• Friday, June 21, 2024
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BusinessDay

Equities dancing to weak macro drumbeat

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This past week saw the equities market extend losses, as investors continued to book recent gains as concerns linger over the effectiveness or otherwise of the recently implemented FX regime, a policy which was earlier anticipated would be the major pull for the foreign portfolio players. The ASI was down 17bps w/w, settling at 28,805.45 with YTD now trimmed to +0.6%.

The money market opened N191.2 long in the past week. However, debit of the previous week’s T-bills auction as well as funds provisioning for Bond auction in the course of the week further tightened liquidity thereby pushing higher key money market rates despite an inflow of N73.0bn maturing OMO bills. At the end of the week, the Open Buy Back (OBB) and Overnight (O/N) rates trended higher w/w, closing at 20.8% and 22.8% respectively vs. 9.0% and 9.5% in the previous week.

For equities, we expect a slow start to the week as the market continues to worry about the strength of the underlying domestic macro fundamentals, although we anticipate demand will gradually trickle in, with investors likely to take position ahead of the release of more H1-16 corporate earnings. We see a bearish close for the FI markets this week, as investors react to the June headline inflation figure which surprised somewhat to the upside. This in our view, clearly puts next week’s policy meeting of the Monetary Policy Committee (MPC) firmly into focus while also pushing investors into a more cautious mood.

Global and Macro-economic market update

Global markets post strong gains, despite fresh concerns about the Euro area

Bullish sentiments dominated the US equities for most part of last week, although a terrorist attack in France late Thursday halted momentum as it brought to the fore concerns around the outlook for global growth. Despite the pull-back, US equities still posted strong gains w/w as investor demand remained strong for most of the week. On the data front, Consumer prices rose 0.2% in June, the fourth straight monthly increase—as the cost of gasoline, rent and medical care continued to go up, according to a government index that tracks the cost of living. Also, sales at US retailers rose 0.6% for the same month, by a surge in spending at home-and-garden centers and online stores.

A similar trend played out in the Euro area, as the equities market in the region clawed back some of the gains recorded from earlier on in the week, owing to the attack in France. Before the attack, stocks in Europe were on a bull run, on the prospect of more easing measures from global banks including the BOE and Bank of Japan, which were meant to ease concerns over slow global growth and the fallout from the Brexit vote. We note the BOE held rates steady at its policy meeting that held mid-week. Despite Friday’s drop, the Stoxx 600 still ended with a 3.2% gain for the week, the biggest weekly advance since late May 2016.

Asian markets also started the week in a buoyant mood, although a week-long rally across Asian stocks hit the brakes Thursday, with investors waiting to see whether the Bank of England’s interest-rate decision would make or break further equity gains. Data released in the course of the week showed China’s gross domestic product grew in the second quarter, beating forecasts of a 6.6% reading as record stimulus which poured into the economy in the first quarter lent at least temporary stability to a slumping economy. We note that Q2 GDP recording matched Q1-16 GDP figure which also came in at 6.7%.

On the domestic scene, headline inflation for the month of June came in at 16.5%, 90bps higher thank May print. According to the National Bureau of Statistics (NBS), both core and food inflation increased, with the former increasing by 1.2% m/m to 16.2% mostly driven by cost of imported food, electricity, liquid fuel and transport costs, while the latter also rose by 40pbs to 15.3% on higher food prices.

Domestic Financial Markets Review and Outlook

Equities: Equities market extends bearish trend w/w, loses another 17bps

This past week saw the equities market extend losses, as investors continued to book profits on concerns over the effectiveness or otherwise of the recently implemented FX regime, a policy which was earlier anticipated would be the major pull for the foreign portfolio players. The ASI was down 17bps w/w, settling at 28,805.45 with YTD now trimmed to +0.6%.

Nevertheless, sector performance was more mixed. The Consumer and Industrial goods indices ended the week on a positive, gaining 1.0% and 1.5% w/w respectively. For these sectors, examples of the counters that drove gains over the course of the week include HONEYWELL (+14.8%), LIVESTOCK FEEDS (+4.9%), LAFARGE AFRICA (+4.6%), UNILEVER (+3.8%), FLOURMILLS (+3.7%) and DANGSUGAR (+3.2%). On the flip side, the Insurance index led losses, shedding 1.8% w/w. The Banking and Oil and Gas indices also closed in the negative territory, posting negative weekly returns of 0.2% and 1.3% accordingly. The major stocks that drove the bearish run in these sectors include SKYE (-31.0%), OANDO (-14.5%), WEMA (-10.7%), DIAMOND (-10.5%) and MRS (-8.0%).

Market sentiment improved this week a as market breadth settled at 0.6x (relative to 0.2x in the previous week) as 21 stocks advanced while 37 declined. Activity level during the week also improved as average volume and value traded rose 21.7% and 49.6% to 229.9mn units and N2.7bn respectively.

The week also saw some Q2-16 earnings numbers release from the likes of Nigerian Breweries and United capital, effectively kick-starting the Q2-16 earnings season. We expect a slow start to the week as the market continues to worry about the strength of the underlying domestic macro fundamentals; although we anticipate demand will gradually trickle in, as investors likely to take position ahead of the release of more H1-16 corporate earnings.

Lower liquidity drives money market rates higher w/w

The money market opened N191.2 long in the past week. However, debit of the previous week’s T-bills auction as well as funds provisioning for Bond auction in the course of the week further tightened liquidity thereby pushing higher key money market rates despite an inflow of N73.0bn maturing OMO bills. AT the end of the week, the Open Buy Back (OBB) and Overnight (O/N) rates hinged higher w/w, closing at 20.8% and 22.8% respectively vs. 9.0% and 9.5% in the previous week accordingly.  While money market rates will likely ease marginally, we expect them to remain elevated as investors shift gaze and make provision for the T-bills re-issuance that will take place in the course of the week.

FI market bearish with focus on Bond Auction and Inflation expectations

In line with recent trend, bearish run in the fixed income and Treasury bills market continued this week. For T-bills, average yield across maturities was up 1.6% to 11.6%, as a much tighter system liquidity aided broad based sell – offs across tenors. Average yields at the Bond market also increased by 50bps to 14.6%, as investors provided funds for the primary market auction which held mid-week.

At the Bond auction, the Debt management office (DMO) issued N30.0bn, N35.0bn and N55.0bn of the JUL 2021 (new issue), JAN 2026 and MAR2036 bond instruments with marginal rates coming in at 14.50%, 14.90% and 14.98% respectively. Similar to recent primary market auction patterns, the total amount offered was oversubscribed by close to 2.0x. The DMO under allotted the JUL 2021 and JAN 2026 instruments by 15.0%and 12.5% respectively whilst the 10-Year MAR 2036 bond was over allotted by 12.5%.

We see a bearish close for the FI markets this week, as investors react to the June headline inflation figure which surprised somewhat to the upside. This in our view, clearly puts next week’s policy meeting of the Monetary Policy Committee (MPC) firmly into focus while also pushing investors into a more cautious mood.

Strong demand continues to pressure the naira

At the spot market, the naira closed at N282.8 NGN/USD in the past week, and depreciated further in the parallel market to 353.0 NGN/USD from 350.0 NGN/USD. Despite recent introduction of a new FX policy regime, the naira continues to see pressure as investors remain skeptical on the effectiveness (or otherwise) of the new FX policy.

Oil price closed the week US$1.2pb lower than the previous week at US$47.2pb as demand/supply dynamics remain in the balance.  We expect demand for the greenback to stay strong across the major segments of the FX this week, as investors continue to assess the impact and workings of the new FX regime.