Morning Note /

Latam Daily: Latam markets attracted notable portfolio inflows last week

  • Talking Points: Peru impeachment hearing, Chile inflation data on tap today

  • Forex: PEN markets still illiquid, suggesting volatility may continue

  • Fixed Income: Portfolio flow data affirms our view that Latam markets are attracting inflows

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Danny Greeff
Daron Hendricks
Kieran Siney
ETM Analytics
8 March 2022
Published byETM Analytics

Talking Points: Peru impeachment hearing, Chile inflation data on tap today

Brazil: While the market is pricing in more rate hike risk amid a surge in international commodity prices, economists polled in the central bank’s weekly Focus survey left their 2022 year-end Selic rate forecast unchanged at 12.25%. That said, economists upwardly revised their 2023 year-end Selic rate forecast to 8.25% from 8.00% previously. This came on the back of topside revisions to both the 2022 and 2023 inflation projections, which now sit at 5.65% and 3.50%, respectively.

The inflation and interest rate revisions were primarily driven by commodity supply concerns relating to Russia’s invasion of Ukraine, which has resulted in a spike in oil and agri prices. The higher rate bets also followed the stronger-than-expected GDP print last week. Economists now expect Brazil’s economy to expand by 0.42% of GDP this year, up from 0.3% in last week’s survey. It is worth mentioning that data published by IHS Markit showed that private sector conditions improved in February.

Mexico: Inflation expectations for Mexico have been increased for the end of 2022 and 2023, according to the Banamex survey of economists published yesterday. Headline inflation is forecasted to rise to 4.88% this year, an upward revision of 0.4 percentage points, due to the likely impact of Russia’s invasion on Ukraine as it bolsters energy and commodity prices for the global economy. Core inflation expectations were also revised higher to 4.8% this year from 4.43% previously. In line with the adjustment in inflation expectations, the economists foresee Banxico continuing with its monetary policy tightening in the upcoming meeting, scheduled for later this month. The median estimate is for a 50bps rate increase, which has gained further traction in the last couple of days. The benchmark interest rate is estimated to end 2022 at 7.50%, according to the survey, up from 7.25% forecasted previously. Lastly, economic growth forecasts for this year were cut to 2% from 2.10%

On Monday, Mexico's anti-trust watchdog reiterated its criticism of President Lopez Obrador’s proposed changes to the electricity sector, arguing it would undermine competition, raise prices, and hinder the sector's development. The Federal Economic Competition Commission (COFECE) has previously advised lawmakers not to pass the bill. Other critics have stated that the bill would delay the transition to cleaner energy since CFE power plants mostly burn fossil fuels and deter potential private investors. The bill is the latest attempt by the president and his allies to undo a historic energy opening passed by Obrador's centrist predecessor and give state-run companies more control over Mexico's energy industry

Colombia: Today, the market will have the February edition of the consumer confidence index to digest, which is expected to show a continued decline in sentiment after the significant weakness into the end of last year. Inflationary pressures continue to hurt household balance sheets, while Colombians are also having to digest the hit from rising interest rates. The index's recent decline is consistent with broader expectations for Colombia's economic expansion to lose some momentum in the coming months, although the recent surge in global commodity prices could provide the economy with some additional impetus until the dust settles in Ukraine.

Chile: The trade numbers surprised to the topside printing a surplus of $121mn, versus a market expectation of a deficit of $362m. Exports fell less than expected, but still influenced strongly by seasonal factors, printing $7.578bn from $8.368bn in January, imports were in line, falling to $7.457bn from $7.569bn in January. Copper exports totalled $3.836bn for the month of February. Today, meanwhile, swill see the release of the last CPI figures. Market expectations are for a moderation of the month on month reading to 0.7%, the year on year reading is expected to rise to 8.2% from 7.7% with higher energy and commodity costs filtering through the economies pricing structure.

Peru: Today, President Castillo will be facing his second impeachment attempt since he took office. The motion will likely reach the debate phase in Congress, as four parties have said that they support the motion, with 53 seats in Congress among them. An impeachment motion will need 26 votes to reach the first stage and 52 to start the debate. From there, 87 lawmakers will need to back the impeachment to see Castillo ousted. Furthermore, Castillo's Cabinet will face a vote of confidence this week as well, with the outcome of this looking a bit uncertain given that there are still some controversial appointees. If Congress votes against the Cabinet, Castillo will need to name replacements, as he longer has the power to dissolve Congress. Five political parties have already said that they will not approve the current Cabinet

Forex: PEN markets still illiquid, suggesting volatility may continue

Brazil: There was a jump in bullish bets in the Brazilian Real last week, rising for the fourth straight week. The current overall speculative standing has now climbed to the most bullish level on record, according to the CFTC data that goes back to the mid-1990s and eclipses the previous high set in 2017. The USD-BRL currency pair price has been in a downward trend since the beginning of the year and has reached the lowest levels since June, just below 5.0550. The BRL’s undervaluation, high carry attractiveness, improving fiscal metrics, and the surge in commodity prices are all contributing to the currency’s run of gains which should keep speculators net bullish.

Mexico: The USD-MXN continued to leg higher on Monday, rallying 1.3% as the bulls looked to breach the 21.400 mark, reporting its biggest daily gain since February 2021. The pair has risen 2.3% since Russia invaded Ukraine, placing it among some of the biggest gainers when looking at other emerging market FX pairs, only bettered by those in Eastern Europe.

CFTC data from Mar. 1 shows MXN bullishness remained until last week. Net-long MXN positions increased for the fifth straight week and reached a two-year high. The MXN’s valuation has supported this, and investors are taking time to assess the situation in Ukraine and look for other emerging market currencies to run to. There are plenty of reasons why the MXN should be weakening in this environment, but speculators remain supportive, so it could rally once the dust settles. It should be noted that CFTC positioning data frequently lag spot moves. For now, the topside bias could see the USD-MXN probe the November 2021 highs of 22.1550 in the near term.

Colombia: The COP regained its footing after Friday's retreat, appreciating 0.35% on Monday as investors priced in Colombia's improving terms of trade and renewed bets for an aggressive monetary tightening trajectory after this weekend's inflation shock. The COP's fortunes have reversed in recent weeks, with the currency up more than 7% year to date after tumbling in Q4 over political concerns ahead of the upcoming elections. As long as Russia and Ukraine remain at war, the COP will continue to benefit alongside its LATAM peers, which are being traded as proxies for commodity exposure while also benefiting from being so far removed from the conflict.

Chile: The local unit finished above the 810 handle yesterday with a stronger USD providing the platform to book profits on CLP longs. For now the pair remains bracketed between the 200DMA support level at 793.1268 and the 100DMA resistance level at 821.41.

Peru: The USD-PEN dipped back below 3.7500 yesterday, with a lack of liquidity in the market, leading to some outsized moves. Peru's terms of trade remains very supportive of the currency, but with the external environment so volatile, we could see these kinds of swings continue over the coming sessions. Today's impeachment debate, meanwhile, also holds the potential to generate some volatility for the local market. A failed vote is what is mostly priced in, so any surprises could see the PEN come under some pressure.

Fixed Income: Portfolio flow data affirms our view that Latam markets are attracting inflows

Brazil: The flattening bias in Brazil’s swap market persisted on Monday as stagflation concerns continued to mount. That said, relative to previous sessions, the degree of flattening was modest after reports surfaced that the government is weighing a temporary fuel subsidy. Specifically, the 10v2 swap spread closed the session 2bps lower at -75bps. With inflation risks skewed firmly to the upside, we see the risk of a more profound inversion in the curve in the sessions ahead.

While global risk appetite has taken a massive blow amid the conflict in Ukraine, investors have continued to inject funds into emerging market assets. Last week marked the 10th straight week of inflows into EM exchange-traded funds listed in the US, with investors pumping in $1.35bn in the week ending March 4, compared to $623.5mn in the previous week. Brazil was the largest recipient of funds in LatAm last week, with investors injecting $101.7mn into Brazilian focussed ETFs. Since the start of the year, inflows into EM ETFs listed in the US have totalled $10.1bn.

Although investors have been net buyers of EM assets in recent weeks, investors have become far pickier over which EM assets they are willing to hold. Latam assets in particular have outperformed as investors rotate out of Russian and EM assets sensitive to the conflict between Russia and Ukraine.

The latest EM ETF data underpins the monthly EM foreign capital flows data published by the Institute of International Finance on Thursday, which revealed that foreign net portfolio inflows to EMs came in at $17.6bn in February, a notable increase from $8.1bn in January. Looking ahead, given the fragile global market conditions, we expect to see more significant differentiation on flows dynamics with commodity-exporting countries that have a low sensitivity to Russia and Ukraine but benefit from higher oil, metals and agri prices expected to outperform...

Mexico: Mexico’s breakeven rates have spiked since the start of March as traders protect themselves against mounting inflationary pressure, with now being a good time to buy. Specifically, the 2yr inflation-linked bond is trading near 4.45%, an attractive yield for a linker, especially after it recently traded near April 2020 low yields. The rise in Udibonos stands out as demand for linkers has been high around the globe as investors became more concerned about inflation due to surging commodity prices. In the short term, the risk of higher inflation has materially risen and is likely to see Udibonos remain favoured.

Colombia: Colombian bonds started the new week off on the defensive, with yields rising across the curve as investors digested this weekend's higher-than-expected CPI print and the recent surge in commodity prices. Accordingly, moves were especially pronounced at the front-end of the curve, with traders pricing in a steeper rate-hike trajectory for the months ahead as inflationary pressures continue to rise. The broader bias for yields remains to the topside, with stagflation risks set to keep investors cautious over the near term.

Chile: Not surprisingly we saw front end underperformance in terms of bonds yesterday as investors grappled with thoughts of stagflation and most certainly a more aggressive BCCH given the developments currently unfolding. In terms of the swaps, further curve inversion noted with the 2v10 swap spread now quoted at -168.50 bpts which is a new all-time low for the market. Can it get even lower? Most certainly, given the current pressures, we cannot rule out levels as extreme as -200 bpts.

Peru: Local bond yields continued to rise yesterday as investors continued to rotate into haven assets amid worries over the impact of the Russia-Ukraine crisis on global growth, as well as inflation. Yield on the 2031 tenor, for instance, is nearing its recent peak of 6.81% with a test of this level looking likely over the coming sessions. Dollar bond yields also climbed on the day, but outperformed their local-currency counterparts once again. Finally, CDS spreads are widening out with the 5-year benchmark at its widest since November. At 96bp, there is still very little risk of a credit event being priced in, however