Morning Note /

Latam Daily: Politics in focus with Chile still to name new Cabinet

  • Talking Points: Colombian economic data and Fitch conference in focus

  • Forex: Liquidity to normalize today as US markets return

  • Fixed Income: Rising UST yields a threat to Latam debt

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Daron Hendricks
Danny Greeff
Kieran Siney
ETM Analytics
18 January 2022
Published byETM Analytics

Talking Points: Colombian economic data and Fitch conference in focus

Brazil: Data published by the BCB on Monday revealed that economic activity rebounded in November, snapping a four-month streak of contraction. Specifically, economic activity rose by 0.69% m/m in November, reflecting the solid performance of the retail and services sectors, which more than offset a decline in the industrial sector. Relative to year-ago levels, economic activity in Brazil was up 0.43% in November. On balance, the BCB’s November economic activity print would’ve helped quell concerns over the near term growth outlook. That said, there is still a risk that GDP may have contracted for a third consecutive quarter in Q4 2021.

Nelson Barbosa, a close economic adviser to Luiz Inacio Lula da Silva, who is leading the polls ahead of the presidential election later this year, said that Brazil’s next president will have to increase public spending to fight poverty and unemployment temporarily. Barbosa said that financial markets have already realized that the current fiscal rule limiting the growth of public expenditures to the inflation rate “is unfeasible.” Barbosa added that the ending cap was created without effective mechanisms that would allow the government to comply with it and needs to be replaced as part of a wider overhaul of Brazil’s budget laws. In order to address poverty and other social needs within the economy, Barbosa said that a broader fiscal strategy that may increase public debt in the short term but stabilize it later on would be required. With former President Lula looking the most likely winner of the election later this year, these comments will undoubtedly come as a concern for fiscal hawks, given that Brazil’s fiscal outlook is already gloomy..

Mexico: High-frequency economic data published by Bloomberg has shown no major drag from the Omicron variant yet but has pointed to economic activity losing momentum and still below its pre-pandemic levels in many sectors. The increasing number of covid-19 infections due to the spread of the Omicron variant adds risks to the growth outlook, though early data through the second week of January does not indicate any impact on activity. The effect may be negligible given that the government is reluctant to reintroduce lockdown measures.

Mexico President Lopez Obrador resumed his public activities on Monday after recovering from a second bout of covid-19. The president used his relatively speedy recovery to remark on the lighter symptoms of the omicron variant, which has quickly become dominant in the region. However, he didn’t explicitly state what variant he had contracted. Mexico's official Covid-19 death toll of more than 300,000 is the fifth-highest globally, although daily fatalities are now far lower than the peaks of previous waves.

In other news, Fitch is the latest among the rating agencies to place Citibanamex’s credit ratings on negative rating watch, reflecting the uncertainty about the potential credit implications for its subsidiaries, including the consumer, small business and middle-market financial businesses, according to an official note. The agency also stated that a downgrade could occur if Citibanamex and affiliates are sold to an entity with a notably weaker credit profile. In a separate release, Fitch will begin a three-day Latin American credit outlook conference today, with the outcome likely to hold key insights for regional investors. .

Colombia: Trade data released yesterday showed Colombia's trade deficit deepened by more than expected in November, coming in at a record $2.01bn after a $1.52bn shortfall in October. Record high imports more than offset a slight rise in exports, reflecting improving demand in Colombia as its economic expansion continued prior to the latest wave of COVID-19 infections. Specifically, imports rose from $5.81bn to $6.55bn, while exports rose from $3.79bn to $3.99bn. This large deficit may concern the finance ministry and central bank, given the depreciatory pressure it exerts on the local currency.

Today, the focus will be on economic activity stats for November. Consensus expectations as per Bloomberg surveys are for a slight deceleration from 9.3% y/y to 8.6% y/y, although risks are tilted to the topside after what was reflected in yesterday's trade data. Further out, the outlook for Colombia's economy is that it begins to consolidate above pre-pandemic levels of output in the months ahead, with demand dynamics still looking relatively strong at present.

Chile: Not surprisingly we have seen the authorities tighten mobility in Santiago and 45 other municipalities nationwide as the country gets to grips with a surge in COVID-19 cases. Restaurants will cut seating capacity, while fewer people will be allowed in events both on the home front and in public spaces. The Health Ministry also announced that health workers would start receiving the booster shot from this week

On the political front, investors will be eagerly awaiting the presentation of President-elect Gabriel Boric’s new cabinet. He stated to the media that he would make his cabinet known by the end of the week. The big question is who will the finance minister be? If Boric’s aim is to calm the markets, he may choose Andrea Repetto who is a highly regarded economist and professor. Other candidates include Nicolas Grau who is part of his inner circle and e advised Boric on economic issues when he was preparing for his debates. Claudia Sanhueza is also a contender while other names doing the rounds include Roberto Zahler, and Guillermo Larrain

Peru: Communities of Ccapacmarca will, according to the PM's office, evaluate the proposals put forth by the government and miner MMG within the next 15 days. During this period, the communities will keep the blockades lifted according to the statement issued by the PM's office. Meanwhile, communities within Chumbivilcas will continue with their dialogue today and tomorrow with the mining company and the government. Note that the Ccapacmarca community did not sign the agreement reached between those from Cumbivilcas, the government and Las Bambas at the end of last year.

It is another quiet session ahead today in terms of local economic data, with no scheduled releases. Regionally, there is a Fitch Ratings credit outlook conference that will kick off today and continue through to Wednesday. This could provide some market-moving newsflow for the region given that investors will be looking to see if there could be any credit rating actions on the cards in the near term given the fiscal deterioration we have seen since the onset of the pandemic. For Peru specifically, we shouldn't see much in the way of speculation of a downgrade, given that the country's finances are better than expected at the moment.

Forex: Liquidity to normalize today as US markets return

Brazil: The BRL ended the session modestly firmer against the USD on Monday after paring back most of its earlier gains. Note that the BRL managed to gain as much as 0.61% during intraday trade yesterday, reaching a low of 5.4944. However, the BRL was unable to sustain its break below the 100-day moving average and ended the day just 0.09% stronger against the greenback at 5.5230. While the BRL was unable to hold onto its earlier gains, the local unit still ended the session near its strongest level in 2 months.

Mexico: The USD-MXN seesawed yesterday as reduced liquidity due to the US holiday left markets range-bound. The pair closed the session at 20.3002, the lowest it’s been since early November, with the bears continuing to challenge the strong 200DMA support at 20.2801 but lacked the impetus for a break lower. This may have been the final move lower for the USD-MXN as there has been a shift in risk appetite in pre-market trade today with the return of US markets and a spike in UST yields. The pair has gained more than 0.3% this morning and is now looking to probe the 20.400-handle. A break of which would signal the end of the USD-MXN’s bearish bias.

Colombia: It was a slow start to the week for global forex markets as liquidity dipped due to a US long weekend, with currencies generally trading in familiar ranges yesterday. This was also the case for the COP, which depreciated only marginally through the session as the market awaited fresh directional inspiration. Trading conditions will normalize today, with the COP's resilience set to be tested against a firming USD. However, it may find some tailwinds in rising oil prices, although it remains to be seen whether these can be sustained.

Chile: The USD-CLP appears to have found a bottom in the very short term. The pair has struggled to sustain any moves to the downside and the same applied yesterday. This morning, the pair is set to open just ahead of its closing level of 822.90 yesterday. There is some risk off sentiment rearing its head in Asia and the EU this morning, raising risk aversion to nudge investors out of emerging markets. Focus through the week will tube predominately on offshore data and the earnings results on Wall St.

A strong set of earnings on Wall St will almost certainly bolster risk appetite and could help sentiment towards emerging markets. US markets are already fully positioned for a strong economy that could withstand higher interest rates. But for a commodity currency like the CLP, a strong global growth performance is good news for commodity prices which would underpin Chile’s terms of trade thus adding additional resilience to the currency.

Peru: The USD-PEN continued its slide lower yesterday, testing the 3.8500 level in intraday trade but failing to sustain a break below it. The move lower has also seen the pair drop below the 50% retrace level of the April 2021 low of 3.5753 and the September high of 4.1444. This break opens the door towards the 61.8% retrace level of this move at 3.7927. Momentum indicators, however, are looking very oversold on the pair right now, suggesting that we could see some consolidation in the near term and potentially a period of USD buying given the attractive levels.

Fixed Income: Rising UST yields a threat to Latam debt

Brazil: In a report published on Monday, global credit rating agency Fitch said that the emerging market sovereign rating cycle has turned more positive. In its report, the agency highlighted four EM rating upgrades in the fourth quarter of 2021 and only two downgrades. Fitch added that negative rating outlooks continue to outnumber positive outlooks but added that the net balance has recovered to -14 in January from -33 in August 2020. Fitch said that the combination of continuing economic revival after the pandemic, nascent fiscal recoveries and higher commodity prices are some of the main factors underpinning the improvement in sovereign credit conditions for EMs in 2022. Fitch forecasts that the median GDP growth for EMs is 4.0% in 2022, marginally lower than the 2021 median of 4.4%. Meanwhile, the median budget deficit is expected to narrow to 4.0% of GDP in 2022 from 5.2% in 2021.

However, the agency said that the real effective interest rates across EMs have already started to rise, adding that reducing government debt/GDP will be a slow and challenging process. Fitch noted that EMs face a number of downside risks heading into the new year. Some of the key downside risks include uncertainty pertaining to the pandemic, which has left governments across the board in a worse financial position, rising rates, and a stronger USD meanwhile point to more challenging external financing conditions. Fitch also pointed out that the global inflation shock has forced an abrupt shift in EM monetary policy. A number of EM central banks have had to raise rates aggressively to combat inflation with Brazil leading the pack. Fitch said that this would weigh on growth and raise government borrowing costs..

Mexico: Mexican bonds came under mild pressure at the start of the new week, ending the consolidation seen on Friday. This resulted from low trading volumes and investors focusing on monetary policy tightening by the US Federal Reserve. The 10v2 bond spread, meanwhile, rose slightly to 35bps and will likely continue to widen in the session ahead as the benchmark MXN 10yr bond tracks the rise in the US 10yr bond yield. Note, the benchmark US 10yr bond yield has made a clean breakout above 1.80% today, claiming an October 2020 high, which is increasing the market's wariness. Domestic and regional bonds will likely record an offered tone through today’s trading. A weaker MXN will also attribute to the selloff.

Colombia: Colombian bonds started the new week off on the back foot, as investors positioned for tighter monetary policy in response to hawkish comments from out of the US. Yields rose sharply across most of the curve, with the 9-year tenor leading the charge with a 12.35bps increase through the session. Note that more of the same likely lies ahead today, with Colombian bonds set to track UST yields higher. Additionally, investors may also price in some concern over the upcoming Fitch ratings conference, although they may take some comfort from the fact that Moody's recently upgraded its outlook for Colombia's credit rating from negative to stable.

Chile: The 2v10 swap spread remains at new lows with -24.5 bpts the level for now. Swaps are reflecting the economic realities which the country faces of higher near term rates and economic dynamism which remains uncertain, coupled with the need for a larger pool of capital to support the social spending needs of the new government. Granted the new administration may not be able to be as expansionary on the spending front as they would have liked given the economic circumstances, but they are certainly going to be more accommodative to honour some of the election promises made.

Peru: Expectations for tighter US monetary policy put local bonds on the back foot yesterday, with yields seen rising across the curve barring one or two tenors. At the time of writing, the 2-year US Treasury yield had climbed by as much as 5bps to just north of 1.00% as trading has resumed following yesterday's public holiday in the US. The benchmark 10-year US Treasury yield, meanwhile, had risen by around 4bps at the time of writing to 1.82%, its highest level since January 2020. This will continue to pressure local bonds, and we should see a weaker open today as a result. The local 2031 tenor could test the 6.200% level as a result.