Stock Outlook

Oil trend to determine stock movement

Nigerian markets which have been in freefall lately may continue their decline this week unless oil prices rebound

Nigerian markets officially entered bear territory as stocks tumbled for a 12th day on Friday, with the benchmark index dropping by 3.68 percent to 33,225.75 points at the close of trading.

The NSE – ASI fall brings it 22 percent lower than the 2014 highs of 43,039.45 points reached on July 9.

A bear market is usually defined as a 20 percent decline from a previous high.

Nigerian Stocks are selling off amid concern falling oil prices will spur capital outflows and prompt the central bank to raise interest rates.

Market mood was largely bearish for most part of last week as the market shed points for all five trading days.

Economic Diary

WEDNESDAY November 12

DMO to auction N65 bn in bonds

Nigeria plans to raise N65 billion ($392 million) worth in sovereign bonds with maturities of three to 20 years at an auction on Nov. 12, the Debt Management Office said on Friday.

The debt office said it will auction N10 billion worth of three-year bonds, N30 billion of 10-year debt notes and N25 billion of 20-year bonds on Wednesday using the Dutch auction system.

All the bonds are re-openings of previously issued debt notes.

“For re-openings of previously issued bonds, successful bidders will pay a price corresponding to the yield-to-maturity bid that clears the volume being auctioned, plus any accrued interest on the instrument,” DMO said in a notice.

THURSDAY November 13

Q2 2014 Foreign Trade estimates

National Bureau of Statistics (NBS)

Bond Outlook

Higher liquidity to spur demand for Nigerian bonds

Increased money market liquidity after the central bank capped the amount of idle cash that banks can deposit with the regulator will drive demand for bonds by local investors, helping to offset a sell-off by foreign funds.

Nigerian assets have taken a beating in recent weeks on the back of a drop in the price of crude oil.

In a bid to force banks to lend to the productive sector and stimulate economic growth, Nigeria’s central bank restricted lenders and discount houses from placing more than N7.5 billion each as deposits with the regulator.

This has raised the level of liquidity in the banking system and buoyed demand for local debt by local pension funds and other assets managers.

Nigeria plans to raise N65 billion ($392 million) through bonds with maturities of three to 20 years at an auction on Nov. 12.

“We are expecting strong demand at the bond auction next week, with subsequent drop in yields across the board,” one dealer said.

Dealers said banks are expected to increase their position in the short-dated instruments, while pension funds are seen buying more of the long-term debt.

Yields fell at the secondary bond market on Thursday after the central bank announced its restriction on volume of deposits banks could place with it.

Yields on the bench-mark bond 2014 however closed at 12.69 percent compared with 12.56 percent last week.

Currency Outlook

Devaluation risk seen as oil price declines

Analysts expect a 10 to 15 percent devaluation of the currency, around half the scale of what the central bank did six years ago, if oil prices continue their plunge.

The naira has touched new intraday lows nearly every trading session on strong dollar demand, partly from foreign investors and partly from domestic importers worried about the risk of currency devaluation.

Nigeria’s central bank has vowed to defend the naira, despite a drop in oil prices which has unnerved foreign investors and sent its stock and bond markets into a tailspin, Deputy Governor Sarah Alade told Reuters on Friday.

Alade said the naira, which has dropped around 4 percent so far, has been trading outside its preferred band for some time, but the bank will continue to defend it. The bank sold dollars as part of that defence on Friday, she said.

Alade said the bank was willing to defend the naira and would be guided by the dictates of the market to do that, adding that the last time the currency was devalued, in 2008; oil prices were lower than they are now, even though the price is declining.

“At the last time when did that (devalued), we didn’t have the kind of oil prices that we have now, so we are still comfortable,” Alade said.

The currency closed at N165.90 following the central bank’s intervention, after weakening to 173.05 naira intraday against the dollar. It closed at 169.90 naira on Thursday.

The central bank on Thursday restricted the sale of dollars to importers of telecoms equipment, power generators and finished products at its foreign exchange auction, funneling demand towards the interbank market.

“The central bank’s actions are aimed at addressing naira pressures (but) … by transferring USD supply from (its auction) to the interbank market … the naira will come under further pressure at the interbank market owing to strong USD demand,” analysts at Ecobank said.

OIL OUTLOOK

WTI oil expected to climb this week

West Texas Intermediate (WTI) may climb this week, a Bloomberg News survey shows. Sixteen of 34 analysts and traders, or 47 percent, estimated futures will increase through Nov. 14, while nine respondents predict a price decline.

WTI and Brent oils advanced after U.S. employment gains exceeded 200,000 for a ninth month and the jobless rate dropped to a six-year low, bolstering the fuel demand outlook.

Crude rose as much as 1.9 percent in New York and 1.2 percent in London. Payrolls increased by 214,000 in October following a 256,000 gain the prior month that was more than initially estimated, Labor Department figures showed Friday.

The unemployment rate fell to 5.8 percent.

“The market is concentrating on the jobs numbers,” Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said. “The unemployment rate dropped to 5.8 percent even as the labor force expanded, which implies that more people will be consuming goods and driving. This is all good for demand.”

WTI for December delivery rose $1.07, or 1.4 percent, to $78.98 a barrel at 12:56 p.m. on Friday on the New York Mercantile Exchange. Prices were down 1.9 percent last week and are 20 percent lower this year. The volume of all futures traded was 3.8 percent above the 100-day average for the time of day.

Brent for December settlement gained 76 cents, or 0.9 percent, to $83.62 a barrel on the London-based ICE Futures Europe exchange. Volume was 15 percent lower than the 100-day average. Prices have fallen 25 percent in 2014.

World Diary

WEDNESDAY NOV 12

Redbook

8:55 A.M ET

Definition

A weekly measure of comparable store sales at chain stores, discounters, and department stores. It is a less consistent indicator of retail sales than the weekly ICSC-Goldman index. It is also calculated differently than other indicators. For instance, figures for the first week of the month are compared with the average for the entire previous month. When two weeks are available, then these are compared with the average for the previous month, and so on through the month. It might be more useful to compare year-over-year figures since these are indeed compared to the comparable week a year ago. This index is correlated with the general merchandise portion of retail sales covering about 10 percent of total retail sales.

Why investors care

Consumer spending accounts for two-thirds of the U.S economy, so if you know what consumers are up to, you’ll have a pretty good handle on where the economy is headed. Needless to say, that’s a big advantage for investors.

The pattern in consumer spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth. This balance was achieved through much of the nineties. For this reason alone, investors in the stock and bond markets enjoyed huge gains during the bull market of the 1990s. Spending at major retail chains did slow down in tandem with the equity market in 2000 and during the 2001 recession. Sales weakened again in 2008 due to the credit crunch and recession.

The Redbook is one of the more timely indicators of consumer spending, since it is reported every week

THURSDAY NOV 13

EIA Petroleum Status Report

11:00 A.M ET

The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the U.S., whether produced there or abroad. The level of inventories helps determine prices for petroleum products.

Why investors care

Petroleum product prices are determined by supply and demand – just like any other good and service. During periods of strong economic growth, one would expect demand to be robust. If inventories are low, this will lead to increases in crude oil prices – or price increases for a wide variety of petroleum products such as gasoline or heating oil. If inventories are high and rising in a period of strong demand, prices may not need to increase at all, or as much. During a period of sluggish economic activity, demand for crude oil may not be as strong. If inventories are rising, this may push down oil prices.

Crude oil is an important commodity in the global market. Prices fluctuate depending on supply and demand conditions in the world. Since oil is such an important part of the economy, it can also help determine the direction of inflation. In the U.S., consumer prices have moderated whenever oil prices have fallen, but have accelerated when oil prices have risen.

The level of US inventories also has implications for Nigeria as oil exports accounts for 95 percent of the nation’s dollar earnings and 70 percent of the Federal Budget.