April 5, 2018/Cordros Report
March in retrospect
- Global risky assets within our universe of coverage remained pressured, with concerns hinged primarily on geopolitical tensions and monetary policy decisions.
- The bears remained dominant in the domestic bourse, despite a positive earnings season, as investors continued to book profit on the notable accumulated gains from 2017 (+42.30%) through January 2018 (+15.95%).
- The overnight lending rate trended northwards, by 358 bps, following substantial outflows via FX and OMO sales.
- Treasury bill yields contracted, by 38 bps on average, as market players reacted to the declining inflation rate and reduced supply at the primary auction.
- Trading in the bond market was mixed, albeit with a bearish tilt, as strain in system liquidity kept a tight lid on demand, amid the lower-than-expected fall in February inflation rate to 14.33%. Consequently, average yield recorded a 1 bp m/m expansion to close at 13.69%.
- The naira remained stable during the month, as the CBN continued its support via persistent interventions, albeit at a slower pace.
In the nearest term
- Notwithstanding the continued decline in the prices of domestic risky assets, our medium-to-long term outlook favours positive return. That is anchored on strengthening optimism about macroeconomic conditions, positive corporate performance, declining yields on debt instruments, and partly, compelling re-entry opportunity created by lower share prices.
- Despite expected significant inflows from maturing OMO bills (valued at NGN1.32 trillion) and budgetary allocations to state and local governments (estimated at NGN400 billion), the overnight money market rate is likely to expand in April, as we expect the apex bank to ramp up the frequency of its open market operations, in order to mop up excess liquidity.
- While the reduced supply of bills at the primary market auctions may likely fuel bullish sentiments in the NTB market, the expected squeeze in liquidity position may likely constrain demand, driving yields northward. Plus, the frequency and supply of OMO bills, in addition to the stop rates at the OMO auctions, could dictate yield direction – particularly for the longer dated bills.
- Our theme on the bond market continues to favour downward trending yields, as continued signals of monetary easing, the federal government’s new debt management strategy, and moderating inflation rate (we estimate 13.52% for March) will remain key drivers of yield movement in the near-to-medium term.
- Our view of the forex market remains positive, as growth in oil revenues continue to shore up the foreign reserves, supporting the CBN’s interventions in the market and aiding stability of the naira.