Markets in search of catalyst as optimism wanes

Proshare

Monday, June 13, 2016 2:26PM /United Capital 

When is the next phase of rally?
In the past week, Nigerian equities continued on a bearish path as activities slowed on the back of unclear FX policy direction. As buying pressure subsided, the market continued to reverse the strong gains seen in prior weeks with speculative positioning clearly dominating trades. The ASI shed 1.5% w/w to settle at 27,232.6 with YTD returns sinking deeper into negative territory at -4.9%. Losses seen during the week were driven by sell-off in financials and consumer goods counters.

Rates in the money market were sticky-down in the past week in spite of healthy level of system liquidity (408.3b at the close of the week vs. 400.0bn previously). The Open Buy Back (OBB) and Overnight (OVN) rates closed at 4.7% and 5.1% respectively (vs. 3.3% and 2.7% previously). Trends in the T-Bills market followed similar pattern as prior week as investors continued to show interest in the short dated T-bills instruments while the 364-day instruments continued to sell off with yields at roughly 11.0% .

As the market continues to grapple with poor macroeconomic backdrop and uncertainty in the FX space, we expect equities to post lackluster performance this week. That said, the market will likely see some bargain positioning midweek as investors fish for badly beaten counters. However, gains (if any) will likely be short-lived, until we see a definite CBN pronouncement on the domestic currency.

Global and Macro-economic market update

Prospects of US rate rise dims as economic uncertainties heighten


Global markets were broadly bearish last week, with the US market retreating late in the week as emerging economic data doused the possibility of US rate hike either in June or July. Global Brent crude prices dipped to US$49.6 from US$49.7 in the prior week.

For this week, investors will be watching closely a rate decision by the Federal Reserve in its July 14-15 meeting. If the Fed keeps rates steady as expected, investors will turn attention to the post meeting comments from Janet Yellen further gauge the possibility of a rate hike later in the year.

Markets elsewhere were cautious about US policy, trading sideways for much of the week but ending generally lower on the week. European equities fell for the second straight week. On the economic front, the Eurozone received some positive news flow, as Q1 GDP was revised higher to 0.6% from an earlier estimate of 0.5%. This pushed the region's annual growth rate to 1.7%. Growth in the fourth quarter of 2015 was also revised higher, to 0.4% from 0.3%. Chinese equities ended a holiday-shortened week with a modest loss.

Amid the bearish momentum in global equities, IMF cut its growth forecast for the global economy to 2.4% from 2.9% citing sluggish growth in developed markets, falling commodity prices and reduced capital flows. The Bank also trimmed it 2017 forecast from 3.1% to 2.8%.

On the domestic scene, media statements pointed to an imminent release of the new CBN FX policy framework after ongoing consultations with the banks. In any case, we expect an adjustment in the Official rate with a possible re-opening of the interbank market.

Financial Markets Review and Outlook 

Equities market dips further as investor optimism wane; ASI loses 1.5% w/w


In the past week, Nigerian equities continued on a bearish path as activities slowed on the back of unclear FX policy direction. As buying pressure subsided, the market continued to reverse the strong gains seen in prior weeks. The ASI shed 1.5% w/w to        settle at 27,232.6 with YTD returns sinking deeper into negative territory at -4.9%. Losses seen during the week were driven by sell-off in financials and consumer goods counters.

Although performance across sectors were mixed, negative sentiment capped gains with the Consumer goods sector Index recording the biggest loss (-1.9%), followed by Industrial Goods and Banking Indices which were down by 1.5% and 1.0% as DANGCEM (-2.7%) and UBA (-9.1%) led decliners for the week.

Market activity as measured by average volume and value traded weakened at the close of the week, with the former decreasing by 38.4% to 191.9m units while the latter was also down by 44.0% to N1.6bn from N2.8bn in the prior week. Reflective of continued weakening of investor optimism, market breadth closed bearish at 0.4x (vs 0.3x in the previous week), as 15 stocks advanced against 41 decliners.

As the market continues to grapple with poor macroeconomic backdrop and uncertainty in the FX space, we expect equities to post lackluster performance this week. That said, the market will likely see some bargain positioning midweek as investors fish for badly beaten counters. However, gains (if any) will likely be short-lived, until we see a definite CBN pronouncement on the domestic  currency.

Market rates rise amid moderate system liquidity

Rates in the money market were sticky-down in the past week in spite of healthy level of system liquidity (408.3b at the close of the week vs. 400.0bn previously). The Open Buy Back(OBB) and Overnight (OVN) rates closed at 4.7% and 5.1% respectively (vs. 3.3% and 2.7% previously). The OBB and OVN rates opened the week at 3.6% and 3.1% but moved up to 5.3% and 4.8%, after an early OMO auction of N93.2bn by the CBN and FX funding at the CBN intervention window.

Trends in the T-Bills market followed similar pattern as prior week as investors continued to show interest in the short dated T-bills instruments while the 364-day instruments continued to sell off with yields at roughly 11.0%

Given current level of system liquidity, we see a possibility of further OMO calls by the CBN, hence we expect an uptick in short term money market rates, which is also likely to be accentuated by profit taking in overpriced instruments this week. Barring a change in FX policy, we expect investors to continue to trade on the short end of the curve, while pricing in expectations of higher inflation prints towards the end of the week.

Sell pressure greets bonds as attention shifts to auction

In the bonds space, sell-offs across the curve as investors freed up cash for this week auctions, sending yields upward by 50bps. At the end of the week, average bond yield stood at 14.0% (vs. 13.5% in the prior week), temporarily ending the bull run seen since the last MPC meeting. The sell-offs which was almost week-long was concentrated on FGN MAR2024, FGN JUL2034 and FGN MAR2036 bonds.

The Debt Management Office announced an auction N105.0bn worth of bonds at the monthly bonds primary market   auction scheduled for this week. The amount on offer is N15bn of FEB2020, N40bn of JAN2026 and N50bn of MAR2036 bonds. We expect these bonds to clear at stop rates of 13.6%, 13.8% and 14.0% respectively.

The secondary market is likely to see moderate level of activities as investors shift focus to the inflation figures and possible change in CBN's FX stance. We expect the market to remain calm though short term investors with yields close to current levels.

Uneasy calm as Naira forwards price-in imminent currency adjustment

The CBN continued to intervene in the Official market at N197, but Naira Non-Deliverable forwards (NDF) are pricing in huge depreciation (NGN/USD 6M: 317.0, and 12M: N340) even as the parallel market rate closed the week at 358.00/368.00 (vs. 354.00/356.00  in the previous week). As the market awaits further clarity on CBN's FX policy stance, we expect the USD/NGN to continue to decline as demand remains unmet amid huge backlog.

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