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The Market Today - 5 July 2018

CBN encourages Yuan transactions post currency swap                                                

Following the Central Bank of Nigeria’s (CBN) $2.5 billion currency swap transaction with the People’s Bank of China (PBOC) in May 2018, CBN officials held a town hall meeting on Wednesday in Lagos to introduce the benefits of its recent swap ahead of plans to start auctioning the Chinese currency later in July. The apex bank is attempting to sway local businesses importing goods from China to use the yuan instead of the U.S. dollar in an effort to ease trade flows and pressure on the naira-dollar exchange rate. In our view, given the size of the swap compared to Nigeria’s annual imports from China (c.40% of total import bill), the primary benefits would come in terms of reducing the exchange rate risk by permitting direct naira-yuan conversion, eliminating double transaction charges, and easing of transaction processes.                                                         

Losses taper at midweek                                                            

The Nigerian equity market endured another bearish session – shedding 28bps – albeit with the banking sector notching a positive close. Gains in large cap banking stocks tempered losses yesterday. But with underlying negative sentiment still persisting (evidenced by low market turnover), we foresee another negative performance on the exchange.                                                          

Stock Watch: FO has shed 29% over the last thirteen sessions. The stock currently trades at a year-low of ₦26.10 (Target price: ₦77.75) and has declined 40% YTD, compared to a 3% decline in the Oil & Gas sector YTD.                                                

Undersale at PMA amid buying in secondary market                                                     

The CBN conducted a primary market auction yesterday, offering ₦171 billion and selling ₦102 billion across the 91DTM, 182DTM and 364DTM bills at respective stop rates of 10.00%, 10.50% and 11.51% (Previous: 10.20%, 10.50% and 11.50%). Amidst this, Interbank Call rate declined 233bps to 17.00%. Sentiment in the T-bills space was positive, with yields declining 7bps on average. Notably, yields on the 15DTM (-45bps to 12.55%), 85DTM (-33bps to 12.22%) and 197DTM (-35bps to 12.83%) bills declined. Trading in the bond space was mixed, with buying on short-dated bonds matched by sell pressure at the long end. With rates at the PMA coming in slightly below secondary market levels and liquidity pressure easing, we foresee a slight buy bias in the T-bills space, whilst the mid-long end of the curve remain quiet.