Global Market Review and Outlook
In global markets this week, oil prices experienced a steep drop as doubts over OPEC’s ability to stabilize an increasingly oversupplied oil market amidst faltering demand growth amongst key Asian importers, weighed on sentiment. This resulted in a 4.3% W-o-W decline in Brent crude to US $45.2/b as of writing on Friday. Nevertheless, performance across the Global equity markets under our watch was largely positive as most of the benchmark indices appreciated.
In the developed markets, the UK FTSE declined 0.7% W-o-W due to concerns regarding the current socio-political climate following the June 8 election upset and terrorist incidences. The US NASDAQ however rose 1.2% W-o-W respectively as thirty-four of the largest banks operating in the country passed a US Fed test of their ability to withstand economic shocks while the S&P 500 closed flat.
Across the BRICS markets, performance was mixed as 2 of 5 indices declined. The Brazil IBOVESPA and Russia RTS slid 0.9% and 1.9% W-o-W respectively against the backdrop of the fall in global oil prices. On the other hand, the China SHANGHAI COMPOSITE advanced 1.1% W-o-W amid speculation of the financial authorities’ intervention in the market to ensure stability, while the India BSE and South African FTSE indices rose 0.3% and 1.1% W-o-W respectively on the back of slight gains in the prices of precious and industrial metals - Gold and Zinc.
In the Eurasian region, performance was mixed as 2 of 4 indices advanced. The France CAC 40 declined 0.2% and 0.5% W-o-W despite President Emmanuel Macron’s parliamentary victory which fortified his electoral triumph while the Hong Kong HANG SENG and Japan NIKKEI gained 0.3% and 0.9% W-o-W respectively.
In the African markets we track, the Nigerian All Share Index recorded the highest loss (-5.0% W-o-W) to halt a 4-week bull run on account of the slide in oil prices and profit taking. Contrarily, the Ghana GSE and Kenya NSE appreciated 0.4% and 2.3% W-o-W. We expect commodity price movement to continue to dictate movement in emerging and frontier markets in the coming week.
Equities Market Review and Outlook
The 4-week bullish run in the Nigerian stock exchange came to a halt this week against the backdrop of a slide in oil prices which weakened sentiment and prompted investors to take profit in counters that had appreciated in prior weeks. Consequently, the All Share Index dipped 5.0% W-o-W to settle at 32,122.14 points while YTD gain pared to 19.5% following declines on 3 of 5 trading days. The bearish performance was mainly due to losses in bellwether stocks across the Consumer Goods, Banking and Industrial Goods sectors – NIGERIAN BREWERIES (-7.4%), ACCESS (-11.4%), GUARANTY (-3.4%) and DANGCEM (-4.6%). Accordingly, investors lost N583.9bn as market capitalization fell to N11.1tn while activity level waned as average volume and value traded dipped 15.6% and 23.3% to 462.2m units and N4.9bn respectively.
Performance across sectors was broadly bearish as all indices declined. The Banking index fell the most, down 6.8% W-o-W on account of losses in ACCESS (-11.4%) and GUARANTY (-3.4%), while selloffs in DANGCEM (-4.6%) and WAPCO (-9.2%) dragged the Industrial Goods index 6.2% southwards W-o-W. In the same vein, the Insurance and Consumer Goods indices slid 5.4% W-o-W and 4.0% W-o-W respectively on account of weaker sentiment towards MANSARD (-15.8%) and NIGERIAN BREWERIES (-7.4%) while the Oil & Gas index shed 3.3% W-o-W on the back of negative sentiment towards OANDO (-13.4%) and FORTE (-10.0%).
In line with the bearish sentiment on the Bourse, market breadth (advancers/decliners’ ratio) softened to 0.4x (from 0.9x recorded in the previous week) as 21 stocks advanced while 49 declined. The best performing stocks were NEIMETH (+44.1%), ASHAKACEM (+21.4%) and LIVESTOCK (+20.9%) while TRANSCORP (-23.1%), FIDSON (-16.7%) and MANSARD (-15.8%) were the worst performers. As aforementioned, the bearish sentiment on the bourse that hampered this week’s performance is partly attributable to the slide in oil prices that occurred earlier in the week. We thus expect this fundamental driver to continue to dictate performance in the near term, although we remain medium term positive on the market performance.
Foreign Exchange Market Review and Outlook
In the Foreign exchange market this week, the CBN continued with its weekly intervention in order to boost FX liquidity and keep investors’ confidence upbeat. However, in comparison to the previous week (US$831.5m), the volume of intervention this week (US$195.0m) was significantly lower as US$100.0m was allocated to dealers in the wholesale window while US$50.0m was allotted to Small and Medium Enterprises (SMEs) window and US$45.0m to the Retail end of the market to meet invisible demands for Business/Personal Travel Allowances, school tuition, medicals, etc. Since the launch of the Investors’ & Exporters’ (I&E) FX window, the volume of trades within that end of the market has consistently appreciated with cumulative volume currently at US$2.5bn.
At the official market, the naira exchange rate marginally depreciated from N305.60/US$1.00 last week to settle at N305.85/US$1.00. However, at the FMDQ NAFEX segment, the naira appreciated 2.5% W-o-W to close the week at N362.16/US$1.00 while rates at the parallel market also improved, appreciating to N368.00/US$1.00 from N370.00/US$1.00 in the previous week. We opine that the convergence in rates between the NAFEX and Parallel market continues to serve as a proxy for the potential impact of the adoption of a floating exchange rate.
In the FMDQ OTC Futures segment, the lacklustre performance which has been recorded in recent weeks continued as investor appetite remains dampened by the upward revision of contract prices. Also, the last of the initial 12 contracts which were issued in June 2016 following the adoption of a “flexible exchange rate regime” matured during the week and notably, none of the contracts which were worth US$1.0bn each was completely subscribed within this period. During the week, the total value of open contracts declined to US$2.7bn from US$3.3bn in the prior week as the NGUS JUN 2017 contract matured and was replaced by the NGUS JUN 2018 instrument. As noted earlier, the weaker appetite for these futures contracts is reflected in the fact that the NGUS MAY 2018 instrument which was earlier issued, still remains unsubscribed.
We believe the stability in the FX market will be sustained in the short to medium term as the CBN continues its drive to boost FX liquidity in the markets. Hence, we expects to see similar rates in the coming week.
Money Market Review and Outlook
Despite a drop in system liquidity and increased primary market issuances during the week, Open Buy Back (OBB) and Overnight (OVN) lending rates trended southward on 3 of 5 trading days of the week. Available data on the CBN website showed that the week opened with negative financial system liquidity of N71.7bn. As a result, OBB and OVN rates rose 34.8 and 37.6 percentage points on the first trading session to settle at 50.0% and 53.3% respectively. The CBN conducted OMO sales on all trading days save for Thursday and a T-bills auction mid-week while the DMO conducted its monthly bond auction during the week. As a result, system liquidity moderated on all sessions save for Thursday when a FAAC inflow of N275.2bn hit the system, prompting the CBN to conduct another OMO auction on Friday to squeeze excess liquidity. The CBN mopped up N403.1bn in OMO sales, hence OBB and OVN rates rose rise 25bps and 42bps on Friday. Accordingly, rates closed at 8.8% and 9.5% on Friday, down 6.4 and 6.2 percentage points W-o-W respectively
The Treasury Bills market closed bearish this week as average yield on benchmark bills rose 11bps W-o-W to settle at 18.2%. During the week, the CBN offered N133.3bn in the T-bills auction held. Expectedly, investors favoured longer tenored bills with the 364-day instrument receiving the most subscription. The Apex Bank allotted the exact offer/subscribed amount for the 91-day (N28.1bn), while over allotting that of the 364-day tenor with N61.3bn as against N50.0bn on offer. However, the 182-day instrument was undersubscribed at N43.8bn relative to N55.1bn offered amount. The 91, 182 and 364-day papers were allotted at stop rates of 13.5%, 17.5% and 18.6% respectively.
In the week ahead, we expect the CBN to continue its weekly SMIS sales and OMO mop-ups. The impact of these sales will keep liquidity tight barring any major inflow. Hence, we expect money market rates to trend higher.
Bond Market Review and Outlook
Performance in the local bond market this week was relatively bearish as yields rose prior to the Debt Management Office’s Primary Market Auction (PMA) which took place on Wednesday. Consequently, average yield on benchmark bonds rose 11bps W-o-W to close at 16.1%. The DMO offered N40.0bn, N50.0bn and N50.0bn of the JUL 2021, MAR 2027 and APR 2037 instruments respectively at the Wednesday auction. The PMA was undersubscribed by N18.1bn with a total subscription of N158.1bn relative to offered amount of N140.0bn.
Investors’ preference was skewed towards the longer duration APR 2037 instrument as total subscription for the bond stood at N88.2bn relative to offered amount of N50.0bn whilst total subscription for the MAR 2027 instrument was N57.4bn relative to offered amount of N50.0bn. The JUL 2021 instrument was undersubscribed with a total subscription of N12.5bn compared to the offered amount of N40.0bn. Investors strong preference for longer duration bonds at the auction is an indication of the fact that traders still have a medium term dovish expectation for interest rate. Notwithstanding, the DMO allotted N4.2bn, N30.3bn and N64.8bn of the JUL 2021, MAR 2027 and APR 2037 instruments at marginal rates of 16.19%, 16.19% and 16.20% respectively.
In another development, the FGN issued a 5-year US$300.0m diaspora bond in the US debt market this week which was oversubscribed by 130.0% and priced at 5.62%. The DMO still has two outstanding major issuances this year - US$328.0m in Sukuk to fund road projects as well as US$64.0m via Green Bond.
Similar to last week, sentiment was bearish on Sub-Saharan Africa Eurobonds, which could be attributed to rout in the oil market and US Fed monetary policy tightening last week. Yield rose on a W-o-W basis on all instruments we track save for few short tenored bonds – Ghana 2017 (down 39bps W-o-W) and South Africa 2017 (down 4.3% W-o-W).
Performance of Nigerian corporate Eurobonds was mixed this week as ACCESS 2017 (down 1.7% W-o-W), FIRST BANK 2021 (down 30bps W-o-W) and ZENITH 2019 (down 3bps W-o-W) enjoyed positive sentiment while yields rose 30bps, 24bps, 41bps and 12bps on the FIDELITY 2018, ACCESS June 2021, ACCESS October 2021 and FIRST BANK 2021 respectively. Year to date return on all outstanding Nigerian corporate debt instruments remain in the positive region against the backdrop of the strong gains recorded at the start of the Quarter following moderation in domestic macroeconomic risks.