FX market remain under pressure as treasury bills market records mixed performance
Gains in the shares of MTN Nigeria, Dangote Sugar and Total Energies were largely responsible for All Share of Index closing in the positive, gaining 1.1% at the close of trading last week on the Nigerian Exchange Limited.
Market capitalization as a result of the performance closed at about 22 Trillion in the review period.
A review of trading in the week showed that local stocks closed in the green territory despite profit-taking activities. Gains in MTNN (+7.2%), DANGSUGAR (+6.7%), TOTAL ENERGIES (+2.4%), and DANGCEM (+1.2%) spurred the weekly gain. Based on the preceding, the MTD and YTD return printed -2.1% and +5.2%, respectively. However, activity levels were weaker than the prior week, as trading volumes and value decreased by 49.7% w/w and 42.9% w/w, respectively. Sectoral performance was mixed as the Consumer Goods (+0.6%) index recorded the sole gain while the Industrial Goods (-5.9%), Banking (-1.8%), and Oil and Gas (-0.6%) indices declined. The Insurance index closed flat.
Capital market experts expect market performance to be dominated by the bulls in the week ahead, as positioning by early birds in dividend-paying stocks ahead of 2021FY dividend declarations should outweigh profit-taking activities. Notwithstanding, we reiterate the need for positioning in only fundamentally sound stocks as the weak macro environment remains a significant headwind for corporate earnings.
In the money market, the overnight rate contracted by 600bps w/w to 11.8% last week, as the healthy system liquidity position brought forward from last week and the supporting inflow from OMO maturities (NGN40.00 billion) helped offset funding pressures for the December FGN (NGN98.80 billion) and CBN’s weekly FX auctions.
In the coming week, it is envisaged that the OVN rate would trend northwards and remain elevated as expected debits for CRR and CBN’s weekly auctions are likely to outweigh the sole expected inflow from OMO maturities (NGN45.00 billion).
Meanwhile, trading in the Treasury bills secondary market was mixed, albeit with a bullish tilt, following relatively higher demand for OMO bills in the absence of renewed primary market supply this week.
Accordingly, the average yield across all instruments pared by 2bps to 4.9%. Across the market segments, most of the yield decline was witnessed at the OMO segment (-3bps to 5.5%) while the NTB segment was unchanged at 4.5%. At the bi-weekly NTB PMA, demand remained sizeable, as the NGN5.86 billion worth of bills on offer were oversubscribed by 11.5x. The auction closed with the CBN allotting NGN960.66 million of the 91D, NGN1.10 billion of the 182D and NGN3.80 billion of the 364D, at respective stop rates of 2.49% (previously 2.50%), 3.45% (unchanged) and 5.00% (previously 5.34%).
The Treasury bonds secondary market also traded on a mixed note, although with a bullish bias, as investors remained on the sidelines but continued to cherry-pick instruments across the curve. Consequently, the average yield declined slightly by 2bps to 11.6%. Across the benchmark curve, the average yield contracted at the short (-11bps) end as investors increased their demand for the APR-2023 (-58bps) bond, but expanded at the mid (+1bp) and long (+3bps) segments following sell pressures on the JUL-2030 (+3bps) and APR-2037 (+19bps) bonds, respectively. At the bond auction, the DMO offered instruments worth NGN100.00 billion to investors through re-openings of the 12.5000% FGN JAN 2026 (Bid-to-offer: 10.5x; Stop rate: unchanged at 11.65%) and 16.2499% FGN APR 2037 (Bid-to-offer: 2.1x; Stop rate: 13.10% – previously 12.95%) bonds. Despite the significant level of demand (subscription: NGN132.61 billion; bid-to-offer: 1.3x), the DMO eventually under-allotted instruments worth NGN98.80 billion, resulting in a bid-to-cover ratio of 1.3x.
In the short term, experts expect yields to oscillate around current levels, driven by thin maturities and deliberate efforts by the DMO to reduce domestic borrowing costs for the government. Also, we expect non-bank liquidity to be geared towards relatively higher non-sovereign instruments, thus tempering demand.
Also in the week, Nigeria’s FX reserve remained under pressure, declining by USD181.19 million to USD40.71 billion (15th December 2021) as the CBN continued to support the naira at the official channels. Meanwhile, the naira was flat at NGN415.07/USD at the I&E window (IEW) but appreciated by 0.3% to NGN572.00/USD at the parallel market. At the IEW, total turnover (as of 16th December 2021) declined by 11.7% WTD to USD1.01 billion, with trades consummated within the NGN405.00 – 469.51/USD band. In the Forwards market, the naira was unchanged at the 1-month (NGN 415.96/USD) contract but appreciated at the 3-month (+0.2% to NGN420.55/USD), 6-month (+0.2% to NGN429.51/USD) and 1-year (+0.1% to NGN447.37USD) contracts
In the opinion of experts at Cordros Research, 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.