CBN, hence we expect an uptick in short term money market rates on the back of profit taking in overpriced instruments. In the short term, we expect investors to continue to trade on the short end of the curve, as macroeconomic uncertainties constrain longer term positioning.

Bonds market still in a “buy” mode as yields average 12.4%

Amid weak demand, the bull run seen since the last MPC meeting did not materially wane in the past week as average bond yield inched up to 12.5% from 12.4% in the previous week.  Investors continued to roll down the curve, with increased activities in shorter tenured bonds instruments. Uncertainty around FX and poor macro outlook remained the key themes driving sentiment in the market. As things stand, the yield curve appears to be relaying bullish expectation ahead of the CBN’s release of FX policy which could be positive for FPI in the short to medium term. We note that longer term instruments continue to trade as significant deep discount (JAN 2026: 95.7, JUL 2030: 78.1, JUL 2034: 89.1 and MAR 2036: 93.0) offering opportunity for investors to lengthen duration in anticipation of a medium term rebound in the macro backdrop.

This week, we expect the bonds market to remain calm though short term investors are likely to continue to price-in anticipated higher inflation print for May as well as expectation of poor  Q2-16 GDP numbers.

Naira remains pressured amid elevated demand in the parallel market

The CBN continued to intervene in the Official market at N197, while the parallel market rate closed the week at 354.00/356.00 from 350.00/354.00 the previous day. The market is still shrouded in uncertainty regarding the next policy move by the CBN.

We expect the USD/NGN to continue to decline as FX demand remains heightened in the aftermath of the liberalization of the downstream petroleum sector pricing regime.