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The Market Today - 26 July 2018

CBN plans more private sector credit despite hawkish tune                                                       

Having corroborated the argument that a reduction in policy rate would not necessarily translate to increased credit to private sector, owing to structural impediments, the MPC highlighted key steps the CBN should take in a bid to stimulate credit expansion to the economy. Particularly, the Committee hinted that the CBN would provide direct credit intermediation by purchasing commercial papers issued by large corporations – on a need basis – and also implemented a differentiated dynamic cash reserves requirement (CRR) regime for banks that provide cheap long term debt to the real sector. Whilst resolving the underlying structural rigidities remains the best long-term solution for a stronger monetary transmission mechanism, we expect the highlighted strategies could potentially stimulate modest credit expansion to a few key sectors.                                                                  

Bourse extends losses as sell-offs continue in key sectors                                                          

With all key sectors save for the Banking sector recording a loss, the ASI stumbled to another red close (ASI: -30bps), as traders sold off on blue chips. With market sentiment remaining bearish, we foresee another negative session today as investors continue to sell.                                                         

Stock Watch: ETERNA has lost 16% in the last  twelve sessions to settle at N5.90. The stock, which lost 167bps yesterday, has returned 45.32% ytd – outperforming the sector index (-8.48% ytd).                                                                

Bears hold sway despite healthy system liquidity                                                           

"The DMO conducted a Bond PMA yesterday, offering N90 billion and selling N67 billion on the 5-yr, 7-yr and 10-yr bonds at respective stop rates of 13.69%, 14.00% and 14.2999% (above secondary market levels). Also, the interbank call rate declined 10bps to 7.07% on the back of relatively buoyant liquidity in the system. Meanwhile, sentiment in the T-bills space turned negative despite healthy system liquidity (₦232 billion), with yields rising 9bps on average. Notably, yields on the 8DTM (+71bps to 11.65%) and 232DTM (+49bps to 13.38%) bills advanced. Trading in the bond market was similarly tepid, albeit with a negative tilt. Overall, yields rose 4bps on average across benchmark bonds, with particular pressure coming from the 16.00% FGN JUN 2019 (up 20bps to 12.86%), 16.39% FGN JAN 2022 (up 9bps to 13.62%) and 12.40% FGN MAR 2036 (up 10bps to 14.27%). Whilst today’s inflow (₦404 billion via T-bill maturity) is supportive of improved demand in the T-bbills market, we expect a mop up action by the CBN to dampen sentiment. Meanwhile, we foresee another downbeat session in the Bonds space as rates adjust towards primary market levels.