November 6, 2018/Cordros Report
October in retrospect
- Sentiments were broadly negative across most global markets within our coverage, with all the major benchmark indices posting losses.
- Mixed trading was the theme for domestic equities in October, as earnings releases played a key role in swinging investor sentiments.
- The overnight lending rate eased 225 bps m/m to close at 4.92%, amidst robust system liquidity at the foot of the month.
- Bearish sentiments were sustained in the treasury bills market, as renewed hawkish signaling by the CBN drove yields higher for the third consecutive month, on average.
- The bearish trend persisted in the FGN Bond market, on the prospect of higher bond supply and increase in OMO rates.
- Stability was the theme for the FX market during the month, as the naira continued to trade range-bound.
In the nearest term
- Our outlook for equities in the medium term remain conservative, as jitters surrounding the upcoming elections are likely to intensify as the date draws closer, and the absence of a positive catalyst fails to give respite to the expected sell pressure. However, recovery is likely in the long term, amidst stable macroeconomic fundamentals.
- We expect current buoyant liquidity to persist on the back of inflows from maturing OMO bills (NGN1.61 trillion), bond coupon payments (NGN23.49 billion), and the budgetary allocations (c. NGN400 billion) to state and local governments. In effect, a contraction in the overnight rate is likely.
- 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.
- We reiterate our expectation for modestly higher yields in the bond market, in the medium term, anchored on (1) domestic monetary policy direction, (2) sustained uptick in inflation rate, (3) capital flight amid higher yields in safe haven assets, and (4) political uncertainty stemming from the upcoming general elections. At the next bond auction on 21st Nov 2018, the DMO is expected to offer NGN115 billion – NGN35 billion of the APR-2023 (reopening), NGN35 billion of the MAR-2025 (re-opening) and NGN45 billion of the FEB 2028 (re-opening) – in bonds to investors.
- Despite continued decline in the foreign reserves, our outlook for the FX market remains stability, as oil prices and production remain fairly supportive, aiding inflow of oil revenues, which provide the apex bank sufficient legroom to sustain its interventions in the currency space.