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Nigeria financial market – Oil market balance raises hope for exchange rate stability

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The external reserve balance sustained a downtrend last week, declining 35bps w/w to settle at $36. 0 billion. Furthermore, following the agreement by OPEC+ countries to relax production cuts to 7.7mb/d effective from August, oil continues to trade above $40.0/bbl., reaching a 4-month high of $44.1/bbl. as of 23rd July as economic activities continued to improve despite the spike in COVID-19 cases. Also, the CBN continued its weekly intervention into the Secondary Market Intervention Sales (SMIS) Wholesale Window, offering a total of $100.0m for the week. Meanwhile, the local currency traded flat at ₦381.00 against the dollar in the official window while it depreciated by ₦2.00 to close the week at ₦472.00/$1.00 at the parallel market. At the Investors’ & Exporters’ (I&E) Window, the NAFEX rate weakened by ₦1.00 w/w to settle at ₦389.50/$1.00. Also, activity level weakened 33.2%w/w in the I&E Window to close at $130.3 million.

At the FMDQ Securities Exchange (SE) FX Futures Contract Market, the total value of open contracts appreciated 22bps ($30.3m) w/w to $13.6 billion. The SEP 2020 instrument (contract price: ₦396.48) recorded the most buying interest with additional $17.1m for the week, taking its total value to $1.2 billion. Conversely, the JAN 2021 instrument (contract price: ₦407.30) saw the least subscription of $1.7m, bringing its total value to c.$1.2 billion. In the coming week, the Naira is expected to trade at a similar band on the back of sustained CBN intervention sale to the FX segments

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Money Market: Bullish Run Continues in the T-Bills Market 

At the start of the week, system liquidity stood at ₦86.9 billion while OBB and OVN rates opened at 9.2% and 10.7% respectively, lower than last week’s close of 20.3% and 21.8%. On Tuesday, OBB and OVN rates fell to 2.1% and 2.8% respectively as system liquidity rose to ₦480.6 billion following OMO repayment of ₦25.4 billion. By the close of the week, OBB and OVN rates printed at 1.6% and 2.2% respectively as system liquidity settled at ₦963.1 billion.

In the T-bills secondary segment, performance was bullish as average yield across tenors dipped 7bps w/w to 2.0% from 2.1%. The 91-day instrument saw the most buying interest with rates lowering 50bps. Similarly, rates on the 182- day declined 28bps while the 364-day instrument closed flat. This week, maturities worth ₦20.1 billion and ₦266.0 million are expected from the OMO and T-bills markets respectively as well as bond coupon payment worth ₦49.6 billion to hit the system. As such, the CBN is expected to keep rates in check and mop-up excess liquidity via auctions.

Bonds Market: Bullish Trend Continue 

The domestic bonds market last week experienced continuous buying interest with average yield falling in 4 of 5 trading days to close at 7.2% relative to previous week’s close of 7.8%; average yield fell 60bps w/w. Across the term structure, the market sustained a bullish streak at the long and medium end of the curve with average yield falling 93bps and 74bps w/w respectively. However, average yield on the short term maturities rose 2bp w/w, suggesting investors need for higher return.

At the primary market, heavy demand for bonds enabled the DMO to significantly cut stop rates by an average of 190bps across the four re-opening instruments auctioned during the week. JANUARY 2026, MARCH 2035, JULY 2045 and MARCH 2050 were offered with respective size of ₦25.0 billion, ₦42.0 billion, ₦75.0 billion and ₦35.0 billion. All instruments were 2.9x, 1.7x, 3.7x and 5.9x oversubscribed with MARCH 2035, JULY 2045 and MARCH 2050 over allotted. The respective marginal rates of the instruments were 6.0%, 9.5%, 9.8% and 10.0%, down 200bps, 150bps and 220bps for JANUARY 2026, MARCH 2035 and MARCH 2050 relative to closing rates at the previous month’s auction. All the instruments were issued at premium to par value and on the aggregate, a total of ₦130.0 billion was offered with subscription and allotment of ₦470.1 billion and ₦177.0 billion respectively.

The bullish momentum at the Sub-Saharan Eurobonds market continued last week as yields moderated on all of the 31 sovereign and 18 African Corporate Eurobond instruments we track, save for BAYPORT MANAGEMENT 2022 and ECOBANK TRANSNATIONAL 2024 (yield rose 3bps and 6bps respectively w/w). At the SSA space, the Zambian instruments enjoyed the highest pricing with average yield moderating by 0.6% w/w; though, Kenyan and Nigerian baskets followed with 0.3% and 0.2% average yield moderation respectively. Average yield on the SSA Eurobond market moderated 0.2% w/w. Similarly, the African corporate Eurobonds experienced significant buy interest with the average yield tapering 44bps w/w. The SIBANYE GOLD 2023 and ESKOM HOLDINGS 2021 recorded the most buying interest with average yield falling 350bps and 229bps respectively. This week, yields are expected to fall at the domestic bond market while at the Eurobonds segment, we expect investors will continue to identify specific opportunities that present optimal returns amid uncertainty of market conditions.

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