Thursday, October 22, 2015 11.25PM / FDC
Short term interbank rates averaged 6% p.a. from October 2 – 22, 2015, 841bps lower than the corresponding period in September. This was as a result of increased market liquidity as inflows exceeded outflows during the period under review. The CBN delayed in mopping up excess liquidity, possibly as part of its drive to encourage lending to the real sector and reflate the economy. As at October 22nd, the OBB and O/N rates were at 5.33% p.a. and 5.92% p.a., 1,800bps and 2,091bps lower than their respective figures in the previous month.
Outlook: Money market liquidity is expected to remain at current levels pending significant outflows. However, an expected disbursement of FAAC funds estimated at N400bn may further boost liquidity.
Global oil prices (Brent crude) averaged $49.77pb from October 2 – 21, 2015, 2.2% higher than the average of $48.68pb in the cor-responding period in September. Although, concerns over Russia’s involvement in Syria caused a temporary spike in Brent crude to $50pb during the period under review, slowing Asian economies and an increase in U.S. crude inventories continued to weigh on crude prices. In addition, OPEC continued to produce above its production quota of 30mbpd as they battle for market share with Non-OPEC members.
Outlook: The outlook on oil prices remains bearish as crude prices are unlikely to rebound with slowing demand from emerging economies, increased OPEC production and U.S. inventory.
Exchange rate volatility continued in October, as market panic heightened with the decline in external reserves towards the $30bn psychological resistance level. As at October 22nd, the naira traded at N226/$ at the parallel market, a 1.1% depreciation from N223.5/$ at the end of September. The naira however, appreciated by 0.16% to N198.77/$ at the Interbank Foreign Exchange Market (IFEM) on October 22nd compared to N199.08/$ at the end of September. The IATA rate of exchange remained flat at N200/$ during the same period under review.
Outlook: The CBN has reiterated that currency devaluation is unlikely but the pressure on the naira is expected to continue with no significant accretion in external reserves.
Nigeria’s external reserves fell by 0.99% ($300m) to $30.04bn as at October 21st. Year to date, the reserves level has declined by 12.9% ($4.45bn). The level of import and payments cover is down to 4.86months from 4.92 months at the end of September.
The expected release of the ministerial list drove positive market sentiments as investors expect a mini market rally to follow the announcement of a cabinet. The market managed to sustain gains recorded in the first two weeks of the month.
Sentiments were buoyed by the expected release of the ministerial list, and positive reports by the military on containment of the terrorist group in the North-East. The NSE ASI gained 2.99% from 30,311.77 to 31,217.77 its highest in Seven weeks. Market capitalization also increased by 1.69% from N10.42trn to N10.59trn. Consequently, the year-to-date (YTD) return in the market was -9.92%.
All sectors recorded positive performance in the second half of the month.
The consumer goods sector had the best performance: gaining 4.97% during the period despite rising inflation, Nigerian Brewer-ies, NASCON and Nestle managed to drag the oil and gas sector into positive territory with combined gains of 22% during the period.
During the period, financial services sector dominated activities on the exchange accounting for 55.99% of total value traded. Consumer goods sector accounted for 19.40% whilst industrial goods, conglomerates, oil and gas and accounted for: 10.13%, 7.33%, 5.25% respectively. Total volume of shares traded within the period was 3.37bn, while market breadth increased to 1.07x as 44 stocks advanced against 41 stocks that declined. 108 stocks remained unchanged during the period under review.
In line with our expectations, the MPC at its just concluded bi-monthly meeting, decided to reduce the Cash Reserve Requirement (CRR) to 25.0% from 31.0% and maintain the going rate of 13% for the MPR.
We expect that this decision would help to ease the liquidity crunch in the system and have a net positive impact on banking stocks in Q4.
Outlook: Positive sentiments may drive the Nigeria equities market in the first two weeks of the month after the ministerial list is released and investors play out likely policy scenarios. We expect renewed interest in the exchange by local investors as market activities pick up. Long-term investors will likely wait for Q3 results after which they will take positions in undervalued stocks.
However, poor Q3 results may dampen investor confidence as the effects of government policies may partially affect Q3 results. Effects of these policies will be felt the most in Q4 due to policy lags. Some level of volatility is expected in the first two weeks of the month, as speculators will attempt to take advantage of market sentiments.