June 5, 2018/Cordros Report

May in retrospect 

• Trading in global markets within our coverage was mixed, with the US posting gains while mixed sentiments was the common theme in the European and Asian markets. 

• Selloffs persisted in the emerging and frontier markets, as the MSCI EM (-3.75%) and MSCI FM (-9.75%) indices remained subdued by the bears. 

• Selloffs persisted in the Nigerian equities market, as the ASI declined for the fourth consecutive month, by 7.67% to 38,104.54 points. 

• The overnight lending rate rose, by 125 bps, to close the month at 3.67%, on the back of reduced liquidity in the market. 

• Treasury bill yields expanded, by 144 bps on average, on the back of tight system liquidity and slightly higher stop rates at the OMO auctions. 

• FGN Bond yields reversed the downward trend amid tightened liquidity, higher primary auction rates and selloffs from foreign investors. 

• The dollar faced significant demand pressure during the month, causing the NGN to dip to record lows of NGN362.02 and NGN366.00 respectively in the I&E FX window and parallel market – rates last seen in August 2017 and November 2017, respectively. 

In the nearest term 

• The significant moderation of stocks prices since February (14.1%) in the domestic market, plus the still-positive macros, are in our view, suggestive of inherent value in the market. Hence, whilst the present selloffs call for cautious trading in the short term, they also call for investors to focus on fundamentally sound stocks for long term investment. 

• Notwithstanding expected inflows via maturing OMO (NGN1.02 trillion) and treasury (NGN247.54 billion) bills, as well as the budgetary allocations (we estimate NGN330 billion) to state and local governments, we expect the overnight rate to expand in June, with the central bank’s OMO auctions and FX sales keeping a lid on liquidity position. 

• Our expectation of a tighter liquidity position suggests constrained demand in the NTB secondary market. 

• We expect yields in the bond market to inch higher in the short to medium term anchored on (1) weakening signs of monetary easing, (2) capital flight amid higher yields in safe haven assets and political uncertainty stemming from the upcoming elections. At the next bond auction on 27th June 2018, the DMO is expected to offer NGN60 billion – NGN20 billion of the APR-2023 (re-opening), NGN20 billion of the MAR-2025 (re-opening) and NGN20 billion of the FEB 2028 (re-opening) – in bonds to investors. 

• Our theme for the FX market remains stability, as stable oil prices and production will continue to support increased oil revenues and aid the apex bank’s conventional interventions in the FX market. 

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