The local bourse reversed the bearish momentum seen in previous weeks as the bulls took control in the last two trading sessions of the week. The gains were enough to offset the losses in the first three days of the week, bringing week-on-week (W/W) return for the benchmark index (NGSE INDX) to a marginal 0.05% as year-to-date (YTD) losses pared to -20.3%. Similarly, market capitalization gained N4.7bn to close the week at N9.5trn (US$47.8bn). The gains in heavyweights within the banking, consumer and industrial sectors buoyed market momentum. ACCESS (+4.2%), DANGCEM (+1.9%), ETI (+2.7%), NESTLE (+1.8%), UBA (+3.8%), WAPCO (+3.4%) and ZENITHBANK (+4.2%) were the key market drivers.
It’s still bearish times for fixed Income instruments as risk-averse investors continue to sell off positions and book profits ahead of any surprises the next auction may bring. The bond market was particularly quiet as players thread the path of caution. The bearish run in the T-Bills space was largely driven by the OMO auction and the PMA during the week with rates coming in above secondary market rates. As a result, average T-Bills and bond yield increased by 310bps and 68bps to 6.1% and 10.1% respectively.
The benchmark index hit a 3-year low of 27,289.89 points last week with the Relative Strength Indicator (RSI) printing close to 10. This suggests the market is possibly at, or near its bottom. At these levels, from a technical standpoint, bargain hunting is expected to drive prices higher in the short term. Furthermore, one can posit from the gains in the early days of the month that a December rally might be in the offing. However, current macro backdrop continues to engender weak appetite for Naira assets with foreign investors staying largely on the sidelines, even as domestic apathy towards equities lingers. On balance, we expect to see a technical bounce as the festive season approaches, though we caution that gains would pare given the absence of near term sustainable trigger.
Global and Macro-economic update
ECB decision disappoints, despite moves to boost the Eurozone. The European Central Bank (ECB) met last week and decided to shore up the Eurozone economy by extending its Quantitative easing (QE) programme and cutting a key interest rate. QE programme (€60bn monthly) was extended by 6 months to March 2017 just as the range of assets being purchased was also expanded to include regional and local government debts. Overnight deposit rate was cut from -0.2% to -0.3% in a bid to press on the banks to lend to the real sector instead of loading up cash at the ECB, as the banks will pay more to the ECB for holding their reserves. ECB President, Mario Draghi, noted that its QE programme was working, but an extension of QE was needed to tackle prolonged low inflation and get it back towards the ECB’s 2.0% target. Eurozone inflation, currently at 0.1% is expected to reach 1.0% and 1.6% in 2016 and 2017. However, market was disappointed by this unanimous decision as the ECB had dropped so many hint that they would act decisively to the markets. Also, market was expecting an increase to the €60bn monthly QE figure. We believe it’s probably not the right time to get too hawkish on the expansionary move as the Eurozone economy has shown appreciable growth momentum in recent quarters even as credit conditions continue to improve. We note however that these recent ECB decisions have raised the probability of a rate hike by the US Fed on December 16.
Yellen signals an increasing probability of a rate hike in December. Janet Yellen, US Fed chairwoman, in her speech to the Joint Economic Committee hearing on the economic outlook boosted the probability of a rate hike in December. Though she did not specifically point to a rate hike in December, she said recent numbers since the Fed’s last meeting had been consistent with the Fed’s rate hike criteria. According to Yellen, the US economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market. Ongoing gains in the labor market, coupled with judgment that longer-term inflation expectations remain reasonably well anchored, serve to bolster confidence in a return of inflation to 2%. She warned that any further delays to raising rates could be detrimental to the economy. “Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals.
Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.”
OPEC Decision sustains bearish outlook for oil price. OPEC, at its meeting on Friday, decided to keep its production level unchanged, with the 1.5bmbp/d it has been producing over its output ceiling of 30mbp/d. According to OPEC, the world dynamics have changed, thus they need to look to non-OPEC members to join in the oil price stability drive. With higher production levels from Iran soon after western powers life economic sanctions, OPEC feels it would need to monitor the market and see what Iran brings to the market before deciding on an official production number. OPEC also indicated that it cannot and will not take up the responsibility of balancing the markets single handedly, that to kick-start the process, non-OPEC members will have to join in and contribute to the effort. This decision led to a plunge in global crude oil prices overnight, which could push prices lower this week; WTI crude for January delivery closed down 2.7% at US$39.9p/b and Brent dropped 1.9% to close at US$43.0p/b. For the week, WTI crude fell 4.2% and Brent dropped 4.1%.
Financial Markets Review and Outlook
Equities retreats bearish stance; W/W returns on the positive. The local bourse reversed the bearish momentum seen in previous weeks as the bulls took control in the last two trading sessions of the week. The gains were enough to offset the losses in the first three days of the week, bringing week-on-week (W/W) return for the benchmark index (NGSE INDX) to a marginal 0.05% as year-to-date (YTD) losses pared to -20.3%. Similarly, market capitalization gained N4.7bn to close the week at N9.5trn (US$47.8bn). The gains in heavyweights within the banking, consumer and industrial sectors buoyed market momentum. ACCESS (+4.2%), DANGCEM (+1.9%), ETI (+2.7%), NESTLE (+1.8%), UBA (+3.8%), WAPCO (+3.4%) and ZENITHBANK (+4.2%) were the key market drivers. Market activity as measured by average volume and value traded increased by 17.0% and 12.9% to 243.5m units and N2.9bn accordingly. Market breadth gauging investors’ sentiment came in at 0.6x, an improvement from 0.5x reported in the preceding week, as 27 stocks appreciated in price against 49 losers.
A review of the NSE indices showed mixed sentiment across sectors. While the consumer and Oil & Gas sectors moved south, the Banking, Insurance and Industrial sectors closed north. Top gainer was the Industrial sector which gained 2.5% on account of gains in bellwether DANGCEM as well as WAPCO. Following suit was the banking and Insurance sectors which returned +0.9% and +0.6% respectively for the week driven by gains recorded in ACCESS, CONTINSURE, ETI, UBA and ZENITHBANK. On the flip side, sell bias in FO (-9.7%) and SEPLAT (-6.8%) drove the Oil & Gas sector down by 6.2% for the week, while the Consumer goods sector declined marginally by 0.1% as HONYFLOUR lost 13.0% in the week.
Transnational Corporation of Nigeria Plc (TRANSCORP) last week announced the successful merger of its two power subsidiaries Transcorp Ughelli Power Limited and Ughelli Power Plc, to a single entity called Transcorp Power Limited. Management stated that the merger, aimed at harmonizing the management and operations of Transcorp power business for great efficiency, will lead to higher output in terms of power generation. We note that the company through Ughelli Power Plant is working towards generating at least 25.0% of Nigeria’s power.
Also, shareholders of PZ Cusson, PZ Towers and PZ Power last week approved to merge the three companies into one entity. According to management, the purpose of this business combination is to drive improved operation efficiencies, cost savings, enlarged managerial efficiencies and reduce transfer pricing complexity. This will be achieved through simplification of corporate structure, streamlining their operations and reducing administrative costs thereby deriving the maximum benefits of synergy.
Outlook for Equities
The benchmark index hit a 3-year low of 27,289.89 points last week with the Relative Strength Indicator (RSI) printing close to 10. This suggests the market is possibly at, or near its bottom. At these levels, from a technical standpoint, bargain hunting is expected to drive prices higher in the short term. Furthermore, one can posit from the gains in the early days of the month that a December rally might be in the offing. However, current macro backdrop continues to engender weak appetite for Naira assets with foreign investors staying largely on the sidelines, even as domestic apathy towards equities lingers. On balance, we expect to see a technical bounce as the festive season approaches, though we caution that gains would pare given the absence of near term sustainable trigger
Market rates trend marginally upward amid strong liquidity.
System liquidity remained robust last week with opening balance starting the week at N539.5bn and closing the week at N1.0trn – implying 83.7% rise in liquidity levels. The boost in liquidity was driven by FAAC inflow worth N473.8bn which hit the system, returned funds from the T-Bills auction and T-Bills roll-over which were yet to be extracted from the market as at last week. After 2months of no OMO auction, the CBN issued OMO bills worth N47.7bn last week with stop rate at 8.0%. However average NIBOR increased to 8.8% from 8.3% in the preceding week while the Open Buy Back (OBB) was flat at 1.0% and overnight (O/N) dropped to 0.6% from 0.8%. With system liquidity at over N1.0trn coupled N193.98bn (N114.27 for 168-day and N79.71bn for 178-day) in net T-Bills maturing this week, rates will remain at sheer low levels, though outflows to this week’s bond auction will slightly pressure liquidity levels.
Sell Pressure heightened in Fixed Income assets.
Fixed Income instruments were largely bearish last week as risk averse sellers exited positions and book profits ahead of any surprises the next auction may bring; the bond market was relatively tedious as players continue to thread the path of caution. The bearish run in the T-Bills space was largely driven by the OMO auction and the PMA during the week with rates coming in above secondary market rates. As a result, average T-Bills and bond yield increased by 310bps and 68bps to 6.1% and 10.1% respectively.
296-day Treasury Bills worth N47.7bn was sold via OMO last week with stop rate at 8.0%. Also, Primary Market Auction (PMA) worth N129.18bn in 91-day (N17.85bn), 182-day (N18.0bn) and 364-day (N93.33bn); rates at the auction were 5.6%, 7.0% and 8.0% for the 91-day, 182-day and 364-day bills respectively. The DMO is scheduled to hold its December FGN Bond auction on Wednesday for a total of N50bn via Feb 2020 5yr re-opening (N30bn) and Mar-2024 10yr re-opening (N20bn).
Ample system liquidity is expected to trigger renewed demand in fixed income instruments. Thus, yields are expected to decline this week.
Naira sustains free fall in the parallel market.
As CBN control measures stay firm, offer rate at the Official window remained within the N197 and N196.97 range last week. Official rate appreciated to N196.97 in the course of the week but closed at N197 for the week. At the interbank, the local currency also maintained its grip, appreciating slightly by 0.002% week-on-week to peg its mid-quote at N198.65/US$. At the parallel segment, the Naira lost 1.7% to close at N246/US$ from N242/US$. The loss was largely driven by inadequate supply in that segment coupled with CBN’s decision to lock-out several BDCs due to late rendition of their weekly returns. The external reserve lost 0.8% WoW to US$29.8bn. Interbank rate will remain stable this week while pressure on the parallel segment will be sustained, hence pushing the Naira lower.
