May 4, 2018/Cordros Capital
April in retrospect
- Global equities were mixed in April, reflecting investors’ assessment of geopolitical tensions, trade war fears, economic data, and first quarter earnings.
- Investors remained bearish in the equities market, as the ASI dropped for the third consecutive month by 0.57%.
- The overnight lending rate declined, by 566 bps, to close the month at 2.42%, on the back of surplus liquidity in the market.
- Treasury bill yields contracted, by 350 bps on average, driven by surplus liquidity, declining inflation rate, reduced auction supply, and monetary policy rate cut expectations.
- Trading in the bond market was bullish, amid surplus liquidity, the lower-than-expected fall in March inflation rate, and reduction in both OMO sale frequency and stop rates.
- The naira remained stable, despite significant decline in the apex bank’s intervention in the FX market by 44.02% to USD816.18 million.
In the nearest term
- In the medium to long term, we look for gains on the domestic bourse, on the back of (1) fast-declining yields of fixed income securities, (2) relatively lower prices of value stocks, and (3) positive macroeconomic fundamentals.
- Significant inflows from maturing OMO bills (NGN1.21 trillion), treasury bills (NGN357.73 billion), bond coupon payments (NGN323.49 billion), and budgetary allocations to state and local governments (estimated at NGN350 billion) are likely to support liquidity in May, leading to a contraction in the overnight money market rate.
- The reduced stop rates and supply of OMO bills, further deceleration in inflation rate, as well as the CBN’s relative tolerance for surplus liquidity in the market, are likely to stoke bullish sentiments in the NTB secondary market, spur demand and thus, drive yields southwards.
- 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 12.57% for April) will remain key drivers of yield movement in the near-to-medium term.
- In the absence of any shocks, it is likely rates remain stable, with the naira trading within current band, as the apex bank persists in its interventions in the FX market – supported by healthy external reserves position. Plus, the recently sealed USD2.4 billion Nigeria-China currency-swap agreement further positions the LCY on the path of sustained stability in the medium term.