…Naira depreciated against the US dollar by 0.32% WTD to NGN387.75/USD at the I&E window but closed largely flat at NGN450.00/USD in the parallel market
FRI, JUN 12 2020-theG&BJournal- Despite a negative closing session, the domestic equities market eked out a gain in holiday-shortened week, following investor interest across banking stocks and large caps, BUACEMENT (+3.8%) and MTNN (+1.7%). Thus, the All-Share Index advanced by 0.7%, WTD, to settle at 25,182.67 points. Accordingly, Month-to-Date and Year-to-Date losses moderated to -0.3% and -6.2%, respectively. On sectors, the Insurance (+3.7%), Industrial Goods (+2.2%) and Banking (+0.5%) indices closed higher while the Oil and Gas (-3.3%) and Consumer Goods (-0.2%) indices recorded declines.
Risks remain on the horizon due to a combination of the increasing number of COVID-19 cases in Nigeria and weak economic conditions. Thus, we continue to advise investors to trade cautiously and seek trading opportunities in only fundamentally justified stocks.
Fixed income and money market
The overnight (OVN) rate contracted by 687bps, WTD, to 9.8%. The OVN was elevated for the better part of the holiday-shortened week as system liquidity was strained following outflows for the weekly FX auction and MTN’s commercial paper. However, banks were able to access the CBN’s Special Lending Facility window by midweek, which led to the eventual contraction in the rate.
In the coming week, inflows from OMO maturities worth NGN355.20 billion are expected to boost liquidity However, FX and bond auction debits will likely drive the OVN higher by the end of the week.
Treasury bills
Trading in the Treasury bills secondary market was mixed amidst the strain in system liquidity. Consequently, average yield across all instruments contracted by a marginal 3bps to 4.5%. Activities in the relatively more attractive OMO secondary market were slightly bullish as average yield contracted by 10bps to 5.0%. On the other hand, amidst the liquidity crunch, investors sold off at the NTB segment with average yield expanding by 6bps to 3.4%. At the PMA, the CBN fully allotted NGN90.94 billion worth of bills – NGN4.41 billion of the 91-day, NGN7.82 billion of the 182-day and NGN78.71 billion of the 364-day – at respective stop rates of 2.00% (previously 2.45%), 2.20% (previously 2.72%), and 4.02% (previously 4.02%).
Yields on treasury bills are expected to contract, owing to the expected boost in system liquidity next week.
Bonds
Trading in the Treasury bonds secondary market was bearish, in the absence of any significant inflows to support buying activity. Consequently, average yield expanded by 7bps to 10.1%. Across the curve, average yield contracted at the short (-11bps) end, due to demand for the JAN-2022 (-53bps) bond, while they expanded at the mid (+24bps) and long (+2bps) segments, following sell-offs of the APR-2029 (+34bps) and MAR-2050 (+3bps) bonds, respectively.
We expect investors’ focus to shift to next week’s PMA, wherein the DMO will offer NGN150.00 billion across three instruments to investors through re-openings – 12.75% APR-2023, 12.50% MAR-2035, and 12.98% MAR-2050 bonds. Nonetheless, we still expect some increased activity at the secondary market as investors cover lost bids at the auction which is likely to be oversubscribed.
Foreign Exchange
For the second straight week, the CBN recorded another reserve drawdown as FX outflows outpace inflows – foreign reserves dipped by USD82.09 million WTD to USD36.50 billion. Nonetheless, the naira depreciated against the US dollar by 0.32% WTD to NGN387.75/USD at the I&E window but closed largely flat at NGN450.00/USD in the parallel market. Unlike in the spot market, the naira gained ground against the US dollar across all contracts in the forwards market. Specifically, the 1-month (+0.1% to NGN388.71/USD), 3-month (+0.4% to NGN392.70/USD), 6-month (+0.8% to NGN398.45/USD), and 1-year (+2.3% to NGN416.25/USD) contracts all appreciated against the US dollar.
For us, the widening current account (CA) position suggests that odds are stacked against the Naira. Beyond that, as the economy gradually reopens, the resumption of FX sales to the BDC segment of the market will place an additional layer of pressure on the reserves as the CBN funds the backlog of unmet FX demand.-With Cordros Research
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