Global Market Review and Outlook
The performance of markets this week showed that the negative outings across markets last week was more of a reaction to the result of the referendum on BREXIT. In June, equities performance was mixed across regions. Whilst the markets in the BRICS classification outperformed other regions, the best performing index for the month of June was the Nigerian ASI, up 7.0% on account of the developments in the FX market, followed by the Brazilian Ibovespa (+6.2%) and the UK FTSE (+2.5%).
In a turn of events, the frenzy which erupted across global markets following the conclusion of the BREXIT referendum in which the UK voted to leave the EU, seems to have calmed as most indices under our coverage reversed losses from the previous week and advanced W-o-W. In the developed markets, the UK FTSE appreciated 5.9% W-o-W as some respite returned to the market while investor sentiment was also stoked by comments made by the Governor of the Bank of England, Mark Carney, which suggest possible cuts in interest rate to mitigate the impact of the BREXIT on the economy. In the US markets, positive sentiment persisted as both the NASDAQ and S&P 500 appreciated 3.4% and 3.3% W-o-W respectively signaling a recovery from the panic selling by investors last week, which was triggered by BREXIT. Similarly, the overall positive sentiments filtered into the European markets as the France CAC and the German DAX rose 4.0% and 2.0% W-o-W on expectation of further monetary easing policies following the BREXIT. As worries surrounding the BREXIT continued to fade, the Asian markets closed in the green for the week as the Japan Nikkei surged 4.9% W-o-W while the Hong Kong Hang Seng appreciated 2.6% W-o-W.
Performance across markets under the BRICS classification was also positive as all indices trended northwards W-o-W. The Brazilian Ibovespa closed 3.4% higher W-o-W as the recently released labour data which surpassed analysts’ expectations, signaled a possible improvement in the economy, followed by the Russian RTS which improved 3.1% W-o-W. The China Shanghai previously plagued by massive sell-offs, rebounded this week as the index rose 2.7% W-o-W majorly due to bargain hunting even as investors await release of economic data for the month of June. The Indian BSE and the South African FTSE also followed suit, gaining 2.8% and 1.4% W-o-W respectively.
The African markets were the contrarians for the week as all indices, save for the Ghana GSE which rose 0.6% W-o-W, closed in the red. The Nigerian All Share Index dipped the most, down 4.4% as investors remain wary on the operations of the FX market, followed by the Egypt EGX (-3.0%) and the Kenyan NSE (-1.8%) W-o-W.
Weekly Equities Market Review and Outlook
The euphoria which came with the re-introduction of some flexibility in the FX market seems to be waning, if performance of the market this week is anything to go by. Some overhanging concerns about the new policy which has left investors with “a lot to desire”, coupled with profit taking in counters that gained significantly in the past week, drove the negative performance for the week. The market started the week on a bearish note as investor sentiment was weakened by the credit rating downgrade by Fitch as well as the BREXIT vote, driving the benchmark index 2.6% southwards. This negative trend continued on Tuesday as the market closed 0.9% lower on account of profit taking.
However on Wednesday, this trend was reversed as the All Share Index appreciated 0.8% as a result of gains in market bellwethers but returned to the red on Thursday, sliding 0.7% southwards. On Friday, the All Share Index depreciated 1.0%. Consequent on losses recorded during the week, the ASI dipped 4.4% to settle at 29,305.40 points. However, following impressive gains during the month of June, the index appreciated 7.0% while YTD return settled at +3.3%. In the week, market capitalisation contracted N461.7bn to N10.1tn. Activity level also waned as average volume and value traded fell 39.1% and 35.4% to 290.9m units and N3.4bn respectively.
All sector indices closed in the red with the Banking index depreciating the most, down 5.4% following losses in ZENITH (-8.2%) and ETI (-7.3%). The Consumer Goods index closely trailed, losing 5.1% on account of sell-offs in NIGERIAN BREWERIES (-9.6%). Similarly, the Industrial Goods and Oil & Gas indices also fell 4.5% and 3.7% respectively against the backdrop of losses in DANGCEM(-4.1%) and SEPLAT (-5.4%). Finally, the insurance index closed lower, down 0.5%.
Investor sentiment weakened this week as evident in the market breadth which fell to 0.4x (from 1.2x in the previous week) following 22 stocks that advanced against 51 declining stocks. The best performing stocks for the week were JBERGER (+15.8%), CONOIL (+15.7%) and UNIONDICON (+15.7%) while SMURFIT (-25.5%), HONYFLOUR (-22.6%) and CHAMPION (-14.9%) were the worst performing stocks. The performance of the market in the week is indicative of the fact that investors might have overreacted to the recent FX reform. We expect market performance to remain soft as investors await further development in the FX market.
Money Market Review and Outlook
Money market rates during the month of June saw Open Buy Back (OBB) and Over Night (O/N) lending rates crossing the 50.0% mark for the first time in 2016 driven by the volatility in liquidity levels on the back of special FX intervention by the Apex Bank after the commencement of the new FX framework. OBB rates in June hovered from as low as 1.6% to as high as 63.3% whilst O/N rates trended between 2.2% and 68.5%. Aggregate liquidity levels hovered between deficit and N1.0tn in June 2016.
This week, financial system liquidity opened at N168.1bn. OBB and O/N rose 8.8% and 10.8% to close at 28.0% and 32.0% respectively at the end of Monday’s trading session. The expected Federal Accounts Allocation Committee (FAAC) inflow of about N146.7bn also hit the system on Monday and this impacted opening system liquidity levels on Tuesday. Consequently, OBB and O/N declined 10.8% and 13.0% to close at 17.2% and 19.0%. By midweek, OBB and O/N rates moderated to 12.2% and 13.4% as liquidity levels improved especially as the weekly FX intervention which used to be a major drag on liquidity had been terminated. OBB and O/N lending rates dropped to single digits at the end of Thursday’s trading session with OBB closing at 4.4% whilst O/N closed at 4.8% on the back of an OMO maturity of N115.0bn. OBB and O/N rates rose 0.1% and 0.2% to close the week at 4.5% and 5.0%, down 14.7% and 16.2% W-o-W respectively.
The Treasury Bills market saw renewed buying interest this week and as a result, the average T-bills rate declined on all the trading days of the week. On Monday, average T-bills rate declined 0.4% to 10.7% (from 11.0% on Friday) on the back of renewed buying interest on all the ends of the T-bills curve. Average rate inched even lower on Tuesday to 10.2% as system liquidity improved owing to inflow of FAAC allocation. By midweek, average T-bills rate declined 0.5% to close at 9.7% as buying interest continued, dropping to 9.5% on Thursday as liquidity levels rose as a result of the N115.0bn OMO maturity inflow into the system. Average T-bills rate closed the week at 9.4% on Friday, down 1.7% W-o-W.
In the week ahead, we expect money market rates to rise as the apex bank is scheduled to auction N94.0bn worth of treasury bills. There is also a T-bills maturity of N44.0bn scheduled to hit the system next week but the T-bills auction will taper its effect on system liquidity.
Foreign Exchange Review and Outlook
During the month of June, the Apex Bank released the guidelines for the new FX framework, surpassing consensus expectations. The much awaited guidelines included the adoption of a single FX market structure and the introduction of derivatives products. On the first trading day of the new interbank market, the Apex Bank cleared US$4.02bn of pent-up demand accumulated over months at N280.00/$US1.00. Subsequently, interbank rate tumbled from the pegged N197.00/US$1.00 to over N280.00/US$1.00. As it stands, the CBN remains the major supplier of FX even in the new FX market structure as the inflow of foreign capital has not been as swift as expected amidst global & local macroeconomic challenges. In the parallel market, the Naira appreciated to a month high of N335.00/US$1.00 after the announcement of the new FX framework. However, the continued exclusion of 41 items in the accessibility of FX at the interbank market ensured that the parallel market continued to thrive. Consequently, the exchange rate appreciation witnessed in the parallel market relapsed as the Naira fell to N345.00/US$1.00 during the last week in June.
The CBN launched the Naira settled Over-The-Counter (OTC) FX futures contract this week by creating US$1.00bn each of 1 to12 months contracts. Citi Bank Nigeria Limited executed the first Naira settled OTC FX Futures on the FMDQ OTC platform during the week after buying US$20.0m worth of NGUS April 2017 at N210.00/US$1.00. The interbank’s spot rate hovered between N281.23/US$1.00 and N281.49/US$1.00. Whilst one-year forward quote rate closed at N317.82/US$1.00 suggesting bearish sentiments in the medium term, one-year futures quote rate issued by the CBN closed bullish at N225.00/US$1.00. At the parallel market, the naira traded at N347.00/US$1.00 on Monday, depreciated to N355.00/US$1.00 by midweek and closed the week at N352.00/US1.00.
In H2:2016, we believe the FX market will be shaped by the depth of the new inter-bank market. Investors continue to watch market proceedings for liquidity. Whilst we hold the view that the interbank market will become fully functional when autonomous inflow sources (other than from the CBN) increase, we remain comfortable with the current arrangement.
Bond Market Review and Outlook
During the month of June, activities in the bonds market was mixed but largely bearish. The Federal Government through the Debt Management Office (DMO) borrowed a total of N112.0bn via the sale of N22.0bn, N40.0bn and N50.0bn of the FEB2020, JAN2026 and MAR2036 bonds respectively. Average marginal rate at the auction cleared at 14.5%, 90bps higher than the average rate at the May auction as investors priced in macroeconomic realities into their valuation of the offered instruments. The Nigerian Sovereign Eurobonds also saw renewed buying interest as the announcement of FX market reforms stoked positive investor sentiment in the Nigerian Sovereign Eurobond instruments. By the second week in June, the Nigerian sovereign bonds YTD return had outperformed all the other sovereign bonds instruments in the sub-Saharan African region. However, the decision by Fitch Ratings to downgrade Nigeria’s credit rating to B+ triggered a sell sentiment across the Nigerian sovereign bonds instruments. The bearish sentiment however lasted for a week as the impact of the FX reforms continued to strengthen investor sentiment.
Activities in the bonds market this week was broadly bullish as average yield across benchmark bonds declined on all trading days amidst buying interest save for Tuesday when yields trended 0.1% northwards. Average yield across benchmark bonds declined 0.1% on Monday to close at 14.4% (from 14.5% on Friday) with increased activity observed on the FGN JAN2019 instrument. By midweek, average yield moderated 3bps from Tuesday’s closing levels to close at 14.4%. Average yield across benchmark bonds dropped further on Thursday to 14.0% as buying interest increased (especially in the FGN JAN2026 and MAR2036 bonds) on the back of the improved system liquidity effected by the maturing OMO bills, to settle at 13.7% at the end of Friday’s trading session, down 0.8% W-o-W.
The impact of the Fitch Ratings downgrade on investor sentiment towards Nigerian sovereign bonds was short-lived as renewed buy interest returned during the week. Consequently, yields dropped across the three Nigerian sovereign Eurobonds, with yields of the FGN 2023, FGN 2021 and FGN 2018 Eurobonds down 0.3%, 0.3% and 0.4% W-o-W respectively.
We expect that yields in the local bonds market will continue to moderate in the week ahead as we anticipate more buying activities from PFAs and other institutional investors as they reposition their portfolios for H2:2016 though inflationary pressures remain a concern. We also expect the bullish sentiments in the Nigerian sovereign Eurobonds to persist next week as investors take advantage of attractive discount bonds within that space.