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United Capital investment views: Will July inflation numbers extend trend?

by Editor

August 18, 2016 | 12:00 am
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This past week saw the equities market extend losses, as low volumes and weak buying momentum relayed downbeat sentiment across sectors, given the lingering uncertainties around the domestic macro environment. Investors also continued to book gains on positions taken ahead of the Q2-16 earnings. At the end of the week, the ASI was down 65bps w/w, settling at 27,246.88 with YTD now at -4.9%.
The money market opened on relatively tight system liquidity of N81.1bn. Nonetheless, a dearth of OMO issuance by the Apex bank up until Thursday, as well as inflow from maturing bills worth N113.0bn boosted liquidity ensuring key market rates trended lower. The CBN however issued OMO worth c.N254.0bn on Friday (Stop rate c.18.0%), once again tightening liquidity similar to the start of the week. Consequently, the Open Buy Back (OBB) and Overnight (O/N) rates remained elevated w/w, closing at 22.5% and 24.8% respectively vs. 19.5% and 20.6% in the previous week accordingly.
We anticipate another bearish run for equities this week, even as positive triggers remain scarce. Furthermore, we think July headline CPI (likely to print higher y/y relative to June) also creates another reason for investor to move capital to safety, further re-enforcing our downbeat outlook for the equities market this week. For the fixed income market, we anticipate secondary market yields for both T-bills and Bonds will shift higher this week, as investors turn attention to upcoming July inflation numbers (scheduled for release on Tuesday) as well as the week’s Bond and T-bill auctions.
Global and Macro-economic market update
Global equities shrug-off weak economic data to post weekly gains
US equities only recorded modest gains las week, as disappointing retail sales data released at the end of the week weighed on optimism around the momentum of economic growth. The data revealed U.S. retail sales stalled in July after three straight monthly gains, having increased by 2.3% on average over the past 12 months. We note that retail sales numbers are an important part of consumer spending, which remains the backbone of the U.S. economy and latest data has again raised further questions as to the strength of recovery of the US economy as well as the timing of the next Fed funds rate adjustment.
Despite a bearish end to the week in the US, European equities still closed higher supported by the strength of oil related gains recorded earlier on in the week from the possibility of crude production freeze at the next OPEC meeting as announced by the Saudi petroleum minister – Khalid Al-Falih. The week also brought economic data to spotlight, with Q2 GDP data showing broader growth may be losing steam in the Euro area. Specifically, the economic bloc recorded Q2-16 GDP growth of 0.3%, which was at a slower pace than the 0.6% in the first quarter, although matched preliminary consensus estimate.
Stocks in most Asian markets also ended the week higher, despite negative sentiment that stemmed a raft of disappointing economic data from China. These showed that July industrial output grow 6% from a year earlier, below consensus estimate of 6.2%, which was in line with June recording. Also, Chinese retail sales rose 10.2% from a year earlier, below expectations for a 10.5% increase and the 10.6% growth posted in June.
On the domestic scene, in the face of dwindling fiscal revenue and palpable difficulty in financing the 2016 budget,  the Finance Minister Mrs. Kemi Adeosun announced last week that a committee has been inaugurated to review, update and when necessary overhaul the domestic tax policy. In a similar vein, she added that the Securities and Exchange Commission (SEC) and Federal Inland Revenue Service (FIRS) will be unveiling new tax incentives to spur further growth of the capital markets.
Domestic Financial Markets Review and Outlook
Equities: Market posts weekly loss, sheds 65bps
This past week saw the equities market extend losses, as low volumes and weak buying momentum relayed downbeat sentiment across sectors, given the lingering uncertainties around the domestic macro environment. Investors also continued to book gains on positions taken ahead of the Q2-16 earnings. At the end of the week, the ASI was down 65bps w/w, settling at 27,246.88 with YTD now at -4.9%.
As one would expect, sector performance was bearish save the Industrial good sectors which posted a w/w gain of 0.7% majorly driven by WAPCO (+4.16%). On the flip side, the Banking, Consumer Goods, Insurance and the Oil and Gas sector posted w/w losses of 0.6%, 1.5%, 0.3% and 0.3% in that order. Example of counters that drove price depreciation in these sectors include CAP (-22.4%), STERLING (-18.8%), DIAMOND (-13.9%),  HONEYWELL (-10.7%), MRS (-9.7%), BERGER PAINTS (-9.7%), 7UP (-9.3%), FMNL (-9.0%), TRANSCORP (-8.9%) and SKYE (-8.6%), PZ (-7.7%), ZENITH (-4.6%) and NB (-1.9%).
When compared to the previous week, market breath, our proxy for overall market sentiment, came in flat at 0.5x as 18 stocks advanced against 35 decliners. Also, activity level saw average volume advance 20.0% while average value declined 17.1% settling at 272.2m units and N2.1bn respectively. The week also saw ZENITH Q2-16 earnings numbers which was disappointing on account of the impact of FX on earnings. We anticipate another bearish run for equities this week, even as positive triggers remain scarce. Furthermore, we think July headline CPI (likely to print higher y/y relative to June) also creates another reason for investor to move capital to safety, further re-enforcing our downbeat outlook for the equities market this week.
Tight system liquidity drives money market rates higher w/w
In the past week, the money market opened on relatively tight system liquidity of N81.1bn. Nonetheless, a dearth of OMO issuance by the Apex bank up until Thursday, as well as inflow from maturing bills worth N113.0bn boosted liquidity ensuring key market rates trended lower. The CBN however issued OMO worth c.N254.0bn on Friday (Stop rate c.18.0%), once again tightening liquidity similar to the start of the week. Consequently, the Open Buy Back (OBB) and Overnight (O/N) rates remained elevated w/w, closing at 22.5% and 24.8% respectively vs. 19.5% and 20.6% in the previous week accordingly. Despite maturities of N64.2bn expected mid-week, the impact is likely to be offset by the T-bill auction of c.N112.4bn slated for mid-week. Overall, we expect money market rates will remain elevated and close this week in double digits, with system liquidity likely to remain tight.
FI Market: Yield trends mixed, as attention shifts to upcoming PMA and Inflation numbers
The FI market relayed more mixed sentiment this week, which is an improvement from the bearish run seen in the last couple of weeks. While trades  were mostly within a tight range in the T-bill and Bond market earlier on in the week, a liquidity boost from maturities worth N113.0bn on Thursday drove some buy interest although that was short lived, as an aggressive mopped up by the Apex bank helped moderate gains. For T-bills, average yield across maturities declined 30bps w/w to 17.1%, mostly driven by the impact of strong buying interest seenon Thursday. Similarly, yields in the Bond market also ended the marginally lower, down by 0.2% on average across the curve w/w to end at 15.1%.  We anticipate secondary market yields for both T-bills and Bonds will shift higher this week, as investors focus on upcoming July inflation numbers (scheduled for release on Tuesday) as well as this week’s Bond auction which will see the issuance of July 2021 (N35.0bn – 45.0bn), March 2026 (N25.0bn – 35.0bn) and March 2036 (N35.0bn – 45.0bn) instruments.
Recent pressure on the Naira takes a breather
At the spot market, the naira closed at N320.3 NGN/USD in the past week, losing N0.20 from the previous week. The local currency however firmed in the parallel market to 395.0 NGN/USD from 400.0 NGN/USD in the previous week, with volatility much reduced from the level seen in recent weeks. Despite recent introduction of a new FX policy regime, the naira continues to see pressure as investors remain curious about the effectiveness of the new FX policy.  At the international market, Oil price closed the week strongly higher, adding US$3.3pb to US$47.3pb mostly due to an announcement from Saudi that the possibility for production freeze amongst OPEC members will revisited at next month’s meeting. In the near term, we expect the exchange rate will remain pressure, until autonomous players return to the market to relieve the CBN of its role of major dollar supplies at the interbank.

by Editor

August 18, 2016 | 12:00 am
  |     |     |   Start Conversation

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