Morning Note /

Latam Daily: Politics to drag on Latam assets into the new year

  • Talking Points: Political uncertainty rising again in Peru, focus still on Boric in Chile

  • Forex: CLP sell-off may be a little overstretched at the moment

  • Fixed Income: Flattening pressure to build along Mexico and Colombia yield curves

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

ETM Analytics
21 December 2021
Published byETM Analytics

Talking Points: Political uncertainty rising again in Peru, focus still on Boric in Chile

Brazil: The political landscape in Latin America is always an interesting one and Brazil has not been one to buck this trend. The former President Luiz Inacio Lula da Silva is currently in front of the polls ahead of next year’s election and he has vowed that if he is re-elected that he would enact a broad range of alliances across the political spectrum in an attempt to unite what can be termed a deeply polarised country. He is a former union leader and thus will appeal to the working class, equally he has vowed to improve the credibility of Brazil on the international stage following the damage caused by the current President Jair Bolsonaro. Reuters reported that Lula stated that South American trade deal with the European Union would be a priority, as would strengthening ties with the United States and China.

The rebound in fortunes for the former trade union boss has been nothing short of remarkable. Two years ago he was jail convicted of corruption, eight months ago he was banned from running for the top job in Brazil. All of this changed when those convictions were annulled by the Supreme Court. Lula has yet to officially declare his candidacy however current polls show him as the marked favourite with 48% of the potential vote while Bolsonaro is a distant second at 21%.

Mexico: In the way of data today, the latest quarterly supply and demand data is scheduled for release for Q3 2021. Although historical in its perspective, it still offers some interesting insight in the sense that the market now expects the statistical base factors that have helped generate strong growth to finally start dissapating. It reflects normalisation in economic activity and over time, the data should settle close to the longer term average of between 2-4%. By the Q1 2021 data next year, the data will have normalised.

Today's supply and demand data should be looked at together with the Citibanamex survey of economists that will offer some perspective on economic expectations for the year ahead. In strong focus will be the outlook for inflation, interest rates and of course GDP growth. It all has a bearing on Mexico's fiscal position and its ability to retain its investment grade rating. Thus far, Mexico's more conservative fiscal position has held the country in good stead.

Colombia: Data released yesterday showed that Colombia's trade deficit narrowed in October, coming in at -$1.519bn as opposed to the deficit of -$1.7119bn seen in September. Both exports and imports increased on the month, with the pace of the former exceeding the latter to drive the narrowing of the deficit. Higher exports were likely a result of higher oil prices and improving global demand, while Colombia's fairly robust consumption at the moment drove the growth in imports. Going forward, there are risks that we could see the trade balance deficit widen again, as oil prices have come under pressure, while local demand is likely to have resilient, according to some leading indicators.

Meanwhile, we saw an improvement in confidence levels within the industrial sector in November, with the index rising to 15.2 from 12.2 the month prior. This contrasted with a dip in retail confidence, although that move was very marginal and the index remains buoyed near record highs, according to Bloomberg data. This high level of retail confidence supports the notion mentioned above that domestic demand will remain robust through Q4, even with high inflation and tightening monetary policy, as fiscal support policies and pent-up savings will continue to support consumption.

Chile: As expected, the markets did not respond well to the news that Gabriel Boric will be the next president of Chile. The stock market shed 269.52 points to close at 4088.26 with the mining sector faring particularly badly which was not unexpected given the new president’s campaign promises to tax mining entities more aggressively while keeping a close grip on new projects, especially where there are environmental concerns.

Reuters reported the following- Chile's mining sector is bracing for tighter environmental rules ahead after President-elect Gabriel Boric pledged to oppose a controversial $2.5 billion iron-copper mine that was approved in August after years of legal wrangling. "To destroy the world is to destroy ourselves," Boric told a cheering crowd in his first speech after celebrating election victory on Sunday. The 35-year-old leftist lawmaker singled out the planned Dominga mine, which critics say could devastate La Higuera, a coastal ecosystem rich in biodiversity with a large number of marine mammals and birds. The project's owner, privately held Andes Iron, has long rejected that assertion.

Peru: President Castillo will be testifying before the nation's prosecutor on December 29, with relation to the investigation of alleged interference in military promotions. The main investigation is against former defense minister Walter Ayala and former secretary general Bruno Pacheo. This investigation is in addition to the recent one proposed by attorney general Soria against Castillo regarding alleged illegal sponsorship and influence peddling. A congressional panel is investigating meetings between Castillo and businesswoman Karelim Lopez. It is still unclear what will come of these investigations, but they add to the mounting levels of political risk, and will impede the government's ability to pass through any major reforms until they are completed.

Investigators have also performed a search of the presidential palace and the headquarters of Petroperu due to an ongoing investigation of potential collusion between the state-run firm and a private company involving biodiesel agreements. Prosecutors believe that there is possible executive interference in Petroperu's purchases of biodiesel. The prosecution has ordered the start of the preliminary investigation into alleged crimes of simple collusion and incompatible business against Petroperu general manager Hugo Chavez Arevalo and officials Gunther Document Celis, Muslaim Abusada Sumar and Roger Liy

On the mining front, today will see communities from Chumbivilcas participate in talks called by PM Vasquez to resolve the issue surrounding the Las Bambas mine. The community had previously said that they would not participate, but have changed their mind at the last minute. History suggests that the talks will be dragged out and that a compromise will be hard-fought. This meeting will be key in determining the outlook for the mining sector going forwards, as it could set a precedent for how these negotiations are handled by the government, the communities, and the mines..

Forex: CLP sell-off may be a little overstretched at the moment

Brazil: The USD-BRL remained topside focused yesterday with resistance at 5.7545 firmly in the crosshairs of the bulls. The trend higher has yet to show any meaningful signs of reversal and thus we would be buying on any dips towards the 5.65 mark.

Mexico: The MXN has finally found itself on the defensive. As risk aversion levels have risen, so the MXN has found itself under some pressure and technically, it would appear as though there is more left in this move. Focus in the coming days will be on the US data and the monetary policy reaction from the Fed that global investment markets will price in. Equity markets have started to come under pressure and the prospect of further EM currency weakness can no longer be ignored. Trading action suggests that trading off a long USD base is being favoured for now, with all eyes on Omicron, US data and government restrictions.

Colombia: The USD-COP gapped lower at the open yesterday in reaction to the central bank's rate hike from Friday. Some of the losses were reversed through the day as oil prices slumped, but the pair still closed the session down. The bears were unable to break below the 4000 support level, however, which will leave it as the mark to watch for the sessions ahead. We should see another test of it today as risk appetite is improving and oil prices are rebounding.

Chile: The USD-CLP loved the news of a Boric win as his more left leaning credentials caused fx traders to substantially reprice the value of the peso. The CLP has now cemented its status as the worst performing Latin American currency shedding 18.67% this year. At yesterday’s close of 875.18 things do look stretched and technically there is now a gap to close between 850 and 865, potentially a small USD-CLP short is the trade to take today.

Peru: The USD-PEN kicked off the new week on the front foot, supported by weaker commodity prices and risk-off trading conditions. The pair closed the session at around 4.051, wedged between the 50DMA below and the 100DMA above. The gains yesterday saw the stochastic issue a crossover buy signal on the pair, which suggests that we could see a probe of the 100DMA resistance level take place before Christmas. Given all the political uncertainty within the country at the moment, the topside should be favoured. A break above the 100DMA will open the door for the pair to head back towards the 4.100 level.

Fixed Income: Flattening pressure to build along Mexico and Colombia yield curves

Brazil: There were small shifts in the economists expectations at yesterday’s release of the Central Bank Economists Survey with 2021 year end inflation expectations cut to 10.04% from 10.05% while growth was cut to 4.58% from 4.65%. Good news was that the end of 2022 Selic rate expectations were unchanged at 11.5%.

There has been a definite drop in interest rate expectations over the longer term which is reflective in the break-even rates which continue to trend lower. That said, there are still embedded inflation risks which suggest that we may be bottoming in terms of how much further breakevens can compress

Mexico: With the MXN on the defensive these past few trading sessions, the fixed income market appears to be reacting with shorter dated yields ticking higher. From the 3m out to the 5yr, there has been a rise in yields with the general bias in yields across the front end being higher. The latest inflation forecasts will do little to help and further flattening can be anticipated over the coming weeks and months as the central bank continues to re-establish itself as an inflation fighting central bank. Soime focus today wilol turn to domestic data released, but for the fixed income market, the survey of economists will likely hold the greatest interest..

Colombia: Trading of Colombian government bonds was fairly nondescript yesterday, with little direction seen across the curve. After the rate decision on Friday, it is expected that the central bank will increase the pace of its policy tightening, suggesting that the risk is skewed towards higher short-dated yields and a flattening of the curve as this will weigh on growth prospects further out.

Chile: Payers remained in control yesterday however some would have expected a bigger bond market sell off post the announcement of a Boric win. The fact of the matter is that he will only be able to do what is economically possible and will need to become more pragmatic. Wild spending sprees and massive social support systems will not be plausible. In terms of levels, the 2023 bond gained some 5 bpts to the topside to finish the session at 5.90% while the longer dated 2030 finished at 5.90% some 3 bpts higher on the day.

Peru: Local government bond yields were up across the board from the 5yr sector onwards yesterday, with risk-off trading conditions driving the markets. Moves were fairly marginal, however, with the 20yr tenor the underperformer as its yields climbed by around 6bp on the day. This lack of volatility compared to some of Peru's peers highlights the limited trading activity by foreigners, which is unlikely to improve in the coming months given the rising levels of political uncertainty. We should see yields end the year near current levels, with the bias maybe skewed slightly towards higher yields. The risk to this view is of course if we get another political shock, something that cannot be ruled out.