November 10, 2017/Cordros Research
Capital Market
Equities
The Nigerian bourse recorded its second consecutive weekly gain, with the NSE ASI advancing further by 0.49% w/w to 37,8120.28 points, thus increasing the MtD and YtD returns to 1.20% and 38.12%, respectively. Bargain hunting persisted across the Oil & Gas (+0.83% w/w), Banking (+0.50% w/w) and Industrial Goods (+0.38% w/w) sectors, which subdued profit taking in the Insurance (-1.09% w/w) sector and persisting sell-off in the Consumer Goods (-0.07% w/w) sector. The gains recorded during the week were driven by price appreciations in FO (+10.25% w/w), MOBIL (+2.48% w/w), DIAMONDBNK (+9.43% w/w), GUARANTY (+4.34% w/w), and DANGCEM (+0.89%). Notably, 18.4 million units of FBNH, 16 million units of GUARANTY, 13.5 million units of ZENITHBANK, and 4.9 million units of MOBIL were crossed at average prices of N7.07, N41.85, N25.29, and N165.00, respectively.
With Q3-17 earnings season now over, activities in the market will be driven by outlook for Q4/FY-2017 earnings releases. Whilst noting possibility of momentum profit-taking, given the two consecutive weeks of gains, we believe market fundamentals remain strong, amid improving macroeconomic conditions.
Global Markets
Trading across global equities markets remained mixed, with bullish sentiment in Asia (CSI 300: +2.99% w/w; Nikkei 225: +0.63% w/w) while investors in the U.S. (DJIA: -0.33% w/w; S&P 500: -0.12% w/w) and across Europe (FTSE 100: -1.50% w/w; Euro Stoxx: -2.21% w/w) mostly stayed off risky assets. Activities were defined by corporate earnings, deal activities, government action, and political shake-up. The strong performance in China subdued losses in Brazil (-2.46% w/w) to support the MSCI EM index (+0.67% w/w) while the MSCI FM index (-1.02% w/w) succumbed to dampened appetite in Kenya (-1.67% w/w) despite weekly gains in Nigeria (+0.49%) and Ghana (+0.94%).
Nigeria
Economy
During the week, Moody’s Ratings downgraded Nigeria’s long-term issuer and senior unsecured debt rating to B2 from B1 with a stable outlook, while the local-currency rating was unchanged at Ba1. Moody’s anchored its decision on (1) Nigeria’s slower-than-anticipated progress in addressing key structural weakness, with its significant reliance on a single sector, and (2) the vulnerability of the government’s balance sheet to economic or financial shocks, with elevated debt servicing cost relative to revenues. Relative to 2016, we believe the economy has significantly improved, with government’s efforts and actions at expanding the non-oil revenue base more visible. We do not expect the downgrade to have any significant impact on the planned issuance of the USD5.5 billion Eurobond.
According to the NNPC Monthly Financial and Operations report for the month of August 2017, average daily crude oil production rose by 3.15% in the month of July to 2.01 mbpd compared to 1.95 mbpd in June, while average daily gas production moderated by 2.7% to 7.71mmscfd in August from 7.92mmscfd in July. Meanwhile, refining capacity utilization dropped to a 9-month low of 9.50% vs. 11.94% in July, following operational downtime at the Kaduna and Port Harcourt refineries. Discounting negative surprises from the Niger Delta militants and possible OPEC cuts, we think the increase in production capacity might support the FG’s ambitious production target of 2.3 mbpd in 2018.
Global Economy
The Eurostat on Monday released the Producer Price Index for the euro area, showing that producer prices in September rose by 2.9% y/y and 0.6% m/m. The higher price level was driven by hikes in energy costs (4.6% y/y, 1.5% m/m) and intermediate goods (3.3% y/y, 0.4% m/m). With the pass-through effect of the price increases to consumers, inflationary pressure in the months ahead should gradually move closer to the ECB’s target of 2%.
According to trade data released by the Customs Department on Wednesday, China’s trade surplus declined sharply to USD38.17 billion in October, from USD48.42 billion in the corresponding period last year. Imports increased for the twelfth consecutive month by 17.2% y/y to USD150.81 billion, while exports rose by 6.9% y/y to USD188.98 billion. The declining trade balance reinforces consensus expectation of a slowdown in growth in the latter part of the year.
Nigeria
Economy
During the week, Moody’s Ratings downgraded Nigeria’s long-term issuer and senior unsecured debt rating to B2 from B1 with a stable outlook, while the local-currency rating was unchanged at Ba1. Moody’s anchored its decision on (1) Nigeria’s slower-than-anticipated progress in addressing key structural weakness, with its significant reliance on a single sector, and (2) the vulnerability of the government’s balance sheet to economic or financial shocks, with elevated debt servicing cost relative to revenues. Relative to 2016, we believe the economy has significantly improved, with government’s efforts and actions at expanding the non-oil revenue base more visible. We do not expect the downgrade to have any significant impact on the planned issuance of the USD5.5 billion Eurobond.
According to the NNPC Monthly Financial and Operations report for the month of August 2017, average daily crude oil production rose by 3.15% in the month of July to 2.01 mbpd compared to 1.95 mbpd in June, while average daily gas production moderated by 2.7% to 7.71mmscfd in August from 7.92mmscfd in July. Meanwhile, refining capacity utilization dropped to a 9-month low of 9.50% vs. 11.94% in July, following operational downtime at the Kaduna and Port Harcourt refineries. Discounting negative surprises from the Niger Delta militants and possible OPEC cuts, we think the increase in production capacity might support the FG’s ambitious production target of 2.3 mbpd in 2018.
Fixed Income
Money Market
The overnight lending rate closed lower, contracting by 3,167 bps to 7.75%, vs. 39.42% last week. The contraction was supported by inflows from matured OMO bills worth N233.76 billion, despite withdrawals via OMO auction and FX sales worth N259.2 billion and USD195 million respectively.
The overnight lending rate is likely to expand in the coming week, as inflow from maturing OMO bills worth N141.73 billion could be subdued by outflows via OMO auction and FX sales.
Treasury Bills
Proceedings remained bullish in the secondary market, with average yield contracting by 67 bps to 16.72%, despite system liquidity remaining pressured for most of the week. Yields contracted at all ends of the curve, as investors demanded for the 25-JAN-2018 (-248 bps), 29-MARCH-2018 (-201 bps), and 26-JULY-2018 (-39 bps) bills respectively.
At next week’s NTB auction, the apex bank will offer bills worth N119.94 billion, comprising N32.44 billion, N22.82 billion, and N64.68 billion of the 91-day, 182-day, and 364-day bills respectively. We expect average yield to trend slightly higher, on the back of expected squeeze in system liquidity.
Bond
Sentiment turned bearish in the bond market, with average yield expanding by 8 bps to 15.01%, vs. 14.93% last week. Yields expanded at all ends of the curve, driven by the 29-JUNE-2019 (+4 bps), 13-FEB-2020 (+13 bps), and 18-APRIL-2037(+20 bps) bonds respectively.
We think selloffs will outweigh demand in the coming week, partly supported by expected strain on system liquidity.
Foreign Exchange
The naira appreciated by 0.05% to N360.40 in the I&E FX window, while it remained flat in the parallel market at N363. Total volume traded in the I&E FX window for the week stood at USD682.97 million (vs. USD527.84 million) last week. Meanwhile, the apex bank injected USD195 million into the FX market comprising USD100 million, USD50 million, and USD45 million into the wholesale, SME, and invisibles windows respectively.
With the steady accretion to the foreign reserves (at USD34.12 billion as at Thursday) and the CBN’s continued intervention, our theme for the naira remains stability.
Click here to download full PDF copy of report