Global Market Review and Outlook
The announcement of President Trump as the winner of the November 2016 US election sparked surprising rallies in the US equities markets and this has been sustained on the expectation that the Trump administration will implement pro-growth policies. Accordingly, the MSCI World Index (which tracks equities markets across the advanced countries) has appreciated 8.8% since November. However, delay in the passage of the new health care bill during the week questions the ability of the Trump administration to implement some of the other policies proposed. This has had a resonating effect across global markets.
Consequently, global equities during the week saw a reversal from the uptrend observed in the previous week as most of the indices under our coverage closed in the red. In the developed market, all indices trended southwards as the US NASDAQ and S&P 500 fell 1.4% apiece W-o-W on the delayed passage of President Trump’s healthcare bill. Similarly, the UK FTSE halted a 3-week bullish run to close 1.1% lower W-o-W. The bearish sentiments filtered into the European markets as the German DAX and France CAC lost 0.6% and 0.3% W-o-W respectively.
In the Asian Markets, the Japanese Nikkei declined 1.3% Y-o-Y as a stronger yen together with political developments in relation to the Prime minister pressured sentiments. On the flipside, the Hong Kong Hang Seng appreciated 0.2% W-o-W as investors reacted to corporate earnings releases while the Chinese Shanghai Composite appreciated 1.0% W-o-W.
Across other markets in the BRICS classification, the Russian RTS was the only gainer, up 2.7% W-o-W to extend the positive run. The South African FTSE declined the most, losing 1.4% W-o-W followed by the Brazil IBOVESPA which trended 1.1% southwards W-o-W on the back of mounting political concerns. In the same vein, the India BSE reversed gains from the prior week, declining 0.8% W-o-W as investors sold off on banking stocks.
Sentiments in the African markets were broadly positive as the Nigerian All Share index emerged lone loser (-0.8%) W-o-W. The Kenyan NSE 20 advanced the most, up 3.3% W-o-w on stronger buy sentiment in market bellwethers. Similarly, the Ghana GSE and Egypt EGX gained 0.6% and 0.4% W-o-W respectively.
Equities Market Review and Outlook
The Nigerian Equities market pulled back gains from the previous week as investors’ appetite for equities remained pressured by weak macroeconomic fundamentals. The All Share Index (ASI) opened the week on a positive note (+7bps) extending the bullish run from the prior week to the fifth consecutive trading session. However, the 5-day rally ceased on Tuesday as the broader index dipped 0.4% following sell-offs in Tier-1 Banks. Losses were further extended on Wednesday (-0.2%) and Thursday (-0.1bp), albeit at a slower pace. The ASI ended the week with a 0.2% decline on Friday, bringing W-o-W performance to -0.8% while YTD loss expanded to –5.3%. Interestingly, market breadth strengthened during the week and turned positive on Thursday (1.4x) despite losses recorded. Market capitalization trimmed N71.1bn to N8.8tn while activity level improved as average volume and value traded rose 7.5% and 26.7% to 221.0m units and N1.9bn respectively.
Performance across sectors was broadly bearish as all indices, save for the Industrial Goods index (+5.1%) which was buoyed by strong interest in WAPCO (+13.9%) due to a better than expected FY:2016 result submitted during the week. The Oil & Gas index depreciated the most, down 3.2% on the back of losses in SEPLAT (-9.7%) and FORTE (-6.2%). Similarly, the Banking index slid 2.1% as investors sold off on ACCESS (-5.1%) and ZENITH (-4.5%). The Insurance and Consumer Goods indices also followed suit, losing 1.1% and 0.3% respectively W-o-W.
Overall, market sentiment weakened on a W-o-W basis as market breadth closed at 0.5x compared to 0.9x last week- a total of 16 stocks advanced in contrast to 32 decliners. The Best performing stocks for the week were WAPCO (+13.9%), FIDSON (+13.5%) and LIVESTOCK (+10.9%) while GUINNESS (-9.8%), SEPLAT (-9.7%) and DIAMOND (-8.5%) declined the most. As the earnings season winds down we believe market performance will be majorly driven by developments in the macroeconomic space. Yet, following four consecutive days of decline, we expect bargain hunters to show interest in some fundamentally sound stocks in the week ahead.
Money Market Review and Outlook
OBB and OVN closed at 14.3% and 15.0% respectively on Monday, up 4.0% apiece as financial system liquidity opened the week at a negative balance of N149.7bn due to debit for OMO sales of the previous week. The CBN floated another OMO auction on Monday, selling N2.3bn and N63.8bn of the 206- and 360-day tenored bills at stop rates of 18.0% and 18.6% respectively, while retail FX sale of US$180.00 further squeezed liquidity. System liquidity worsened on Tuesday with a negative opening balance of N209.5bn; as a result, OBB and OVN rates rose sharply to 100.0% apiece. This sharp rise was as a result of the debit in OMO sales and US$500.0m in wholesale FX intervention forward sales on Tuesday. By mid-week, rates moderated to 43.3% and 44.4% respectively and remained at same level on Thursday before declining on Friday owing to improved system liquidity. Rates eventually settled at 9.5% and 10.0% on Friday, indicating a 4.8 and 5.0 percentage point decline W-o-W respectively.
Performance in the Treasury Bills market remained bearish this week as yields trended upward on 3 out of 5 trading days. The week opened on a positive note as average yield declined 15bps while trending higher on all other sessions, up until Friday when yields moderated 27bps to 16.9% following FAAC inflows. W-o-W, yields rose 6bps on average. In the primary market, the CBN auctioned N28.1bn, N23.6bn and N83.1bn of the 91-day, 182-day and 364-day instruments respectively on Wednesday. All instruments save for the 91-day bills were oversubscribed. The 91-day and 182-day bills maintained previous stop rates of 13.6% and 17.2% respectively while the 364-day stop rate inched higher by 13bps to 18.7%.
In the coming week, we expect money market rates to remain dictated by CBN’s sustained but unpredictable interventions in the currency market.
Foreign Exchange Review and Outlook
Sustained intervention by the Apex Bank as well as comments from the central bank Governor drove activities in the currency market this week. After concluding the meeting with a decision to retain status quo on all policy rates, the Governor insisted that speculators betting against the Bank will get their fingers burnt given its ability to continue to intervene as observed recently. In line with the above, the CBN sold US$180.00m on Monday to retail users (for school fees, medical, personal and business travel allowances) and also offered US$500.00m and US$100.0m in FX forward intervention sales for tenors not exceeding 60days on Tuesday and Thursday respectively.
Accordingly, the exchange rate at the parallel market hit a 7-month high this week, appreciating 12.5% W-o-W to settle at N390.00/US$1.00 (Sell) or N380.00/US$1.00 (Buy) as monitored on AbokiFX as at close of business on Friday (24/03/2017). At the current rate, the spread between parallel and the new official (retail) segment of the market where intervention is done at N375/US$1.00 stands at N15.00-N5.00. However, the interbank market rate depreciated 0.5% W-o-W settling at N308.00/US1.00 from N306.50/US$1.00 in the previous Friday.
Our interactions with operators and other stakeholders in the market suggest to us that with rates converging towards the N375.00/US$1.00 retail intervention rate, the Apex Bank may be eyeing unified FX rates at N380.00/US$1.00-N370.00/US$1.00 before cutting intervention to give way for a well-functioning interbank market. Nonetheless, this remains unlikely in the interim given the absence of the political will and overarching implication of this on price-level and public welfare.
Bond Market Review and Outlook
Contrary to the previous week, sentiment in the bond market was bullish this week as yields declined across benchmark bonds on all trading sessions save for Wednesday when the CBN conducted a T-bills auction which pressured liquidity. The market opened the week bullish as traders anticipated dovish comments from the MPC, despite consensus forecasts for a hold on all policy rates, with the 10 years benchmark bond declining 30bps in the first two trading sessions. Sentiment turned bearish on Wednesday, particularly at the longer end of the curve, as dealers repriced assets ahead of the T-bills auction. Renewed interest in longer duration bonds on Thursday and Friday ensured the market closed positive for the week. Consequently, the average yield on benchmark bonds trimmed 24bps to 15.8%. The 10 and 20-year benchmark bond yields declined 42bps and 46bps W-o-W respectively.
Our medium-term outlook for bonds remains bullish as we expect interest rate to decline in H2:2017 in response to improving current account balance and moderating inflation expectation. Marginal rates and order flow analyses of the recent bond auction result suggest this expectation is starting to reflect in the valuation of instruments. Subscription rate for the 20-year PMA was 2x the rate for the 10-year issue and 3.4x the 5-year note issuance – indicating traders are embracing long duration strategy to position ahead of a downward movement in the yield curve. Marginal rates also moderated 37bps across the three instruments on offer with the 20-year instrument rate declining the most (-49bps). Thus, while the bond yield curve continues to show elements of inversion, we expect a bull steepening to correct this in the medium term; hence our conviction to remain overweight on fixed income.
Sub-Saharan Africa Eurobonds under our coverage were mostly bearish this week, save for South African instruments which rallied across maturities. South African foreign currency debts continue to benefit from the broader rally in investment grade high-yield emerging market debts, while the domestic equivalent also rallied as traders expect a cut in interest rate after more than two years of tightening. On the contrary, non-investment grade African sovereigns were bearish with Nigeria’s 15-year and 6-year bond yields rising 14bps and 18bps to 7.6% and 6.2% respectively. However, Nigerian corporates Eurobonds traded bullish this week with the DIAMOND 2019 leading gainers with 118bps contraction in yield (to 15.1%); the hitherto heavily discounted bond has rallied 15.2% YTD due to intense bargain-hunting and improving fundamentals.