Profit taking drives equities south as macro fundamentals come to the fore

Proshare

Monday, March 21, 2016 3:45PM /United Capital Plc

After 2 weeks of straight gains, the equities market took a breather last week, as speculative play drove profit-booking across dividend paying stocks. At the close of the week, the ASI was down 1.1% w/w, settling at 25,694.79 with YTD berthing at -10.3%.

The Consumer goods sector extended its gains as bearish sentiments dominated proceedings across other sectors. The Banking index (-4.8%) led losses, followed by the Oil and gas (-3.5%) and Industrial goods (-1.7%) as well as Insurance indices (-1.0%).

System liquidity opened at N119.6bn.


Thus, while relatively tight liquidity as well as FX funding by banks set the tune for an uptrend in money market rates in the early part of the week, OMO repayment worth c.46bn towards the end of the week as well as coupon payment of N44.3bn on the 2024 FGN bond combined to ease liquidity. Overall, the Open buy back (OBB) and Overnight (O/N) rates closed the week at 4.8% and 5.3% respectively.

We expect to see the last bout of dividend play this week, as investors look to beat register closure dates in a bid to qualify for FY-15 dividends. This will likely see this latest trigger run out its course, leaving equities in search for new set of events to trigger demand.  It is on this basis that we expect the ASI to close marginally higher on a w/w basis the week.

Global and Macro-economic market update

Dovish US FOMC stance sparks a rally in global equities
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In the past week, US equities closed higher, buoyed by the outcome of the US FOMC meeting that saw The Federal Reserve hold interest rates steady, after a rate hike in December.

Despite the US economy showing signs of a gradual recovery, the Yellen led committee appears concerned about the more complicated growth picture in the Eurozone and Asia, as well as these can impact its domestic economy.

While we expect to see more tightening by the US Fed this year, we anticipate that the pace will be more measured, even as key economies globally continue to find their footing.|

European stocks also closed in the green, partly boosted by the US FOMC rate decision as well as an announcement by ECB's Chief Economist Mr. Peter Praet, where he stated that there could be further interest rate cuts on the horizon.

The ECB continues to look for ways to combat deflationary pressures which that have refused to depart, despite its on-going QE. The Eurozone inflation was negative in the month of February, which marked its first negative recording since September 2015.

Momentum also extended to the key Asian equities markets as investors seemed to find relief in the more dovish tone of the US Fed. On the data front, Japanese exports fell for a fifth straight month in February, their longest losing streak since 2012, in a fresh sign of weakness in the world's third-largest economy. Merchandise exports decreased 4.0% from a year earlier to Y5.703 trillion last month, according to data released by the Ministry of Finance.
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On the domestic scene, data released by the National Bureau of Statistics (NBS) showed that inflation rate rose by 11.4% in February, 176bps higher than the January recording.

The fastest pace of increases which led to the overall in the headline index cut across all the major divisions, and captures the impact of sustained FX pressure on imported products, higher electricity tariff and knock-on impact of fuel scarcity seen in the month of February on prices.

Financial Markets Review and Outlook

Equities reverse gains, shed 113bps w/w
This past week saw equities shed some earlier gains, as investors booked profits. At the end of the week, the ASI was down 1.1% w/w, settling at 25,694.79 with YTD berthing at -10.3%. While the Consumer goods sector extended gains though bearish sentiments dominated proceedings across the other sectors.

Despite impressive FY-15 results by Access (Gross Earnings up 37% to 337bn, PAT 53% higher to N65.8bn, total DPS: 0.55K) and Zenith (Gross Earnings 7.2% higher to N432bn PAT up 6.2% to N105.1bn, total DPS: 1.80K), the Banking index (-4.8%) led losses, followed by the Oil and gas (-3.5%) and Industrial goods (-1.7%) and Insurance indices (-1.0%).

Examples of major counters that shed gains in these sectors include OANDO (-25.2%), ETI (-20.3%) following the release of earnings warning for its FY-15 numbers, ACCESS (-10.6%), WEMA (-8.1%), DIAMOND (-7.9%) and TRANSCORP (-6.7%). Gains in TIGER BRANDED CONSUMER (5.8%) NB (+5.0%), and UNILEVER (+5.0%) drove the positive returns seen in the Consumer goods index. |

Market activity as measured by average volume and value traded jumped by 971.1% and 146.7% w/w, to close at 2,381bn and N3.7bn respectively, driven by trades in UNITYKAP. However, market breadth decreased w/w, closing at 0.5x (vs. 1.9x in the previous week) as 19 stocks appreciated in price compared to 41 decliners.

We expect to see the last bout of dividend play this week, as investors look to beat register closure dates in a bid to qualify for FY-15 dividends. This will likely see this latest trigger run out its course, leaving equities in search for new set of events to trigger demand.  It is on this basis that we expect the ASI to close marginally higher on a w/w basis the week.

Money market rates trends higher on thinning system liquidity…

In the past week system liquidity opened at N119.6bn. Thus while relatively tight liquidity as well as FX funding by banks set the tune for an uptrend in money market rates in the early part of the week, OMO repayment worth c.46bn towards the end of the week as well as coupon payment of N44.3bn on the 2024 FGN bond combined to ease liquidity.

Overall, the Open buy back (OBB) and Overnight (O/N) rates closed the week at 4.8% and 5.3% respectively. Also rates assumed an upward trend at the interbank, with the 1M, 3M and 6M NIBOR closing the week at 9.0%., 10.1% and 11.1%, 20bps, 100bps and 30bps higher on a w/w basis respectively. 

Barring FAAC inflows in the course of the week, we expect rates will remain at around current elevated levels early in the week, as attention shifts to the outcome of the MPC meeting and the impact of potential decisions on overall system liquidity.

…FI markets also bearish

Reflective of the impact of relatively tight system liquidity at the start of the week, yield trended higher across maturities in the T-bills market, with sell-offs more pronounced at the short end.

Thus the 91day, 182day and 364day bills added 80bps, 20bps and 10bps w/w to close at 6.6%, 8.2% and 9.3% in that order. The week also saw the Apex bank re-issue maturing T-bills worth N172.0bn, with stop rates coming in at 5.75%, 7.95% and 9.15% respectively.

Bearish sentiments also dominated the bond market as a combination of investor reactions to higher inflation and preparation for the bond PMA impacted proceedings earlier-on in the week. The auction was oversubscribed by N162.4bn, with bids totaling N262.4bn. At the end of the auction, stop rates for the FEB-2020, JAN-2026 and March-2036 came in at 11.3%, 12.1% and 12.4%.

We think the FI markets will be relatively quiet at the start of the week, as investors' attention shifts to the outcome of the MPC meeting. We expect yields to respond to key decisions post-MPC, although mostly within a tight range ahead of the Easter celebrations. Plausible FAAC inflow may however provide the impetus for downtrend in yields 

Naira gains w/w, parallel market still pressured  

 At the interbank, the naira gained 73bps to close the week at N197.65. However, pressure on the naira persisted in the parallel market, as the naira closed the week at N326/US$.

With oil prices still tepid and FX policies unchanged, we believe the fundamental demand/supply imbalance currently rocking the FX market will continue, with attendant pressure on the domestic currency barring policy surprises around FX by the Apex bank at the conclusion of the 2-day MPC meeting.

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