The bullish momentum in the local bourse switched into a higher gear as the All-Share Index rose above the 45,000 psychological mark to close at 45,957.35 points – the highest level since 19th January 2018 (45,092.83 points).
Pertinently, foreign investors’ demand for AIRTELAFRI (+10.0%) and bargain hunting in SEPLAT (+9.4%), DANGCEM (+5.5%), BUACEMENT (+4.2%), NB (+4.4%), DANGSUGAR (+4.4%) and GTCO (+2.4%) drove the benchmark index 3.4% higher.
Consequently, the YTD gains surged to +7.6%. Activity levels were stronger than in the prior week, as trading volumes and value rose by 18.0% w/w and 45.7% w/w, respectively. Save for the Insurance (-0.3%) index that declined, the Oil and Gas (+5.2%), Industrial Goods (+4.4%), Banking (+1.7%), and Consumer Goods (+1.0%) indices closed positive.
In the week ahead, stock pundits believe investors will be focused on the outcome of the MPC meeting to gain further clarity on the movement of yields in the FI market. Consequently, we expect a “choppy theme” as cautious trading will likely dominate the market. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the weak macro story remains a significant headwind for corporate earnings.
In the money market, overnight rate expanded by 50bps w/w to 15.3% this week, in light of debits for CRR, the January bond auction settlement (N170.64 billion), and CBN’s weekly OMO (NGN20.00 billion) and FX auctions offsetting the inflows from OMO maturities (N128.18 billion) and FGN bond coupon payments (N105.17 billion).
This week, experts expect improved system liquidity and, by extension, moderation in the OVN rate, as inflows totaling N764.92 billion arising from the maturing JAN-2022 bond (N605.31 billion), FGN bond coupon payments (N49.61 billion) and OMO maturities (NGN110.00 billion) outweigh funding requirements.
The Treasury bills secondary market traded on a bearish note, (1) mirroring the higher stop rates at the recent NTB auction and (2) as market participants exited positions to provide some respite to their funding obligations. Accordingly, the average yield across all instruments expanded by 6bps to 4.8%. Across the market segments, most of the yield increase was witnessed at the OMO segment (+19bps to 5.8%), while the NTB segment increased slightly by 2bps to 4.4%. The CBN held an OMO auction this week, allotting NGN20.00 billion worth of instruments. The auction was oversubscribed across the three tenors, with stop rates remaining unchanged from the previous auction.
“This week, we expect the outcome of the NTB auction to shape the direction of yields in the T-bills market. The CBN is set to roll over NGN129.33 billion worth of maturities to market participants at the auction,” a report by Cordros Securities noted.
Trading in the Treasury bonds secondary market was bullish last week, following the lower marginal rates at Wednesday’s auction, prompting investors to sustain the demand witnessed earlier in the week. Consequently, the average yield declined by 10bps to 11.4%. Across the benchmark curve, the buying activities were widespread as the average yield contracted at the short (-46bps), mid (-5bps), and long (-5bps) segments following investors’ higher demand for the JAN-2022 (-238bps), FEB-2028 (-11bps) and MAR-2036 (-14bps) bonds, respectively. At the bond auction, the DMO offered instruments worth N150.00 billion to investors through a re-opening of the 12.50% FGN JAN 2026 (Bid-to-offer: 1.5x; Stop rate: 11.50%, previously 11.65%) and a new issue of the 13.00% FGN JAN 2042 (Bid-to-offer: 2.9x; Stop rate: 13.00%) bonds. As expected, demand was higher (subscription: N325.24 billion; bid-to-offer: 2.2x) than December’s auction (Subscription: N132.61 billion; Bid-to-offer: 1.3x). The DMO eventually over-allotted instruments worth N170.64 billion, resulting in a bid-to-cover ratio of 1.9x.
This week, it is envisaged that bond yields would settle lower as investors re-invest ample liquidity expected from the maturing JAN-2022 bond and coupon payments back into the market. Nonetheless, in the short term, we expect frontloading of significant borrowings for the year to result in an uptick in bond yields as investors demand higher yields in the face of elevated supply.
Nigeria’s FX reserve declined by USD102.94 million to USD40.38 billion (19th January 2022) on the back of CBN’s continued support of the naira at the official channels. Meanwhile, the naira appreciated by 0.1% w/w to NGN416.00/USD at the I&E window (IEW) but depreciated by 0.3% to N73.00/USD at the parallel market. In the Forwards market, the naira was unchanged at the 1-month (N 417.07/USD) and 3-month (N422.89/USD) contracts but appreciated at the 6-month (+0.1% to N431.80/USD) and 1-year (+0.6% to N444.24/USD) contracts.
A statement from Cordros said that “In our opinion, the CBN has enough supply to support the FX market over the short term, given inflows from the recently issued Eurobond and the IMF’s SDR. However, foreign inflows are paramount for sustained FX liquidity over the medium term, in line with our expectation that accretion to the reserves will be weak given that crude oil production levels remain quite low. Thus, FPIs which have historically supported supply levels in the IEW (53.8% of FX inflows to the IEW in 2019FY) will be needed to sustain FX liquidity levels. Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would be significant in attracting foreign inflows back to the market.”
