November 26, 2015

Financial market bubbles on new monetary policy

Stock exchange

Nigerian Stock Exchange

All Shares Index rose 0.5% to settle at 27,743.92 points

By Emeka Anaeto, Economy Editor

LAGOS — Investors and money dealers across the various spectrums of Nigerian financial market have reacted sharply to the new monetary policy of the Central Bank of Nigeria, CBN, barely 24 hours of the policy pronouncements.

Yesterday, stock exchange indices reversed nine months downward trend to close positive, bonds trade surged but value of the local currency, Naira, crashed in the parallel market segment.

CBN had, in the last Monetary Policy Committee, MPC, meeting for the year 2015 concluded in Abuja, Tuesday, cut its Monetary Policy Rate, MPR, the nation’s benchmark interest rate to 11 per cent from 13 per cent, its first reduction in the cost of borrowing in more than six years, and also reduced Cash Reserve Ratio, CRR, its credit liquidity control tool, to 20 per cent from 25 per cent, freeing about N740 billion into the banking system.

After reaching the lowest point since February 2015 on Tuesday, the Nigerian stock  market rebounded in the first trading day following the CBN’s new policy. The All Share Index, ASI, rose 0.5 per cent to settle at 27,743.92 points with investors gaining a total of N52.3 billion as market capitalization increased to N9.5 trillion.

Emefiele CBN Governor

Emefiele CBN Governor

This also meant that the stock market, which has the second-biggest weighting after Kuwait on the global MSCI frontier market index, erased seven days of uninterrupted losses. ASI had fallen 20.4 per cent so far this year as at Tuesday.

Positive performance was recorded among all the sector indices except for the Oil & Gas sector which declined 0.4 per cent apparently due to uncertainties in the petroleum supply market with the lingering fuel crises.

“On the back of the reduction in policy rates, investors are reconsidering investment in the equities market to earn higher return,” said Ayodeji Ebo, head of research at Afrinvest Group, a Lagos-based investment house.

In the Treasury Bills market, the bulls held grip as buying momentum swept through the market. Consequently, yields fell by 1.2 per cent from the previous day to close at 2.7 per cent on average.

Similarly, the money market surged with liquidity, pulling back inter-bank rates by 142 basis points on average.

CBN has been injecting cash into the banking system since October this year in a bid to help the economy. Banking system credit balances in CBN stood at N290 billion yesterday keeping overnight inter-bank interest rates as low as 0.5 percent .

Samir Gadio, head of Africa Strategy at Standard Chartered Bank said bond holders could be exposed to future losses if the interest rate easing cycle suddenly ends with inflation currently trading 9.3 percent below the yields.

Commenting on this market development, dealers in Greenwich Trust Limited, a Lagos based investment house, said:“Going into the next trading session, we opine that current sentiments will linger as investors continue to take positions given the lack of alternative short term investments.”

The Federal Government of Nigeria Bond prices inched higher as investors continued to take positions in the market. As a result, yields levels moved down to close at 9.2 per cent on average. However dealers at Greenwich Trust said “at the subsequent trading session, we expect to see a mild decrease in buying momentum due to profit taking”.

In the official segment of the foreign exchange market, the domestic currency remained flat against the US dollar to close at N199/USD1 but in the parallel market segment, the value of the local currency crashed significantly to N243/USD1.0 average.

The currency forwards segment, a derivative market end used to hedge against future exchange rate moves, indicates that the market expects Naira exchange rate to hover around N235.56/ USD1.0 in a couple of months from now.