Nigerian equities have began the year in a correction mode. Last week’s losses were broad based, cutting across the key sectors except the NGSE Industrials driven by counters such as SKYE, UNITY BANK and NB. On the back of this, the benchmark index (NGSE INDX) lost 5.6% to close the week at 27,028.39 points. Similarly, market capitalization declined to N9.30trn. Market activity as measured by volume and value was 899.5bn units and N7.7bn respectively.
Lower market liquidity drove bearish sentiments in the fixed income markets, as bond yields across the curve moved upwards by 100bps on average. In our view, sell-off also factors-in investors’ expectations of a possible upward re-pricing of yields once the DMO issues the borrowing calendar for the new year and government’s borrowing’s ramp up.
The Treasury Bills market is likely to remain calm this week as investors stay cautious, looking to gauge mop-up signals by the CBN. While up-coming market issuance will likely drive some uptrend in yields, buy- bias is likely to be strong towards the end of the week, as investors seek to take advantage of relatively higher yields. In the bond space, expectations of a DMO timetable will likely drive cautious trading, and sentiments will likely remain mixed at the end of the week.
With positive triggers still scarce for equities, we believe market will continue to shed 2015 year end gains, but will likely hit a bottom shortly. Overall we expect a bearish close to the week.
Global and Macro-economic market update
Global markets firmly in rooted in the bearish territory, as market wide concerns heighten
The global market started 2016 in jitters as events in China, geo-political tensions from the US and North Korea as well as Iran and Saudi Arabia, together with what the latter portends for crude oil prices combined to raise investor apathy. It is against this background that major US equity indices posted the biggest percentage declines since September 2011, while both S&P 500 and the Dow Jones recorded the worst opening week of the year in their history. On the data front, the US labor market continued to stabilize with unemployment flat at 5.0% in December while 292,000 jobs were created in the month, beating consensus estimates by 35.8%.
Markets also had a torrid opening in Asia, with Chinese equities leading the way, finishing the week c.10.0% in the red, its worst performance since August 2015. Melt down was driven by market wide concerns as well as weak manufacturing numbers for December which further heightened worries that the world’s second largest economy is slowing. The strength of market volatility seen drove the regulators to act by suspending a circuit breaker system that exacerbated selling earlier in the week, which led to a halt in trading on two trading days.
Euro assets were not left behind as contagion with other key markets rolled in, while economic numbers of key members released in the course of the week was mixed. Industrial output in France, the Eurozone’s second-largest economy, fell 0.9% in November from October, even as manufacturing output rose 0.4%. Mining output fell 6.7% in November.
On the domestic scene, the Governor of the Central Bank, Mr. Godwin Emefiele has come out to say the authorizes have begun to weigh all options around FX and a decision will be taken once the process is concluded. This is response to calls that the Apex bank to reverse some aspects of its policy on foreign exchange which has hindered businesses in recent times.
Financial Markets Review and Outlook
The bears are driving sentiments across equities, amid still hazy domestic macro fundamentals
Nigerian equities have began the year in a correction mode. Last week’s losses were broad based, cutting across the key sectors except the NGSE Industrials driven by counters such as SKYE, UNITY BANK and NB. On the back of this, the benchmark index (NGSE INDX) lost 5.6%YTD to close the week at 27,028.39 points. Similarly, market capitalization declined to N9.30trn. Market activity as measured by volume and value was 899.5bn units and N7.7bn respectively.
With positive triggers still scarce for equities, we believe market will continue to shed 2015 year end gains, but will likely hit a bottom shortly. Overall we expect a bearish close to the week.
System liquidity moderates amid rounds of OMO auctions
While still robust, market liquidity moderated in the past week, on the back of outflows from bouts of OMO auctions which effectively mopped up c. N180bn from the market. Consequently, key money market rate hinged higher with the Open Buy Back (OBB) and Overnight (O/N) rising by 67bps and 58bpd to 1.17% and 1.58% respectively, from the previous week. However, money market rates were more mixed, with the overnight increasing by 30bps to1.3%, while the 3M and 6M NIBOR decreased by 140bps and 200bps to 9.3%% and 10.9% accordingly.
We expect market liquidity will remain healthy this week, although an expected issuance of primary market bills worth N250.0bn creates scope for an uptick in rates.
Moderating market liquidity supports bear bias in Bonds and T-bills
Lower market liquidity drove bearish sentiments in the fixed income markets, as bond yields across the curve moved upwards by 100bps on average. In our view, sell-off also factors-in investors’ expectations of a possible upward re-pricing of yields once the DMO issues the borrowing calendar for the new year and government’s borrowing’s ramp up. Also, liquidity mop-up by the CBN and primary market expectation sustained bearish sentiment in the Treasury Bills market with average Treasury bills inching up by 100bps to 5.4%, while average bond yields also rose by 50bps to 11.2%. Yields on the 5yr, 7yr and 10yr bond instrument increased to 11.3%, 11.5% and 11.7% from 9.5%. 10.0% and 11.1%.
The Treasury Bills market is likely to remain calm this week as investors stay cautious, looking to gauge mop-up signals by the CBN. While up-coming market issuance will likely drive some uptrend in yields, buy- bias likely to be strong towards the end of the week, as investors seek to take advantage of relatively higher yields. In the bond space, expectations of a DMO timetable will likely drive cautious trading, and sentiments will likely remain mixed at the end of the week.
Naira gains, but market spreads still wide.
Having earlier trimmed some losses, the pressure on the naira in the parallel market returned in the course of the past week, with the domestic currency once again hitting the 265.0-270.0/US$ range at the close of the week. The Naira however remained stable at the interbank market, and gained 5bps to close at N198.35. In view of the rather tight control on FX by the Apex bank, we think the current trend will persist, and we will continue to see a large spread between the interbank and parallel markets in the near term.
