Weekly Market Review and Outlook

Global Market Review and Outlook
Global oil prices moderated during the week as Brent Crude declined to US$52.41/b as of writing today after reaching a week-high of US$52.70/b on Wednesday. This was against the backdrop of higher inventory level in the US and reported higher than expected output from OPEC in the past two months. However, with the agreement by Saudi Arabia and Iraq – the two largest producers in OPEC – to strengthen their commitment to production cuts in line with OPEC’s January 2017 output limit, a balance in global crude oil markets and improvement in oil prices is expected. Also this week, the standoff and threats of missile attacks between North Korea and the U.S. gravely intensified geopolitical tension which rattled global financial markets. Consequently, performance of the benchmark global equity market indices under our watch was bearish this as only 5 of 16 indices trended northwards.

In the developed markets, all indices closed in the red. The UK FTSE slid 2.3%W-o-W following the Bank of England’s downgrade of the nation’s economic growth outlook due to sustained Brexit uncertainty. The escalating tension between the U.S. and North Korea dominated financial markets sentiment this week and as such the US NASDAQ and S&P 500 dipped 2.1% and 1.6% W-o-W respectively. Similarly, across the markets in the Europe and Asia, all indices trended southwards W-o-W. The France CAC 40 fell 2.3% as the Bank of France forecast economic growth for Q3:2017 to remain unchanged from Q2:2017 at 0.5%. Germany XETRA DAX, Hong Hang Seng and Japan Nikkei slid 2.5%, 2.4% and 1.1% W-o-W respectively.

Across the BRICS markets, all indices slid save for the Brazil IBOVESPA which rose 0.1% following the reaffirmation of the production cuts at the OPEC meeting which was held during the week. The Russia RTS declined 0.8% W-o-W as investor sentiment was dampened by the sanctions placed on Russia. Similarly, the China Shanghai Composite also fell 1.6% W-o-W following profit taking by investors while the India BSE Sens and the South Africa FTSE slid 3.2% and 1.2% W-o-W respectively.

In the African Region, performance was largely bullish as all indices closed in the green W-o-W. The Kenya NSE 20 advanced the most, up 3.4% as a result of the country’s preliminary presidential election result which soothed investors’ fear of the possible shift from the pro-market regime of Uhuru Kenyatta. The Nigeria All Share Index also rose 2.1% W-o-W, maintaining its upbeat trend due to improvement in investor sentiment on account of the positive H1:2017 corporate results released thus far. Likewise, the Ghana GSE Composite and the Egypt EGX 30 increased 1.0% and 0.4% W-o-W respectively.          

Equities Market Review and Outlook
Activities in the Nigerian equities market this week was largely bullish as the Benchmark Index closed higher on 4 of 5 sessions. The week started off on a positive note, closing higher on the first three trading sessions due to sustained appreciation in Consumer Goods counters. By Thursday, profit taking ensued in stocks that had continuously appreciated, which dragged the benchmark index to close lower. However, market staged a comeback on Friday on the back of ZENITH’s impressive half year result and as a result, the ASI closed 2.1% higher W-o-W to settle at 38,198.60 points while YTD gain expanded to 42.1%. Consequently, market capitalization added N266.6bn to close at N13.2tn. Weekly activity level however moderated against the backdrop of high base effect of DANGCEM off-market crossing last week, as average volume and value traded dipped 39.6% and 74.7% to 303.5m units and N5.7bn W-o-W.

Sector performance was mixed as 2 of 5 indices rose W-o-W. The Consumer Goods index advanced the most, up 9.7% W-o-W on account of sustained appreciations in GUINNESS (+27.1%), NESTLE (+17.7%) and NIGERIAN BREWERIES (+8.7%). The Industrial Goods index followed suit, climbing 2.4% W-o-W owing to gains in WAPCO (+8.8%) and CCNN (+6.8%). On the flip side, the Insurance index declined the most, down 3.0% W-o-W as a result of losses in NEM (-18.5%) and CONTINSURE (-12.2%). Similarly, the Oil & Gas and Banking indices were down 2.8% and 0.9% W-o-W due to declines in FORTE (-10.6%), CONOIL (-10.5%), ZENITH (-5.8%) and GUARANTY (-1.0%).

Investor sentiment as measured by market breadth retreated to 0.8x (against 1.3x recorded last week) as 30 stocks advanced against 36 that declined. The best performing stocks were GUINNESS (+27.1%), NAHCO (+20.3%) and NESTLE (+17.7%) while the worst performers were NEM (-18.5%), MORRISON (-13.3%) and DANGSUGAR (-12.5%). Next week, we suspect the equities market may trade sideways in early trades due to profit taking in Consumer Goods counters which could offset bargain hunting in banking stocks whose earnings are yet to be released. During the week, Zenith Bank Plc released a stellar H1: 2017 scorecard and we expect unreleased Tier-1 Lenders reports to follow the positive trend. The Tier-1 bank grew gross earnings by 77.1% Y-o-Y to N380.4bn in H1:2017 while PAT doubled, surging 112.1% Y-o-Y to N75.3bn. GUARANTY is due for release next week (Thursday 17th August) and as the general mood in the market remains bullish, we expect the benchmark index to close positive next week.

Money Market Review and Outlook
Financial system liquidity stayed negative on all trading days of the week owing to increased primary market issuances and the Retail SMIS (Secondary Market Intervention Sales) FX auction conducted by the CBN during the week. The CBN mopped up a total of N28.6bn in OMO sales on 4 of 5 trading days of the week which hampered system liquidity. Thus, Open Buy Back (OBB) and Overnight (OVN) lending rates remained in double digits from the start of the week before rising to 105.0% and 107.8% on Wednesday from 25.0% and 26.3% respectively in the previous trading day. OBB and OVN rates dropped 58.3ppts and 55.6ppts to 46.7% and 52.2% respectively on Thursday as a result of an OMO maturity inflow of N113.05bn into the system. Consequently, rates closed at 55.8% and 59.3% on Friday, up 33.8ppts and 36.8ppts W-o-W respectively.
At the treasury bills segment of the market, the FEC approved the issuance of dollar-backed Treasury instruments in the international capital market in order to reduce the country’s huge debt profile. Whilst we believe that this policy would enable the government to restructure the country's debt profile by borrowing more in foreign currencies than naira, we expect that this will also drive down government’s borrowing cost while also lengthening the tenor for repayment. The Treasury Bills market closed bearish this week as average yield across benchmark bills rose 61bps W-o-W to settle at 18.5% owing to tight system liquidity. Average yields dropped at the start of the week, down 18bps to 17.7% as investors showed interest in the market. However, yields trended upwards on the remaining days of the week owing to bearish sentiment towards short and medium term instruments. Consequently, average yield across benchmark instruments closed at 18.5% on Friday.
In the week ahead, there will be Treasury bills maturity of 91-day and 182-day worth N62.4bn which would be offset by a rollover of the same amount while an OMO maturity of N168.1bn is also expected to hit the system. We believe this will impact liquidity dynamics a great deal but we are of the view that the aggressive liquidity mop-up signal of the CBN should keep OBB and OVN rates in check.

Foreign Exchange 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, at the I&E FX window, in comparison to the previous week (US$1,089.67m), the volume of sales this week (US$469.29m) was significantly lower as of Thursday market close. The CBN also auctioned US$100.0m SMIS on Wednesday for the clearance of the backlog of matured FX obligations for Raw Materials and Machineries, Agriculture, Airlines, Petroleum Products, Letters of Credit and Bill for Collection.

At the official market, the naira exchange rate stayed flat at N305.55/US$1.00 while it appreciated 0.4% W-o-W to close the week at N365.91/US$1.00 at the FMDQ NAFEX segment from N367.00/US$1.00 the previous week. The interbank NIFEX market also traded within similar level but depreciated 47bps to close at N365.20/US$1.00 from N363.49/US$1.00 in the previous week. Also, the parallel market traded within a tight band with rate remaining unchanged from last week’s close of N367.00/US$1.00. We opine that the convergence in rates between the NAFEX and Parallel market shows the high level of investor confidence in the CBN’s FX policy and continues to serve as a representation for the potential impact of the adoption of a full-fledged flexible exchange rate regime.

In the FMDQ OTC Futures segment, the lukewarm appetite for contracts which has been recorded in recent weeks continued as investor appetite remains dampened by the upward revision of contract prices. During the week, the total value of open contracts marginally increased by US$53.1m to US$2.6bn as the NGUS AUG 2017 contract enjoyed the most buy sentiment. 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 at the different segments of the FX market. Hence, we expect to see rates at current levels in the coming week.
Bond Market Review and Outlook
Performance of the domestic bond market this week stayed bearish as investors’ interest stayed soft. Interest in short tenored instruments drove average yield down 1bps on Monday but reversed on Tuesday, with average yield rising 4bps, due to sell-offs across mid and long tenored instruments which off-set sustained buy sentiment at the shorter end of the yield curve. On Wednesday, average yield stayed flat at 16.8% but further increased 2bps on Thursday as investors reduced exposure to short to medium tenored instruments – especially the JAN 2022 yield which spiked 17bps. Average yield stayed flat at 16.8% on Friday, up 5bps W-o-W. In the coming week, we envisage that yields might trend higher as investors free up positions ahead of the August Bond auction slated for 23rd August, 2017.

Performance across the various SSA Eurobonds under our coverage was broadly bearish this week as investors took profit across majority of the instruments following weeks of persistent bullish sentiment. Yield on all instruments rose W-o-W save for the KENYA 2024 (-25bps), GABON 2017 (-24bps), KENYA 2019 (-16bps) and SOUTH AFRICA 2020 (-3bps) bonds. We opine that the sustained interest in the Kenyan instruments is tied to President Uhuru Kenyatta’s lead in the recently concluded presidential elections held in the country. The KENYA 2024 instrument still remains the best performing in the Sovereign basket we track with YTD gain of 8.7%.

Across the Nigerian Corporate Eurobonds, performance remained mixed as Tier-1 banks’ bond yields fell while some Tier-2 yields rose. Investor interest was majorly centered on the ZENITH 2022 and 2019 bonds (which fell 17bps and 3bps respectively), the Subordinated and Senior ACCESS 2021 debt Notes (yields declined 3bps apiece) and FBN 2021 (-5bps) and GUARANTY (-1bp).  We note that the significant buying interest in ZENITH bonds may be connected to the recently released impressive H1:2017 result of the bank. DIAMOND 2019 and FBN 2021 instruments remain the top price gainers in the year, up 22.5% and 19.1% YTD.