SAT, JUN 06 2020-theG&BJournal- This week, the CBN stepped up its currency market intervention as it recorded its first reserve depletion in four weeks.
Notably, the country’s external balance dipped by USD17.09 million WTD to USD36.58 billion. Nonetheless, the Naira depreciated against the USD by 0.04% w/w to NGN386.50/USD at the I&E window but closed largely flat at NGN450.00/USD in the parallel market.
In the Forwards market, the naira depreciated against the USD across all contracts. Specifically, the 1-month (-0.2% to NGN389.06/USD), 3-month (-0.8% to NGN394.84/USD), 6-month (-1.5% to NGN403.18/USD), and 1-year (-2.5% to NGN426.56/USD), contracts all lost some ground against the US dollar.
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 BDCs segment of the market will place an additional layer of pressure on the reserve as the CBN funds the backlog of unmet FX demand.
Treasury bills
Trading in the Treasury bills secondary market was quiet through the week, as investors remained wary of the rates in both segments of the market. Nonetheless, bullish sentiments prevailed due to the healthy system liquidity, as the average yield across all instruments contracted by 30bps to 4.5%. Average yield at the OMO segment (-97bps to 5.1%) contracted due to liquidity conditions, while sell-off of short and mid tenured instruments caused average yield in the NTB segment to expand by 121bps to 3.3%.
We expect reduced demand for T-bills as system liquidity squeezes. At the NTB segment, we expect muted trading activity in the secondary market as participants seek better rates at next week’s PMA.
Bonds
Trading in the Treasury bonds secondary market was mixed, albeit with bullish bias, as the average yield contracted by 9bps to 10.0%. Trading was static due to muted activity in the market, as market participants shifted attention to FGN’s Sukuk bond issuance. Across the benchmark curve, yield contracted at the short (-15bps) and long (-3bps) ends as investors demanded JAN-2026 (-55bps) and MAR-2050 (-10bps) bonds, respectively, while they expanded at the mid (+1bp) segment due to sell-offs of the MAR-2027 (+1bp) and FEB-2028 (+1bp) bonds.
In the coming week, we expect the tight system liquidity to negatively influence the demand for instruments in the Treasury bond secondary market. Nonetheless, we expect yields to pare, as investors’ demand should remain focused on this side of the market, given the level of yields in the Treasury bills market.
Fixed income and money market
Money market: The overnight (OVN) rate expanded by 13.70 ppts, w/w, to 16.7%. The OVN contracted consecutively throughout the week, as system liquidity remained elevated. System liquidity was further buoyed by inflows from OMO maturities (NGN149.68 billion), however, outflows for CRR debits (NGN459.72 billion) and the CBN’s weekly OMO auction (NGN70.00 billion) caused the rate to increase to its current level. At the OMO auction, the CBN fully allotted NGN70.00 billion worth of bills – NGN20.00 billion of the 82-day, NGN20.00 billion of the 173-day and NGN30.00 billion of the 341-day – at respective stop rates of 4.95%, 7.79%, and 8.99%.
A tight system liquidity and an expansion in the OVN due to the absence of significant inflows to the system is expected next week.
Equities
Negative sentiments took precedence in the domestic markets despite the further easing of the lockdown in the country, amid persistent increases in daily coronavirus cases. Consequently, profit-taking was witnessed on BUACEMENT (-4.8%), NB (-3.0%), and some banking stocks. Precisely, the All-Share Index declined by 1.0% w/w, to settle at 25,016.30 points. Thus, the MTD return settled at -1.0%, as the YTD loss increased to -6.8%. Analysing by sectors, the general performance was broadly negative, as losses in the Banking (-3.7%), Oil and Gas (-0.7%) and Consumer Goods (-0.4%) sectors outweighed the positive performances in the Insurance (+2.4%) and Industrial Goods (+1.6%) sectors.
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.-With Cordros Research
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