Morning Note /

Latam Daily: Quiet session ahead for data keeps focus on external developments

  • Talking Points: Political pressure building on Banrep as elections loom

  • Forex: Ukraine-Russia tensions to drive direction today

  • Fixed Income: Brazil to auction linkers, Chilean swap curve inversion deepens

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Daron Hendricks
Danny Greeff
Kieran Siney
ETM Analytics
22 February 2022
Published byETM Analytics

Talking Points: Political pressure building on Banrep as elections loom

Brazil: It was a quiet start to the week in terms of economic data. Domestically, fiscal dynamics were in focus following reports that the government is analysing a BRL 400 increase per month for all public workers this year. Bloomberg reported that the fiscal impact of the proposed public sector wage increase is in the region of BRL 5bn. According to people in the know, the proposed measure has the support of President Bolsonaro’s advisors. Given the current fiscal constraints, the government would have to cut other expenses to fit the public sector wage increase into the 2022 budget. Bloomberg reported that the government intends to announce the public sector wage increase by March.

Mexico: According to the Organization for Economic Cooperation and Development's (OECD) most recent economic report published yesterday, Mexico's economy is predicted to return to pre-pandemic levels by the third quarter of this year. The OECD predicts economic growth of 2.3% this year, one percentage point lower than its December estimate, supported by robust exports and a tightening labour market. While the OECD forecasts 2.6% growth for the Mexican economy in 2023, this is a slight improvement over the 2.5% previously anticipated. "Mexico has great potential to become a high-growth economy, with higher living standards for all," said OECD Secretary-General Mathias Cormann in presenting the forecasts. Mexico would have to prioritise reactivating private investment and reversing low productivity to improve growth potential in the medium term. The OECD also cautioned that concerns over a contentious proposed reform to strengthen state control of the power market had hindered investment that had already been falling since 2019. Still, it signalled Mexico could recover investment through clear policy decisions.

The organisation proposed measures to increase tax revenues by approximately 3.5% of GDP to boost public spending. The OECD went on to add that Mexico’s tax revenue amounts to 16% of GDP, which is the lowest within the OECD region, a situation that could improve with better tax administration.

Colombia: Political pressure on BanRep is a growing theme in Colombia, with President Duque commenting yesterday that the central bank should be careful with rate hikes so as to not hurt economic growth. Duque reiterated previous concerns that the central bank needs to take into account that interest rate increases won't help ease inflation that is due to external factors. The president also said the government would expand household handouts for one million people to help the poor against consumer inflation.

Note that these comments come shortly after presidential race frontrunner Gustavo Petro vowed to reform the makeup of the Colombian central bank, if elected, as he believes the central bank has failed to fulfil its mandate of increasing production and promoting social equality, which are generally considered secondary to fighting inflation. Should this theme of political pressure on the central bank develop, it could add to prevailing investor concerns over the political situation in Colombia. Independence is central to the monetary authority's credibility, and very important for how investors view the country's economic institutions.

Chile: Locally, the incoming General Secretary of the Presidency, Giorgio Jackson has stated that he has been in contact with the convention leaders and that they have agreed to have regular meetings regarding the rewriting of the constitution. Fears are growing surrounding radicalism in the drafting of the charter, which is understandable however we believe that sense will prevail and as mentioned yesterday a more moderate constitution is the most likely outcome.

Peru: The session ahead will be a quiet one in terms of local economic data, with the release docket only picking up with the Q4 GDP figures on Wednesday. Monthly data for December has mostly been released and shown a fairly notable deceleration in economic growth, owing to waning fiscal and monetary support, Omicron concerns, and tightening global financial conditions. Political noise has also been a constant factor in recent weeks and will be something to watch for when the rest of the Q1 numbers start to come out. The Q4 numbers will unlikely be too market-moving, given how dated they are and what data has already been released for 2022 so far.

Forex: Ukraine-Russia tensions to drive direction today

Brazil: The bullish bias in the BRL persisted at the start of the new week, with the local currency closing the session 0.63% stronger against the USD at 5.1064, according to Bloomberg data. While we expect the broader bullish bias in the BRL to persist in the weeks ahead, the combination of overnight developments, which have prompted a risk-off tone across financial markets, and some challenging technical levels, suggest that it will be a downbeat start to the session for the BRL.

Notwithstanding the risk-off conditions, the USD is trading marginally softer this morning. Part of the reason why may rest with how the Fed might interpret these events and whether a significant market correction would see the Fed turn a little more cautious in their tightening. A more sluggish tightening would hurt the USD, and the dip in US Treasuries may to some extent reflect that.

Mexico: The MXN held steady at the 20.300/USD mark yesterday, in a session marked by reduced liquidity due to the US holiday and risk-off sentiment as geopolitical risks intensify. However, the local currency has taken a bearish turn this morning as risk aversion takes over amid mounting geopolitical tensions, with the MXN weakening past a key technical support, the 200DMA at 20.347/USD. This could pave the way for more losses, with the currency likely to fall to the 50DMA at 20.5450/USD. The MXN bull run was stretched, and the geopolitical turmoil acted as a catalyst for a healthy correction. Some of the MXN’s losses will be mitigated by the surge in oil prices, which are closing in on the $100 barrel mark. For the most part, emerging market currencies will remain on the back foot as news from Eastern Europe dictates the mood towards risk assets.

Colombia: The COP consolidated on Monday, missing the broader EM currency rout that occurred overnight. The currency will, however, be playing catch-up today, and could trade on the back foot as the market prices in geopolitical concerns surrounding the NATO-Russia standoff over Ukraine. Still, the COP may remain somewhat resilient given the surge in oil prices and how undervalued it already is, especially since the market has shown reluctance in recent weeks to drive the currency out of its trading range between its 50-session and 100-session moving averages.

Chile: The USD-CLP maintained its position below the 800 handle with liquidity hampered yesterday on account of the US holiday. Interest to take risk was limited and this left the market rangebound. This morning things are slightly different with copper on the back foot and risk aversion up. We expect the start today to be a difficult one.

Peru: The USD-PEN climbed back above 3.75000 yesterday as risk-off conditions saw emerging market currencies come under a bit of pressure. Reports suggest that liquidity levels were very thin once again, with no trades being reported for a while after the local market open. This could keep the pair volatile over the coming sessions, as it is unlikely that sufficient liquidity will return for as long as global markets are trading so risk-off. If the technical picture is anything to go by at the moment, we should see the bias favour the bulls, with the stochastic issuing a crossover buy signal after reaching the oversold threshold.

Fixed Income: Brazil to auction linkers, Chilean swap curve inversion deepens

Brazil: The flight to safety has seen investors rotate into safe-haven assets such as US Treasuries as investors brace for the worst. While US Treasuries have recorded their worst start to the year in several decades, the benchmark 10yr yield has gapped lower this morning. Other safe-haven assets, including gold, are also bid this morning, while high beta assets such as Asian equities and US equity futures are a sea of red as the latest comments from Putin fuels bets Moscow is moving to take control of territory internationally recognised as part of Ukraine. Moreover, overnight developments have bolstered expectations that Russian forces will move closer to direct confrontation with Ukrainian soldiers.

While a full-scale war hasn’t yet started, the recognition of the two states, according to war experts, will likely see Russian soldiers deployed up to the border with the rest of Ukraine and will be seen as an act of aggression by the West. Bloomberg reported late on Monday evening that Putin has signed aid and cooperation pacts with separatist leaders at a Kremlin ceremony. In his address to Russians late on Monday, Putin said, “I consider it necessary to take the long-overdue decision to recognise the independence and sovereignty of the Donetsk People’s Republic and the Luhansk People’s Republic.” This is the latest move from Putin to assert dominance over its former Soviet neighbour and prevent them from joining NATO. Although tensions have escalated overnight, a Russian invasion of Ukraine has not yet occurred. That said, we still expect a risk-off tone to prevail in the session ahead, given that the threat of an invasion has risen significantly.

Looking at the session ahead, National Treasury is scheduled to come to market with a slate including Selic-linked LFT bonds maturing in 2025 and 2028 and inflation-linked NTN-B bonds maturing in 2027,2035 and 2060. The volume of bonds to be auctioned will be released at 10:30 am local time. As always, the linker auction has the potential to provide some fresh directional impetus for the secondary bonds market. That said, given the developments overnight, we expect domestic markets to take direction from external dynamics. Given the prevailing risk-off conditions and surge in international oil prices this morning, Brazilian bonds are expected to reverse yesterday’s gains as investors rotate towards haven assets.

Mexico: MXN bond yields were little changed yesterday in the thinned-out trading conditions with the US markets shut as investor focus remained on geopolitical tensions, along with inflation, as oil prices continue to soar. Russia’s latest moves on Ukraine are fraying investors' nerves, increasing their flight to safe havens, obscuring any action from the Federal Reserve. The US Treasury 10yr bond yield has slumped to 1.90% at the time of writing to extend last week’s decline as Treasury buying picks up. The widening gap between the Mexican and US 10yr benchmark bond yields, now at about 588bps, raises questions about the economic growth outlook and monetary policy. The spread is likely to probe the 600bps resistance, a breach of which, due to the external environment, could see it head towards the March 2020 blowout of 675bps brought on by the arrival of the pandemic.

Colombia: Colombian bonds started the new week off on the defensive, with yields rising mildly across the curve on Monday. Moves were especially pronounced towards the long-end of the curve, reflecting a broader deterioration of market sentiment and, perhaps, renewed political concerns following Friday's presidential candidate debate. Investors will likely remain defensive through the session ahead, with risk assets under the gun today following the recent escalation of the Russia-NATO standoff around Ukraine. .

Chile: There has been a flight to safety during both the Asian and EU sessions with developed market fixed income markets seeing strong inflows following a ramp up in geopolitical tensions in Eastern Europe. Local bonds have for the most part been consolidative at the start of the week with the 2030 bond holding levels around the 5.90% mark, however, this trend may be unseated today as investors seek refuge from the potential contagion risks. All of that said, there are those that view the Ukrainian situation as strongly localised in Eastern Europe, with any impact on local markets to be short lived.

Moving over to the swap curve, the 2v10 headed further into inversion territory with the spread marking new lows at -132 bpts. We cannot call a floor to the move as yet given that we are in uncharted territory, as long as the oil prices remain pressured to the topside, inflation will be the major driver of front end curve paying interest.

Peru: It was a mixed session for local bonds yesterday, with some selling seen across the front-end to belly while ultralong tenors managed to attract a minor bid. Moves were fairly marginal, however, given a lack of liquidity within the market. Dollar bonds also saw very little action yesterday. The uncertainty within the global markets is exacerbating any concerns over local politics, and keeping investors at bay for now. We may see bonds continue to gradually weaken over the sessions ahead if the tensions in Ukraine don't start to ease. The front-end will likely underperform as surging oil prices will cement rate hike expectations.