Fixed Income: Liquidity to Dictate Market Direction

Fixed Income: Liquidity to Dictate Market Direction

Vetiva Capital’s analysts said system liquidity will dictate the behaviour of the participants in the fixed income market this week.

Average yields in the market has plunged due to low interest rate environment, with monetary policy rate standing at 12.5%.

While government yields have dropped significantly, headline inflation rate has been on ascendancy, rising to 12.40% in May.

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In its breakfast note, Vetiva explained that system liquidity will continue to dictate the behavior of market participants in the space.

Analysts held that there has been a limited improvement to all other drivers of activity in the space.

“As such, we expect the market to start off the week on a mixed note”, analysts stated.

Also, it recalled  Government announced a rise in the price band of premium motor spirit (PMS) to between ₦140.80-₦143.80 per litre in July.

In June, the pump price of PMS was pegged at between ₦121.50 and ₦123.50/liter, and filling stations sell at the maximum price allowed by the PPPRA.Fixed Income: Liquidity to Dictate Market Direction

The coronavirus-led downturn in global economic activity and crude receipts made the government change its stance on PMS subsidies earlier in the year.

This allows market forces to dictate the retail price of petrol in the country going forward.

“The 16% upward revision in the pump price of PMS implies that for the month of July.

“We could see a steeper surge in core prices than in previous months ergo leading to a steeper increase in headline inflation”, analysts said.

Vetiva said this would exert more downward pressure on already weak consumer spending in the midst of a slowdown in economic activity and a currency adjustment.

Also, analysts said the domestic bourse saw another week of sell pressure as investors’ confidence continues to dampen.

Investors sentiments is generally down in the face of global uncertainties and domestic macro-economic challenges.

“In the absence of positive catalysts capable of spurring BUY decisions, we expect the market to extend its downward trend this week”, analysts said.

Vetiva said this despite the attractiveness of a number of fundamentally sound stocks.

Contrary to the persistent declines witnessed last week, the Banking index posted a positive performance on Friday.

Lifted by 0.32% amidst bargain hunting in the two Tier 1 banking heavyweights; ZENITHBANK (+304bps) and GUARANTY (+48bps).


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