August 3, 2018/Cordros Report
July in retrospect
- Performance across global markets within our coverage was broadly positive, as investors recovered from the selloffs which ensued in the previous month.
- Sentiments in the domestic equities market were negative in July, as the ASI shed 3.29% to close at 37,017.78 points.
- The overnight lending rate fell, by 450 bps, to close the month at 9.58%, amid buoyant system liquidity throughout the month.
- The seventh month of the year saw treasury bill yields moderate, by 116 bps on average, to 11.82%, as buoyant liquidity drove bullish sentiments.
- FGN bond yields sustained their upward trend amid higher primary auction rates and selloffs from foreign investors.
- The naira remained stable during the month, as it strengthened against the dollar in the parallel by 0.55% to NGN360, while it weakened by 0.30% to NGN362.40 in the I&E FX window.
In the nearest term
- Our outlook for Nigerian equities in the near-to-medium term remains conservative, in the absence of a near term one-off positive catalyst (save for potential better-than-expected Q2 corporate earnings); more so, amidst brewing political concerns. However, stable macroeconomic fundamentals – in addition to the likelihood of external jitters easing – remain supportive of market recovery in the long term.
- We expect the overnight rate to contract in August, following anticipated buoyant liquidity position from inflows from maturing OMO bills (NGN1.90 trillion), bond coupon payments (NGN62.15 billion), as well as the budgetary allocations (we estimate NGN360 billion) to state and local governments.
- Our expectation of a healthy liquidity position in the coming month, as discussed above under money market, suggests likelihood of high demand in the NTB secondary market.
- Our theme for the bond market favours higher yields – albeit not at significant level above current rates – in the medium term, anchored on (1) domestic monetary policy direction, (2) capital flight amid higher yields in safe haven assets, (3) political uncertainty stemming from the upcoming general elections, and (4) government borrowing to fund the 2018 budget. At the next bond auction on 15th Aug 2018, the DMO is expected to offer NGN90 billion – NGN25 billion of the APR-2023 (re-opening), NGN25 billion of the MAR-2025 (re-opening) and NGN40 billion of the FEB 2028 (re-opening) – in bonds to investors.
- Our outlook for the FX market, particularly in the short to medium term, remains stability, as oil revenues – supported by higher oil prices (YtD: +11.04% to USD74.25/barrel) and stable production – continue to shore up the foreign reserves. However, exit from the financial markets by foreign investors, owing to risk off sentiments in emerging market’s risky assets, remains potential headwind to the already declining foreign reserves.