The Monetary Policy Committee (MPC) held its fourth meeting for the year on the 24th and 25th July, 2017 and much in line with our expectation, status quo was maintained on all key rates as the committee noted that the recent gains recorded in the economic landscape remain fragile and could be disrupted if adequate fiscal and monetary policies are not implemented to complement the recovery. Consequently:
MPR was retained at 14.0%;
CRR was retained at 22.5%;
Liquidity ratio was maintained at 30.0%; and
The asymmetric corridor around the MPR was maintained at +200 and -500bps.
In our view, the decision was the most appropriate option open to the MPC in light of the fragile state of the economy despite the recent improvements in the FX market as well as general price levels. Given the broad consensus on the expected outcome of the meeting, the impact of the decisions across the various markets has been muted.
In the equities market, investors’ main focus will be on the developments in the FX market, particularly with regards to the sustainability of FX interventions by the CBN as well as flexibility of the Investor’s & Exporters’ FX window (I&E Window).
Following the launch of the I&E FX window, investor sentiment has been boosted and this was reflected in Q2:2017 foreign portfolio inflows data which showed portfolio inflows in equities surged 146.4% Q-o-Q to N153.6bn from N62.3bn in Q1:2017 while the All Share Index has appreciated 37.2% YTD.
Although most value stocks appear to be more fairly valued relative to pre-crisis level, we still forecast a modest single digit return in the equities market in the last five month of the year if the FX market stability is maintained as expected.
In the fixed income market, yields have remained elevated despite moderating Headline Inflation rate, and we expect them to remain so as the CBN will likely keep financial system liquidity tight – via aggressive OMO auctions – in order to attract portfolio flows and maintain stability in the FX market.
Nonetheless, we expect fixed income investors to aggressively position in long duration bonds in anticipation of a medium term easing of monetary policy.
With only 2 MPC meetings left for the year, in September and November, there is an increasing likelihood that status quo would be maintained on all policy rates till the end of the year, given the fragile nature of the FX market rebound and negative inflation surprises in the past five months.
In a public speech delivered by the CBN Governor last week at the University of Nigeria Nsukka (UNN), Governor Emefiele referred to the three anchors to drive CBN policies in the near term: FX market stability, Food inflation and Fuel prices.
The recent uptick in domestic crude oil production has been the one of the major drivers of rebound in FX market liquidity, but the downside risk which increased shale production poses to crude oil prices and domestic crude export limit remain headwinds to macroeconomic stability.
Also, Headline Inflation figures have disappointed since March, largely due to seasonality driven food price pressure which is partly offsetting moderation effect of Consumer Price Index (CPI) high base.
Regardless of these two factors aforementioned, Monetary Policy Rate has become a blunted policy – with OMO clearing rate taking its place – given the significant spread between short term market rates and CBN discount window rates.
As it were, harmonizing the various FX market windows to have a single market for all transactions is the only trick left in the monetary policy playbook.
Yet, the high sensitivity of petroleum product prices to interbank exchange rate is a political decision the CBN will likely give considerations for before loosening the belt on liquidity tightening and devaluing official rate.
Hence, we believe the odds favour the MPC maintaining policy rates at current levels in the last two meetings.
Global Market Review and Outlook
On the global fronts, oil prices recorded gains as the news of shale explorers easing on drilling, alongside the decision by OPEC at its meeting in Russia on Wednesday to extend output curbs, bolstered expectations of a diminishing oil glut.
Consequently, Brent crude appreciated 7.0% from $48.10/b last Friday to $51.46/b (as of writing), thus crossing the $50.00/b mark for the first time in over two months. Market participants however, have treaded cautiously as a rebound in US Shale production remains a strong possibility.
Nevertheless, performance across the global indices under our watch was broadly positive as most of the indices trended northwards W-o-W. In the developed markets, the UK FTSE slid 0.1% W-o-W against the backdrop of a lackluster economic performance.
However the US S&P 500 and NASDAQ, rose 0.3% and 0.9% W-o-W on the back of generally positive corporate earnings reports.
Across the BRICS region, performance was largely positive as all indices trended northwards W-o-W.
The Brazil IBOVESPA and Russia RTS advanced 1.0% and 1.3% W-o-W as the improvement in oil prices bolstered investor sentiment while the China SHANGHAI COMPOSITE rose 0.4% W-o-W following cash injections into the economy by the PBOC. Likewise, the India BSE and South Africa JSE climbed 1.1% and 1.4% W-o-W respectively.
In the Eurasia classification, performance was mixed as 2 of 4 indices closed in the green. The France CAC rose 1.2% W-o-W despite the weaker PMI data for June. while the Hong Kong HANG SENG climbed 1.6% W-o-W. On the flip side, the German DAX fell 0.4% W-o-W while the Japan NIKKEI slid 0.1% W-o-W as socio-political concerns mounted.
In the African markets, all indices closed in the green save for the Egypt EGX which dipped 0.7% W-o-W. The Nigerian All Share Index climbed 8.4% W-o-W on the back of positive corporate earnings releases which have begun to trickle in. Similarly, the Ghana GSE and Kenya NSE rose 2.4% and 1.7% W-o-W respectively.
Equities Market Review and Outlook
The improved appetite for Nigerian equities which has trailed the launch of the Investors’ & Exporters’ FX window was sustained during the week as the benchmark index rose to a 31-month high of 37,245.17points following a 16-day bullish streak before the positive trend was bucked on Friday.
Nevertheless, the ASI advanced 8.4% W-o-W to settle at 36,864.71points while YTD performance improved to 37.2%. Similarly, market capitalization rose N980.3bn to N12.7tn while activity level also strengthened as average volume and value traded rose 28.3% and 79.1% to 525.5m units and N8.1bn respectively.
Sector performance was bullish as all indices closed in the green W-o-W. The Banking index led sector gainers, expanding 9.5% W-o-W as investors positioned majorly in Tier-1 banks – ZENITH (+12.9%) and GUARANTY (+9.6%) – in anticipation of positive H1:2017 results.
The Consumer Goods index followed with an appreciation 7.5% following gains in NESTLE (+9.3%) and NIGERIAN BREWERIES (+7.9%). In the same vein, the Industrial Goods and Oil & Gas indices improved 5.9% and 3.1% W-o-W due to price appreciation in DANGCEM (+11.1%) and TOTAL (+5.1%) respectively. The Insurance index closed 2.0% higher W-o-W.
Investor sentiment stayed strong during the week as market breadth stood at 2.2x (from 1.2x last week) – 48 stocks advanced while 22 declined. The top gainers were CONOIL (+21.4%), PRESCO (+20.0%) and DANGSUGAR (+19.3%) while CADBURY (-18.2%), MORISON (-17.6%) and LIVESTOCK (-13.3%) were the worst performers for the week.
Next week Monday is the official deadline for filing of H1:2017 earnings reports hence we expect market performance to be largely driven by reactions towards the corporate scorecards especially as some market bellwethers are yet to release their results.
Money Market Review and Outlook
Despite repeated OMO auctions, money market rates eased this week against the backdrop of an OMO repayment and improved system liquidity. The CBN conducted OMO auctions on all trading sessions but for Monday.
Despite this, system liquidity during the week remained in the positive region save for Wednesday which had a negative balance of N53.0bn. Money market rates – Open Buy Back (OBB) and Overnight (OVN) – were at first elevated at the start of the week (relative to previous Friday’s close of 14.0% and 14.9% respectively) as both rates rose to 17.3% and 18.8% respectively on Monday as the CBN conducted its weekly SMIS FX auction (US$100.00m).
However, rates moderated from midweek, with the OBB and OVN dropping to 10.7% and 11.7% respectively on Thursday, owing to OMO bills repayment of N152.0bn which buoyed liquidity level. Friday’s close saw rates ease to 5.0% and 5.8% respectively, down 9.0 and 9.1 percentage points W-o-W.
Despite the MPC’s decision to retain rates at current levels, performance of the secondary Treasury Bills market was bearish this week as average yield rose on 4 of 5 sessions.
The secondary market opened with a hint of bearish note as average yield across benchmark bills rose by a marginal 4bps on the first session. The bearish pressure intensified on Tuesday as yields rose 57bps on average.
Sentiment stayed the same on Wednesday but an OMO maturity worth N152.0bn which hit the system on Thursday swung market performance positive, hence yields dropped 73bps across tenors. Nonetheless, average yield closed the week at 17.9%, up 0.3% W-o-W.
In the coming week, the CBN will be conducting its bi-weekly N-T-bills with total offer amount of N229.1bn to offset maturing bills of the same amount. We expect the CBN to float several OMO auctions to keep financial system liquidity tight.
Foreign Exchange Review and Outlook
The Monetary Policy Committee on Tuesday voted to maintain status quo on all policy rates on the back of cloudy external factors and fragile domestic economic recovery.
The Committee however noted the stability at the Official FX market and recent convergence between parallel and NAFEX rate, whilst further re-iterating its commitment to sustain and deepen flexibility in the foreign exchange market to further enhance foreign exchange flow in the economy.
In view of this, the CBN conducted its weekly SMIS sales with offer amount of US$100.0m at an offer rate of N320.00/US$1.00 to buoy liquidity. Furthermore, rate at the official market remained pegged within a range of N305.70/US$1.00 – N305.75/US$1.00 during the week, closing at N305.70/US$1.00.
At the Parallel market, rate appreciated from last week’s close of N366.00/US$1.00 to touch a 2017 high of N364.00/US$1.00 on Wednesday before closing the week at N365.00/US$1.00.
Meanwhile, at the NAFEX segment, a total of US$983.0m traded during the week with market rate appreciating slightly from N366.45/US$1.00 at the start of the week to close at N366.08/US$1.00 on Friday.
Activities at the FMDQ OTC FX Futures market improved this week as total value of open contracts increased by US$215.89m W-o-W, owing to increased subscriptions in the NGUS AUG 2017, MAY 2018 and JULY 2018 instruments.
Hence, value of open contracts for the week closed at US$2.5bn as against US$2.2bn in the prior week. The AUG 2017 instrument remains the most subscribed instrument with total subscription at US$416.9m at a contract rate of N358.83/US$1.00 whilst the NGUS MAY 2018 instrument is the least subscribed with US$14.7m at a rate of N363.33/US$1.00.
In the week ahead, we expect the Central Bank to continue its current administration of the FX market by way of weekly SMIS sales and operation of multiple FX windows. Hence, we expect rates to hover around current levels.
Bond Market Review and Outlook
Activities in the domestic bonds market has remained soft as the market recorded a bearish performance this week with average yield across benchmark bonds rising on 4 of 5 trading days. At the start of the week, average yield across all benchmarks rose 2bps to 16.3% majorly due to sell offs on the shorter end of the curve.
However, this trend was reversed on Tuesday but sentiment turned bearish yet again by midweek, as average yield marginally rose 4bp on Wednesday, eventually settling at 16.3% on Friday, up 5bp W-o-W.
Similar to the prior week, sentiment on SSA Eurobonds remained bullish against the backdrop of the mildly dovish comments from systemic central banks in the past three weeks. Hence, yields declined on all trading instruments under our coverage W-o-W.
The Zambian and Kenyan Eurobonds received the most interest as average yield declined 30bps and 22bps respectively W-o-W while the Gabon 2024 instruments also dropped 25bps.
Nigeria 2021 and 2023 bond yields pared 14bps and 9bps W-o-W to 4.6% and 5.6% respectively. On Year to Date basis, the Zambian 2024, Kenyan 2024 and Nigerian 2023 Eurobond instruments are the best performing in 2017 with returns of 8.1%, 7.6% and 7.2% respectively.
Similar to the bullish performance of Sovereign Eurobonds, Corporate Eurobonds also sustained bullish momentum as yields across a range of debt instruments in this category we track.
The FIDELITY 2018 (YTM down 37bps to 9.0%) received the most buying interest followed by the ACCESS 2021 (YTM down 10bps to 9.2%) and DIAMOND 2019 (YTM down 9bps to 13.1%) while yields rose 14bps and 1bp on the ACCESS 2021 and FBNH 2021 instruments respectively.
On a YTD basis, DIAMOND 2019 (+22.4%) remains the best performing trailed by FBNH 2021 (+20.1 %) and FBNH 2020 (+14.9%).