Talking Points: Bolsonaro set to join Liberal Party, political uncertainty in Peru intensifies
Brazil: There is a dearth of economic data out of Brazil today. As such, markets will likely continue to take direction from fiscal, political and monetary policy developments. BCB President Campos Neto and Economy Minister Guedes both have busy schedules today. As always, comments from either figurehead have the potential to result in some fresh price action for domestic assets.
On the political front, President Jair Bolsonaro is ready to join Brazil’s Liberal Party to run for re-election in 2022, according to CNN. Bolsonaro reportedly said that a deal to join the centrist group, one of the largest in the government coalition, is 99% done and chances it could go wrong are near zero. Recall that President Bolsonaro has been independent since November 2019, when he resigned from the Social Liberal Party. While it is yet to be confirmed that Bolsonaro has joined Liberal Party, it should provide a significant boost to President Bolsonaro’s chances of securing a second term in office next year.
Mexico: On a seasonally adjusted m/m basis, Mexico's gross fixed investment (GFI) activity eased to 1.13% in August, following a strong rebound of 2.48% in July. Nonetheless, the latest figure marks two consecutive increases, to the highest in seven months, backed by improved construction spending, coming in at 3.21% m/m in August versus 2.69% m/m in July. Meanwhile, investment into machinery and equipment fared worse than expected during the month, contracting 1.01% m/m after advancing 4.4% m/m in July. On a y/y basis, GFI registered a growth of 13.9% in August, falling from a rise of 15.7% in July.
There are several underlying reasons for the weak investment activity in Mexico, but news of the nation’s top anti-money laundering official resigning yesterday, following a scandal over his wedding last week in Guatemala, may be seen as a step towards greater accountability against corruption. President Lopez Obrador accepted the resignation of Santiago Nieto, the former head of the Mexican Treasury’s Financial Intelligence Unit. Nieto had been seen as a trusted ally of the president in his campaign to root out corruption. But Nieto’s wedding caused a scandal. Local reports mentioned a private plane carrying influential guests to the wedding was carrying $35k in cash. The optics of a private plane, lavish foreign weddings and bags of money run directly counter to Obrador's style of personal austerity. Long-time progressive politician Pablo Gomez will take over at the Financial Intelligence Unit.
Colombia: Consumer confidence data released yesterday reflected a continued improvement in demand-side sentiment in October, with the Consumer Confidence Index rising by 1.7 points to -1.3. With this, the index remained at pre-pandemic levels following the strong improvement in sentiment between May and July as the economy reopened and nationwide social unrest dissipated. The persistent rise in consumer confidence could point to added demand-side inflation down the line as Colombia's output gap closes, which will keep the central bank cautious despite the softer-than-expected CPI print last week.
Chile: Inflation as mentioned yesterday is the factor that is both globally and locally relevant. The CPI reading for October released yesterday shot past all market expectations printing the highest level in more than 12 years which now places the ball squarely in the Central Bank’s court as to how to respond. The year on year print came in at 6% which is double the BCCH’s target rate, while the month on month print rose by 1.3% which was well above the 0.9% expected at the Bloomberg poll. Drivers for inflation remain the usual suspects. Higher transport costs, higher commodity prices, a weaker currency driving import costs higher, supply chain bottlenecks and strong domestic demand all playing a part.
Peru: A second Peruvian minister quit within the space of a week yesterday, when Defense Minister Walter Edison Ayala Gonzalez tendered his resignation following a scandal over changes in military leadership. Specifically, the Peruvian government appointed a number of high-ranking military officials last week, with reports emerging that the Castillo administration had pressured the military to promote people close to the president. Gonzalez’s resignation reflects a broader theme of political instability within the Castillo administration, which could keep investor cautiousness heightened in the near term.
Forex: Investors increased their bearish positions on the MXN for a second week
Brazil: It was a consolidative start to the week for the BRL, with the local unit little changed at 5.5423, according to Bloomberg data. This affords us the opportunity to look at the latest developments in the speculative market. Net positioning for emerging market currencies during the week ending November 2 worsened as investors geared up for the RBA, Fed and BOE rate decisions. Since the data has been released, a risk-on sentiment followed the positions taken by the three major central banks and resulted in investors scaling back expectations about the pace of monetary policy tightening. Moreover, we remain of the view that the bullish bias in the USD could be reduced in some cases, with risks to the outlook for the USD tilted to the downside. This, together with buoyant commodity prices, should support emerging market FX in the months ahead. Domestically, the outright bearishness of the BRL increased last week, with the net short position now sitting at $0.25bn as investors responded to the central bank’s October rate decision, where policymakers hiked the Selic rate by 150bps. While this was a bold move, the market was looking for more commitment from the BCB to reining in inflation. Fiscal and political uncertainty is also weighing on the BRL and continues to limit the scope for a recovery in the local unit.
Mexico: The USD-MXN ebbed and flowed at the start of the week, closing the session little changed at 20.3424 as investors responded to domestic data releases in the build-up to this week’s rate decision and the rise in base metals. The pair has drifted lower in early trade this morning as the USD comes under selling pressure due to the rolling back of some risk aversion in global markets. The 50DMA at 20.2874 is providing some resistance to the downside for the USD-MXN, a break below could see the pair trend towards the near-term 100DMA support at 20.1485. Much of this impetus will be inspired by the local CPI data in the session ahead.
Investors increased their bearish positions on the currency for a second week to the highest since February 2017, coming in at $1.22bn. Note, the MXN tumbled 2.74% between Oct. 26 and Nov. 2, among the worst performers out of the EM currencies tracked by Bloomberg, due to disappointing economic growth and stagflation concerns. Since then, the MXN has recovered some of its losses as Banxico is primed to hike its overnight repo rate by another 25bps on Thursday. This will reduce some of the bearish positions on the MXN, particularly now that the global conditions are stabilising again.
Colombia: The COP consolidated recent losses with a marginal gain on Monday, finding support in rising oil prices and improving risk appetite at the start of the new week. While these factors will likely continue to drive COP demand in the near term, the market will also have to contest with growing question marks over BanRep's policy outlook after CPI data came out softer than expected on Friday. For now, however, it appears there's a fair amount of bearishness priced into the COP, with the currency trading at levels last seen in August.
Chile: The higher inflation print implying strongly higher rates offset any concerns about a negative trade balance. The CLP also responded favourably to the higher copper price and weaker USD. The USD-CLP finished the session at 802.58 which was marginally off the low of 801.35 for the day. 800 remains the line in the sand for now.
Peru: It was a downbeat start to the week for the PEN with the local currency closing the session in the red against the USD. Specifically, the PEN lost 0.09% against the USD to end the day at 4.0140, according to Bloomberg data. The depreciation in the PEN came despite an improvement in global risk sentiment, which saw almost all emerging market currencies close the session in the green against the USD. Underpinning the underperformance in the PEN in recent months has been a combination of elevated political and fiscal uncertainty against the backdrop of highly accommodative monetary policy with Peru’s real interest rate anchored deep in negative territory.
Fixed Income: Inversion in Brazil’s bond curve deepens with the 10v2 spread falling to -0.57bps
Brazil: The divergence between yields on the long and short end of the Brazilian bond curve persisted on Monday, with the 10v2 spread falling deeper into negative territory. Specifically, the 10v2 spread ended the session 12bps lower at -0.57bps. Mounting inflation expectations, which resulted in a topside revision to economists’ 2022 Selic rate forecast, together with the topside surprise in the FGV inflation print drove up yields on the front end of the curve, while a further improvement in global risk sentiment saw yields on the long-end of the curve trade lower.
Volatility in the Brazilian fixed income market remains abnormally high at the moment as traders continue to react to developments relating to the government’s attempt to pass a bill that will change the spending cap rule and limit how many court ordered payments can be made in a single year.
Recall that the Lower House approved the bill in a first-round vote. The bill is scheduled to face the second round of voting today. That said, pressure is mounting from opposition parties, which could delay the process. This would undoubtedly increase uncertainty about the outlook for fiscal policy in Brazil. Moreover, it must be noted that the Supreme Court requested an explanation from the Lower House President Arthur Lira on the mechanism used to vote on the bill last week. This will further complicate the situation for investors.
Mexico: Mexican bonds consolidated yesterday, moving off their recent peaks as investors scaled back expectations for aggressive interest rate hikes from major central banks in the face of growing inflationary risks. Specifically, the 2yr traded around 6.876%, the 5yr at 7.219%, the 10yr and the 30yr at 7.328% and 7.755%, respectively. Meanwhile, the 10v2 bond yield spread narrowed to negative 45bps and compares with a year-to-date low of negative 210bps in March. This underscores the flattening bias seen in the sovereign bond curve in recent months but risks inverting should the 10yr bond yield continue its trajectory higher. This, of course, will depend on the future performance of the US benchmark 10yr bond yield. For now, the UST yields are trading lower ahead of the US inflation readings this week, with producer prices in focus today and consumer prices scheduled for tomorrow.
Colombia: The Colombian yield curve bull-steepened at the start of the new week, as investors drove down front-end yields in response to the lower-than-expected CPI print on Friday. The 2-year bond shed around 6bps from its yield through the session, while the 4-year to 6-year section of the curve dropped around 8bps-10bps. This all but confirmed the end of the market's recent flattening bias, with significant uncertainty over Colombia's inflation and interest-rate outlook still prevailing. Against this backdrop, investors will tune in closely to hear what Finance Minister Restrepo and BanRep Governor Villar say today.
Chile: It is difficult to buck the trend and receive the front end of the yield curve. Yesterday’s inflation figures certainly cemented the view that the BCCH will be hawkish with an aggressive stance on monetary policy a given. Calls of 5.5% for the benchmark rate in the next 6 months is starting to look like a certainty given that even at that level we will have negative real rates until we reach the 2028 bonds. Trend of bearish flattening to continue.
Peru: In line with the broader bias across emerging market bond markets yesterday, Peru’s bond curve continued to flatten yesterday. Yields on the long-end of the curve traded lower on the back of improved global risk sentiment, while yields on the front-end of the curve traded flat on the session. For context, the 10v2 bond spread ended the session at a fresh year-to-date low of 206bps. With expectations mounting that the central bank will turn more hawkish at its policy meeting later this week, we expect the flattening bias in the bond curve to persist in the weeks ahead.