Talking Points: Politics driving the markets in the Andes
Brazil: On the fiscal front, Economy Ministry Special Secretary for the Treasury and Budget Esteves Colnago said the government may cut expenses and tax benefits to pay for a permanent social program, called Auxilio Brasil. Colnago said that the Ministry knows that it will face pressure to make the BRL 400 social aid payment. Colnago added that the government still has BRL 6bn within the spending cap in the current fiscal year. Treasury Secretary Paulo Valle meanwhile stated that the court-ordered payments bill respects the spending cap and, if approved, is expected to anchor the inflation forecast.
While fiscal risks remain significant, there was some further reprieve for fiscal hawks on Monday after the government announced that it had lowered its fiscal deficit forecast to 1.1% of GDP for 2021 from 1.6% previously. Government debt meanwhile is seen at 81.9% of GDP for this year and at 81.7% of GDP in 2022 if Congress approves the precatorios bill.
Mexico: Based on an up-to-date economic forecast by Citibanamex, inflation in Mexico is anticipated to reach 7% by the end of the year, a 20-year high that more than doubles the central bank’s target rate. This is an upward revision of 0.3 percentage points from the previous bi-weekly estimate as inflation continues to rise at a faster-than-forecasted rate, bolstering the argument for policymakers to increase borrowing costs even amid sluggish economic growth. Central bank board member Jonathan Heath said last week inflation is becoming a severe problem and that it would end the year between 7.1% and 7.3%, higher than the central bank’s 6.8% forecast. The analysts also raised their forecast for core inflation to 5.5% from 5.3%. Citibanamex economists foresee the central bank raising rates in December by a quarter-point to 5.25%, keeping the same pace of monetary policy tightening as its four prior decisions. In Latin America, countries including Chile, Colombia and Brazil have accelerated the pace of their rate increases amid a global inflation surge due to supply-chain disruptions and costlier energy and food supplies. As far as economic growth goes, the panel downwardly revised this year’s growth projection by 0.10 percentage points to 5.90% while maintaining 2022’s growth forecast steady at 2.90%.
Colombia: The big news out today is that UK-educated former FinMin Oscar Ivan Zuluaga has won the nomination for Colombia's ruling Centro Democrático party for next year's presidential election. Zuluaga's ideological bias is similar to incumbent President Ivan Duque, leaning more towards conservative, pro-business economic policies and fierce criticism of Colombia's peace accord with leftist rebels. While the likely outcome of the election is difficult to call at this time, early polling suggest Zuluaga will face an uphill battle against left-wing senator Gustavo Petro, who is calling for a more equitable society and an end to oil exploration.
Chile: With all the votes counted the right claimed victory confounding expectations by taking 28% of the vote. José Antonio Kast, the conservative candidate secured a surprise win against his left leaning progressive former student leader Gabriel Boric beating him by 2%. This sets the stage for the run-off which will take place on the 19th December 2021.
The Guardian has some interesting observations reporting the following - “It looks like some of the things Boric stands for don’t respond to people’s urgent needs,” says Valentina Rosas, a political scientist at Chile’s Pontifical Catholic University. “They have no bearing on the price of bread or stopping people breaking into your home.” Abstention is a persistent feature of Chilean elections – where rarely more than half of the electorate turns out. Despite the seemingly high stakes of yesterday’s election, participation hit just 47%. An important factor in next month’s runoff will be the votes of those who backed the libertarian businessman Franco Parisi in the first round. Parisi did not set foot in Chile during the campaigns owing to a child support dispute with his ex-wife, but defied expectations to take 13% of the vote. The destination of Parisi’s share of the vote, which largely comprised young, lower-middle-class men from outside the capital according to one early study, is likely to prove pivotal in the second round”.
Peru: Trying to calm things down after his Prime Minister sparked major concerns within the mining community, President Castillo said yesterday that his government will not be making any unilateral decision on mining and will seek dialogues with business groups and local communities to reach any consensus. His comments suggest that there will be no imminent closures of mines, but that firms will need to make concessions regarding environmental concerns and the rights of local communities. Talks have reportedly begun between the government and Hothschild, with the most likely outcome being that the mines will be given extensions, but tax rates or other concessions will be agreed on. Castillo has often said he wants to increase taxes from mines, something he can't do if they are forced to close.
Meanwhile, opposition party Avanza Pais have announced that they will back the request for the impeachment debate. The party has seven seats in Congress, which adds to the combined 34 seats from the Renovacion Popular Party and Fuerza Popular. This suggests that the proposal should reach the 26 votes needed to be presented in Congress. Following that, 52 lawmakers would then need to vote to admit the impeachment motion. By the end of it all, 87 would need to vote against Castillo. So far, it seems as if the other parties do not support impeachment, suggesting such an outcome is unlikely at the moment.
Forex: Rising dollar applying pressure, but CLP surges on Kast results
Brazil: The BRL snapped a multi-day losing streak on Monday. Notwithstanding the significant rise in the dollar yesterday on the back expectations for a more hawkish Fed and the broad-based losses in emerging market currencies, the BRL ended the session 0.25% firmer at 5.5964, making it the third best-performing currency on the day. Supporting the BRL yesterday was the upward revision to the 2022 interest forecast, the currency's significant undervaluation, the BRL’s attractive carry trade and the weekly FX auctions of $700mn every Monday and Wednesday. Looking at the session ahead, the USD has lost some of its topside momentum today, suggesting that the BRL could open the session on the front foot and extend its recovery against the USD.
Mexico: Yesterday proved to be another eventful day for the USD-MXN. The pair advanced for the third straight session, up 1.4% during this period to print a new high this month at 21.0251, and more importantly, a nine-month high. Though the greenback’s rally has stumbled ahead of the US Open, the pair has remained on the front foot and risks challenging its YTD high of 21.6357 recorded in March.
Investors trimmed their short MXN position for the second straight week ended November 16, as economic data released suggested better growth. However, bets that the MXN will continue to weaken have grown in recent weeks amid mounting concerns that the US Federal Reserve will hike interest rates in efforts to combat inflation. The MXN remains sensitive to inflation data as it would support further monetary tightening against the backdrop of still soft growth fundamentals that have also led to an exodus of foreign investment from the local bond market. Therefore, we don’t foresee a major recovery in the MXN in the short term.
Colombia: The COP was one of only a handful of EM currencies able to gain against a strong USD yesterday, as it appreciated 0.55% on the back of rising oil prices through the session. With this move, the USD-COP retreated back below the 3900 mark, having been unable to sustain breaks above 3950 at the end of last week. Whether the pair can build on this with a retracement of its recent uptrend remains to be seen, and depends greatly on oil-market dynamics and broader USD moves in the near term.
Chile: The CLP certainly took yesterday’s news that Kast had won the first leg as a massively positive outcome. The peso rallied by some 3.5% yesterday making it the best performing emerging market currency for the Monday trading session. The pair closed at 811.95 after opening at 802.40 which was massively lower than Friday’s closing level of 829.90.
Peru: The USD-PEN gapped higher at the open yesterday amid a stronger USD and as investors caught up with the local political developments. The pare erased some of its gains as the central bank sold $5mn in the market but still closed the session bid and above the 4.000 support level. Given the current market conditions, it is unlikely that we will see a break below 4.000 in the week ahead, especially as investors may take risk off the table heading into the Thanksgiving long weekend in the US.
Fixed Income: Chile bonds also outperforming during global sell-off
Brazil: In line with the sell-off in the global bond market, Brazilian bond yields rose sharply on Monday. Adding to the headwinds for Brazilian bonds yesterday was the central bank’s Focus survey, where economists raised their forecasts for inflation and the benchmark interest rate in 2022 while at the same time cutting growth expectations. The upward revisions, in addition to bets that the Fed will bring forward its eventual rate hiking cycle, drove yields on the front end of the curve higher, with the shorter-dated 2yr yield climbing 12.38%. Movements on the long-end meanwhile were more modest, with the benchmark 10yr yield closing the session 5bps higher at 11.81%.
The renomination of Powell as the Chair of the Fed has increased bets that the Fed will speed up the pace of tapering and move forward the timing of its first rate hike. Recall that the Fed last week began winding up its bond purchasing program by decreasing the quantity of assets being bought. Looking ahead, while we do see a strong possibility that the Fed will conclude its asset purchase tapering by mid-2022, we remain of the view that the Fed is unlikely to hike rates until the latter part of 2022, given that there are still a number of downside risks to the economic outlook.
Mexico: It was a bearish start to the week for Mexican bonds, which came under pressure from rising UST yields, a weakening MXN and inflation woes. All of which saw the local yield curve shift upwards to the extent of 8bps to 12bps on the belly to the 15yr tenor. Pulling back the lens slightly to the start of the month, the curve has undergone a bear steepening bias, with the long-end slightly underperforming the short-end of the curve. This contrasts with the beginning of the quarter, where there was a tendency towards a bear flattener. This is likely a result of investors and the central bank expecting higher inflation for longer, given that the most recent CPI readings have yet to show any signs of abating.
Colombia: Colombian bond yields continued to rise at the start of the new week, with bonds generally adding between 5bps and 15bps to their yields yesterday. The focus was, and remains, on external developments, with expectations of more aggressive Fed monetary tightening and European lockdowns driving concerns over global growth prospects. These developments will likely keep risk appetite subdued in the near term, with Colombian bonds set to remain under pressure for a while longer.
Chile: Receivers came out in full force yesterday following the news that the Kast had the upper hand even though he didn’t win outright. Thoughts of a more investor friendly and fiscally tight leader sent the bond market rallying hard. The 2023 finished the session at 5.43% after closing last week at 5.72% while the longer dated 2030 bond finished at 5.54% after closing the week on Friday at 6.06%. We did read the market incorrectly and expected a more subdued reaction to the Kast win but it would seem that the market was stretched to the topside in terms of yield and potentially needed to correct. The question now is whether or not these levels are maintained or do we drift higher again.
Peru: Peruvian bonds weakened yesterday with yields rising across the curve. This isn't surprising given the trading conditions yesterday with US yields rising and the dollar surging. Local political uncertainty also played a role here, although Castillo's comments will have calmed some of those nerves now. Ahead of the local open, UST yields continue to rise as the market prices in a faster pace of tapering and sooner rate hikes. This will keep local bonds under pressure, especially if the dollar remains bid given how linked the Peruvian economy is to the greenback