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The Market Today - 04 January 2019

China takes first steps towards yuan oil payments

China, the world’s largest crude importer has begun taking steps to ensure pricing of its crude imports in Yuan, a key development in the country’s efforts to establish the currency internationally. Crude, which is the world’s largest traded commodity, is typically priced in U.S. Dollars and even a small shift in global oil trade into the Yuan could have a large impact. Reuters reports that the first phase of the plan involves starting with purchases from Russia and Angola, who are two of the largest suppliers to China. We note that the country is in a stronger position to negotiate this shift after it overtook U.S. as the largest importer of crude in 2017, accounting for 18.6% of imports. China’s plan to use yuan to pay for oil comes amid a gradual strengthening of the currency in recent times. However, liquidity of the currency may hamper plans to shift commodity purchases away from the dollar. Whilst the introduction of an alternative currency for commodity exchange would be welcome, we do not expect to see a wider adoption of the Yuan until further steps are taken to address liquidity challenges.

Bears persist as market continues downturn                                            

Driven by losses in three of the four key sectors, the ASI recorded a 96bps loss yesterday, even as market activity continues to slow down (₦1.1 billion traded). Market breadth turned negative with 13 advances and 23 declines. With positive sentiment due to end-of-year activities over, we anticipate a resumption of investor apathy and foresee this driving the market in the coming weeks. Therefore, we expect another relatively quiet session on the NSE today with continued negative trading.                     

Stock Watch: JBERGER has posted positive performances this year, gaining 16% in two sessions to close at ₦23.25. The stock has outperformed ASI so far, the latter has lost 210bps in the first two trading sessions of the year.                                       

Sell-offs in the treasury bills market, amidst special OMO                                               

The CBN conducted the first OMO auction of 2019 yesterday, offering c.₦350 billion and selling c.220 billion (c.₦425 billion matured) on the 91DTM, 182DTM and 364DTM bills at stop rates of 11.90%, 13.50% and 15.00% respectively (effective yields: 12.26%, 14.47% and 17.64%). A special OMO auction was also conducted, selling c.₦184 billion on the 364DTM bill. Following the net maturity, the Interbank Call rate declined 225bps to settle at 14.08%. With the CBN continuing to keep a tight leash on liquidity and investor sentiment persisting weak, we foresee another tepid to negative session across the FI space today.