SAT, FEB 22 2020-theG&BJournal- This week, the bears dominated the domestic equities market, amidst continued risk-off sentiments and the absence of positive market catalysts. Consequently, after 4 trading days of losses, the benchmark index dipped by 1.32% w/w to 27,388.62 points. Analysing the performance by sectors, significant losses recorded in the Consumer Goods sector dampened the market performance, after the index plummeted by 6.8%. Also, the Banking (-2.6%), Insurance (-2.1%) and Oil and Gas (-1.28%) indices closed negative. On the flip side, a gain of 1.0% was recorded in the Industrial Goods sector.
Amidst continued weak market sentiments, we advise investors to trade cautiously, taking positions in fundamentally justified stocks.
Money market
In line with our expectations, the overnight (OVN) rate expanded by 58bps, w/w, to 3.83%. During the week, the OVN was largely depressed as system liquidity remained buoyant against the backdrop of the significant inflows (NGN1.40 trillion) that came into the system in the prior week and inflows this week from OMO maturities (NGN627.22 billion). However, the rate expanded at the end of the week following outflows from OMO (NGN300.00 billion) and FGN bond (NGN100.00 billion) auctions.
We expect the OVN rate to remain depressed in the coming week, supported by a significant boost to system liquidity from OMO inflows worth NGN927.75 billion on Thursday.
Treasury bill
The Treasury bills market remained bullish as the average yield across all instruments contracted by 80bps to 9.4%. This was driven by the OMO segment (average yield: -128bps w/w to 12.0%) of the market given the still buoyant system liquidity. On the other hand, the average yield in the NTB market expanded by 7bps to 3.9% as market participants unloaded instruments in anticipation of the FGN bond auction. There was an OMO auction held during the week, during which the CBN fully allotted instruments worth NGN300.00 billion – NGN10.00 billion of the 89DTM, NGN44.78 billion of the 180DTM and NGN245.21 billion of the 362DTM instruments at respective stop rates of 11.45% (on sale in the prior week), 11.59% (previously 11.60%), and 13.02% (previously 13.04%).
We expect the bullish trend to continue in the Treasury bills market, supported by relatively healthy liquidity.
Bonds
Trading in the FGN bond secondary market was bullishly, as yields readjusted to the lower PMA stop rates. Consequently, the average yield across instruments contracted by 28bps to close at 9.8%. At the auction, instruments worth NGN140.00 billion were offered to investors through re-openings – 12.75% APR 2023 (Bid-to-offer: 1.7x; Stop rate: 8.7500%), 14.55% APR 2029 (Bid-to-offer: 2.1x; Stop rate: 10.7000%), and 14.80% APR 2049 (Bid-to-offer: 4.5x; Stop rate: 12.1500%). Despite subscriptions across instruments settling at NGN458.20 billion, the DMO eventually allotted instruments worth NGN100.00 billion (excluding an NGN60.00 billion non-competitive allotment), resulting in a bid-cover ratio of 4.6x.
We expect sustained demand next week across the bond yield curve, as market players seek to re-invest excess liquidity from incoming maturities.
Exchange rate
As foreign outflows intensified, Nigeria’s FX reserves declined by USD380.2 million WTD to USD36.77 billion (21th Feb 2019), as the CBN maintained its support for the currency via its weekly FX interventions; USD210.00 million was sold across the different segments of the FX market – USD100.00 million to the Wholesale segment, USD55.00 million to the SMEs segment, and USD55.00 million to the Invisibles segment. Consequently, the naira appreciated by 0.1% w/w to NGN364.26/USD at the I&E window but closed flat at NGN360/USD in the parallel market. In the Forwards market, the naira appreciated across the 1-month (+0.2% to NGN365.94/USD), 3-month (+0.5% to NGN368.79/USD), 6-month (+2.3% to NGN373.87/USD) contracts, while the rate on the 1- year (0.1% to NGN392.47/USD) contract appreciated.
Looking ahead, we expect the still healthy foreign reserves to support the CBN’s currency defense over H1-20. Further out, the blend of tighter cash inflows, faster pace of capital repatriation, and possible resurgence of speculative attacks on the naira will force the CBN to throw in the towel in our opinion. Report provided by Cordros Securities
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