The Market Today - 6 July 2018

Normalizing yield curve indicates healthier economy                                                   

The yield curve in Nigeria’s fixed income market has normalized in recent months, taking an upward-sloping shape amid continued recovery. We note that the yield curve became inverted in 2016 with short-term interest rates higher than long-term interest rates, which is often a pointer to a coming recession. Unsurprisingly, the Nigerian economy contracted 1.73% in 2016. As the economy transitioned through 2017, the yield curve became more humped-shape, with interest rate on the 1 -year treasury bill trending above shorter-dated treasury bills as well as government bonds. We consider this trend to be long overdue and a positive sign for the market, and expect greater investor attention at the long end of the space – in contrast to recent years where investors have been overweight short-dated securities.                                                                

DANGCEM lifts Nigerian Stock Exchange                                                             

Bulls bounced back in yesterday’s session notching a 65bps gain after a last-minute spike in heavyweight DANGCEM. Save for the gain in DANGCEM towards the end of the session, mixed trading sentiment in yesterday’s session appeared to have a more positive bias. Nonetheless, we foresee a near-flat session today as investor sentiment on the exchange remains highly mixed.                                                      

Stock Watch: CILEASING has gained 44% over the last fourteen sessions. The stock currently trades at a year-high of ₦2.38 and has returned 85% YTD, making it one of the best performing stocks on the exchange.                                                              

Liquidity inflow spurs buying in T-bills market                                                 

In the absence of an OMO auction and a liquidity boost from an OMO maturity of N239 billion, Interbank Call rate declined to 4.33% (previous: 17.00%). Amidst this, trading in the T-bills space was more bullish, with yields declining 10bps on average. Notably, yields on the 21DTM (-31bps to 11.97%), 105DTM (-66bps to 11.72%) and 168DTM (-35bps to 12.70%) bills declined. Meanwhile, tempo in the bond space was slow, with demand on short-dated bonds tempered by sell pressure on the longer dated tenors. Particularly, whilst yields on the 16.00% FGN JUN 2019 and 7.00% FGN OCT 2019 bonds moderated 7bps and 4bps to 13.08% and 13.26%, yields on the 12.40% FGN MAR 2036 and 16.2499% FGN APR 2037 bonds advanced 17bps and 7bps to settle at 14.43% and 14.33% respectively. We expect buoyant system liquidity from the OMO maturity yesterday to support buying in the fixed income market today barring any sizable OMO mop-up to tighten liquidity.