Morning Note /

Latam markets to face risk-off conditions, slumping commodities

  • Talking Points: Brazil data dump and Peru mining talks in focus today

  • Forex: Risk-off conditions and weaker commodities to pressure Latam FX today

  • Fixed Income: Growth concerns may drag yields lower

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Danny Greeff
Daron Hendricks
Kieran Siney
ETM Analytics
25 April 2022
Published byETM Analytics

Talking Points: Brazil data dump and Peru mining talks in focus today

Brazil: It’s a busy week ahead in terms of economic data. With the central bank strike temporarily suspended, we expect to see a large backlog of data released, including key fiscal, external account, credit and economic activity reports. We could also see the publication of the central bank’s weekly Focus survey. The influx of economic data and economist forecasts have the potential to provide domestic markets with some fresh directional impetus. Meanwhile, Bloomberg published its latest forecast for Brazil on Friday. According to analysts surveyed in the Bloomberg survey, Brazil’s economy will expand by 0.6% in 2022, 1.6% in 2023 and 2.2% in 2024. Analysts said that the chance of a recession happening over the next 12 months is 30%. Inflation is expected to come in at 9.0% y/y this year and 4.8% in 2023, compared to 8.3% and 4.4% in the prior survey. Economists surveyed in the Bloomberg survey expect the Selic rate to rise to 13.25% by the end of the year, implying 150bps worth of rate hikes for the remainder of the year.

Mexico: Mexico's inflationary trend continued in the first half of April, hitting its highest level in more than two decades as prices grew across most categories of goods and services, posing a challenge for Banxico as it considers new interest rate increases. Consumer prices rose 7.72% y/y in the first two weeks of the month, outperforming a 7.63% y/y median estimate in a Bloomberg survey and a reading of 7.62% y/y in the second half of March. Core inflation continued to accelerate, rising to 7.16% y/y, during a period that included the Easter break spending. This compared with a forecast of 7.10% y/y and the previous reading of 6.88% y/y. Sustained core price rises have particularly worried policymakers, indicating that elevated inflation in Mexico could be more persistent than previously predicted.

Mexico's central bank could revise its inflation forecast higher at its next monetary policy meeting due to the impact of Russia's invasion of Ukraine, Bank of Mexico Governor Victoria Rodriguez stated last week. The evolution of the coronavirus pandemic will also play a key role in its next estimate, she said. Banxico targets inflation at 3%, plus or minus one percentage point. Banxico projected consumer prices would peak in the first quarter and then slow to 5.5% by the end of the year.

In terms of the week ahead, several data releases will hold significance for the policy outlook in Mexico, including the preliminary Q1 GDP estimate and monthly trade and budget figures, among others. The week kicks off with the monthly economic activity index, which is expected to have gained some traction in February, with Bloomberg pencilling in a figure of 2.50% y/y. However, the rise in commodity prices and the disruption to global supply chains due to the Ukraine war points to a less optimistic outlook for the manufacturing sector. Notably, leading indicators have pointed to a slight decline for services in February after increasing in the previous three months and remain below their pre-covid-19 levels

Colombia: During Friday’s presidential election debate, the candidates most likely to win agreed on the need to reform the country's unbalanced pension system so that it provides greater coverage for millions of poor people and redirects subsidies. Ideas for financing the reform ranged from a large tax reform (Sergio Fajardo) to more radical plans such as using savings from private funds to pay the pensions of older adults who have not managed to save enough for their retirement (Gustavo Petro), to eliminating subsidies worth $5.3 billion dollars for high-value savings funds and redirecting them to those who do not have pensions (Federico Gutierrez).

Sticking with the elections, note that the latest round of poll results was published this weekend. According to polls conducted earlier this month, leftist Senator Gustavo Petro has extended his lead over conservative candidate Federico Gutierrez, although a large number of undecided voters could yet throw a spanner in the works come election day. Petro’s lead constitutes a significant risk to Colombian financial markets, as his policy proposals have been less than market-friendly.

Chile: The President Gabriel Boric is on the back foot with the voting public. His approval rating declined by some 4% to 36% in the week ending 22nd April 2022, while the disapproval rate shot up to 53% according to the polling firm CADEM. This compares to an approval rate of 40% and a disapproval rate of 50% the week before. It is worth noting that he inherited a difficult economy and social landscape, the problem for him is that his election campaign was driven by promises of a better future and more equitable economy. These things are notorious to get right, and especially hard in the short term, many new governments around the world have seen their approval ratings drop sharply post the election as electioneering gives way to pragmatism.

Moving over to the mining sector, we have seen the constitutional assembly reject a proposal from the environmental committee which would have seen a tightening up of rules surrounding the projection of the country’s natural resources. Mining.COM reported the following - Among the changes suggested, there was one granting nature the status of a legal subject with rights, keeping environmental crimes free of any statutes of limitations and extend protections of water sources, glaciers, wetlands and native forest. The articles had already been toned down amid criticism from miners and analysts concerned about radical proposals such as nationalizing key assets. Constituents rejected the 52 articles presented by five votes, preventing voting on individual items and returned the entire proposal to the environmental committee for further revision. To make it into the new constitution, each article needs to receive at least 103 out of the 154 possible votes. This is the second time the committee’s report has been sent back to the drawing board, as the first presentation saw only six of 40 articles approved.

Peru: Southern Copper announced on Friday that it would look to restart production at its Cuajone mine in the coming days as protestors have halted their actions which saw the water supply to the mine cut off. The resumption of operations at the mine should allow for further dialogue to take place between the firm and the community, which could lead to a longer-lasting solution. Meanwhile, the community of Chila and MMG will continue talks today regarding the Las Bambas mine. The talks are centred around the price paid by the company for the land years ago and any progress here could see more Peruvian mining output come back online. Last week, around a fifth of Peru's copper production was offline, so any resumptions in operations this week will be welcomed.

Meanwhile, President Castillo said over the weekend that he will send a bill to Congress to call for a referendum to change the constitution, hoping to appease protestors that have rocked the country. Castillo said that he will propose that the referendum be carried out during the regional elections in early October. Given the fractured nature of Congress and Castillo's lack of support within it, it is unlikely that the bill will be passed.

Shifting to Petroperu now and the company has said that it could have audited financial statements ready by July. The company is expected to sign a contract with PwC this week and then start negotiations with bondholders and creditors. Recall that the deadline for its audited financial statements had lapsed, leading to downgrades by credit rating agencies. Technically, the company still has not obtained bondholder consent for the late delivery of the 2021 financial statements, but negotiations should take place and creditors should give their consent and allow for the extension.

Forex: Risk-off conditions and weaker commodities to pressure Latam FX today

Brazil: The BRL received a bloody nose on Friday as domestic markets played catch up after being closed on account of a national holiday. The BRL lost 3.76% against the USD on Friday after comments from Fed Chair Powell earlier in the week bolstered bets for big US rate hikes this year. The hawkish comments from the Fed have provided the USD with fresh topside impetus, with the greenback extending its gains this morning. The stronger USD comes on the back of a collapse in base metal prices, with the likes of iron ore, one of Brazil’s main exports, down almost 7% at the time of writing. The combination of the stronger dollar, weaker commodity prices and risk-off conditions point to a downbeat start to the week for the BRL.

Mexico: The USD-MXN closed out last week at 20.2313, with more than a 1.6% weekly gain. The pair pared some of its weekly gain, which would have otherwise exceeded 2%, due to the 50DMA resistance and the prospect that Banxico will raise its benchmark interest rate by the same magnitude as the US Fed, following the early inflation figures for April. The new week has kicked off much the same way the last one ended. The USD-MXN has spiked higher in pre-market trade, punching through the 50DMA resistance to probe the 200DMA resistance at 20.4235, coinciding with the 38.2% Fibo retracement level, which stems from March highs and April lows. From here, the pair will likely target the 61.8% Fibo level at 20.7978, which would lead the way higher to probe March’s 21.4575 high.

Colombia: The COP’s recent bear-run extended on Friday, with the currency selling off sharply into the weekend after Fed Chairman Powell signalled support for a very aggressive Fed tightening trajectory. The currency depreciated 2.40% through the session, making it the second-worst performing EM currency on the day. This decline also took its weekly losses to more than 3.60%, with the USD-COP trading back above the 3850 mark for the first time since early-March. Risk-off sentiment and an oil-market drop at the start of the new week also bodes ill for the COP, with further declines possible despite Friday’s extraordinary selloff.

Chile: The peso took it on the chin on Friday and given the tone at the start of the week we cannot advocate going short USD-CLP now. Copper has lost this morning and the dollar is strongly underpinned, we suggest that buying the dips remains the trade for now potentially with a test of the 850 congestion level possible in the next day or two.

Peru: The USD-PEN surged on Friday as Latam currencies weakened alongside their EM peers amid a notable repricing of Fed rate hike risk and rising speculation that the global economy could come under pressure as a result. The pair closed the week at 3.7689, with the central bank selling 200mn in FX swaps to help ease the volatility. With the gains, the pair has broken above the 50DMA which could open the path back towards the 3.8000 level for the bulls.

Fixed Income: Growth concerns may drag yields lower

Brazil: Brazilian swap rates were paid higher on Friday on the back of the aggressive sell-off in the BRL. The most notable moves were on the longer-end, with the 10yr swap rate climbing 16bps to close the session at a one month high of 12.15%. The shorter-dated 2yr swap rate meanwhile rose 4bps to 12.50%, according to Bloomberg data. While the swap curve bear steepened last week, the 10v2 spread remains anchored in negative territory. The inversion in the curve is being underpinned by the aggressive tightening in monetary policy against the backdrop of lingering growth concerns.

Mexico: The domestic bond market continued to trade in a mixed fashion on Friday, with the front-end of the yield curve rising as investors reacted to the above-forecasted inflation figures, which reiterate that further interest rate hikes are possible and even likely. In contrast, yields on the belly and the long end of the curve fell. This was a recurring theme throughout the week.

Foreign selling of Mexico's bonds accelerated in the week ended April 8 after coming under pressure from the global bond weakness. The 5-day moving average of net foreign outflows accelerated to $96.3mn, falling below the 20-day average of $7mn in inflows, according to data from the Banxico compiled by Bloomberg.

Colombia: Colombian yields rose sharply last week, tracking a broader uptrend in US Treasury yields in anticipation of an aggressive tightening of global financing conditions and a consequent slowdown in economic growth. Moves were most pronounced at the long-end of the curve, with the 10-year yield spread between Treasuries and Colombian bonds widening to the most in nearly a month. Growth and monetary policy concerns will likely also remain at the forefront of market drivers this week, with a BanRep policy meeting scheduled for Friday. .

Chile: US Treasury yields have fallen sharply this morning as the market moves into risk off mode as fears of a global economic slowdown overshadow the threat of higher rates for now. Talk is that Beijing is on the cusp of joining Shanghai in lockdowns and this has spooked the market, equities are off and investors are piling into developed market bonds. The US 10yr is testing 2.80% which to be fair is still a lofty level when looking at the level of the bond on the 7th March 2022 when it was trading sub 1.70%.

Given this backdrop we expect the local bond market to start the week off with a cautious tone. Payers are likely to dominate proceedings with curve inversion trades the favoured play in both bonds as swaps as the front end underperforms..

Peru: Peru bond yields continued to surge higher on Friday and it is unlikely that there will be any reversal in this trend anytime soon, even though UST yields are coming off their highs at the moment. Risk aversion is ramping up and EM assets are under pressure as a result, which will only exacerbate Peru's current issues locally which have driven a sell-off for local bonds.

Petroperu bonds, meanwhile, have not found any relief from news that an auditor will be appointed this week. Yields are still trading near 6.63% for the 2032 tenor. The sell-off may abate for now but it is unlikely that we will see any major rebound at least until the audited financial statements are finally released.