Itaú BBA - Brazilian CDS reaches a 34-month low

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Brazilian CDS reaches a 34-month low

October 18, 2017

Also, DI futures narrowed 1-2bps as the BCB’s activity index came in slightly below consensus.

With information available until 6:30pm Brasilia time

Highlights

  • In Brazil, CDS fell to 175bps (-3bps) – lowest in 34 months. DI futures narrowed 1-2bps as the BCB’s activity index came in slightly below consensus (see Macro Backdrop). The Jan-18 fell 3bps to 7.34%. 
  • In LatAm FX, the CLP was the laggard once again (-0.55% to 626.74/USD) as copper prices further fell (-0.64%). The BRL closed at 3.1707/USD (-0.32%) and the MXN is trading at 18.8479/USD (-0.31%). Finally, the COP outperformed within EM FX, to 2,925/USD (+0.79%). 

Macro Backdrop

BRAZIL
  • According to BCB, the IBC-Br Activity Index shrank 0.38% mom/sa in August, below our forecast and market expectations (-0.3% and -0.25% respectively). The result for the previous month was revised upward by 0.1%. Relative to the same month in 2016, the IBC-Br rose 1.64% (our call: 1.90%; consensus: 1.97%). The result is consistent with other monthly indicators released for August. Industrial production, services real revenue and core retail sales showed a monthly decline. 

COLOMBIA

  • The trade balance in August recorded a USD 930 million deficit, in line with our forecast (USD 928) and slightly wider than the market consensus estimate (USD 900). The trade balance was broadly stable from the USD 1.0 billion deficit recorded one year ago. The resulting trade balance deficit in the quarter that ended in August was USD 2.3 billion, stable from the deficit recorded in 2Q17. The rolling 12-month trade deficit continued to inch down, as it came in at USD 9.2 billion (USD 9.7 billion as of June and USD 11.5 billion in 2016). The recent narrowing from June is due to a recovery in the energy balance (led by coal), while the non-energy balance deficit is broadly stable. At the margin, the annualized trade balance deficit (using our own seasonal adjustment) showed a more convincing correction to USD 9.4 billion in the quarter ending in August, from the USD 11.3 billion deficit in 2Q17, but still larger than the USD 9.1 billion in 1Q17 (which makes us cautious of the expected pace of the correction ahead).
  • Imports (FOB) decelerated, expanding a mere 0.4% year-over-year in August, after recording a 12.2% growth rate in July. The deceleration responded to intermediate goods, which contracted 7.8% (+12.5% in July) dragged by the gasoline component (-27%). Meanwhile, capital goods imports rose 11.5% (+12.6% in July) lifted by transportation equipment (+51.6%). In the quarter that ended in August, imports expanded +4.1% (+5.2% in 2Q17 and +6.9% in 1Q17), boosted by capital goods (+8.9%), especially for the agriculture sector (+35.6%). At the same time, consumer goods imports gained 3.3% (-3.1% in 2Q17) as the durable component expanded 6.5%. Meanwhile, intermediate goods imports moderated to 1.5% year-over-year (+5.3% in 2Q17) pulled down by gasoline (-6.7%) and agricultural goods (-6.8%). At the margin, imports declined 20.4% qoq/saar in the quarter that ended in August (-4.3% in 2Q17), dragged down by the intermediate and capital goods. 
  • As the trade deficit is narrowing, albeit too gradually, external imbalances will remain a source of concern. We expect a current-account deficit of 3.7% of GDP this year (4.3% in 2016). Full Report
Market Developments 
  • GLOBAL MARKETS: Equity markets were strong on the green, led by the Dow Jones (+0.74%). US Treasuries rose (10-year: +4bps to 2.34%) as markets focus on who the next Fed Chair might be – especially if it’s going to be someone with a more hawkish stance on monetary policy. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices were strong as Iraq’s exports fell on domestic tensions, but dropped after EIA’s weekly report showed crude inventories increased last week (WTI: +0.19% to 52.21/USD). Metallic commodities posted losses (iron ore: -2.81%; copper: -0.64%). In FX, most currencies under our coverage posted losses. The CLP was the laggard once again (-0.55% to 626.74/USD) as copper prices further fell (-0.64%). The BRL closed at 3.1707/USD (-0.32%) and the MXN is trading at 18.8479/USD (-0.31%). Finally, the COP outperformed within EM FX, to 2,925/USD (+0.79%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Once again, credit spreads (5-year) narrowed all across LatAm. In Brazil, CDS fell to 175bps (-3bps) – lowest level since December 2014. In Mexico and Chile, country risk also narrowed by 3bps to 108bps and 113bps, respectively. In Chile, spreads inched down 1bp to 54bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Short and long Brazilian yields narrowed 1-2bps as the BCB’s activity index came in slightly below consensus (see Macro Backdrop). The Jan-18 fell 3bps to 7.34% and the Jan-21 went down 2ps to 8.91%, whereas the belly was stable (Jan-19 at 7.26%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve bull flattened after the end of the fourth round of Nafta negotiations. The 1-year decreased 3bps to 7.48% and the 10-year went down 9bps to 7.31%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Chilean rates were broadly stable in the session. In Camara swaps, the belly traded range bound (1-year: -1bp to 2.45%; 5-year: +2bps to 3.54%). Chile Rates Tracker In Colombia, long IBR swaps fell 2bps (10-year: -2bps to 6.09%), while the front end traded range bound (1-year at 4.71%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, October´s IPCA-15 consumer inflation preview will be released (Fri.). We forecast a 0.35% monthly rise, with year-over-year inflation increasing to 2.7% from 2.56%. On economic activity, September’s CAGED formal job creation may come through. We expect a net creation of 62k jobs (stability in seasonally adjusted terms). On fiscal accounts, September’s tax collection will be released throughout the week, for which we forecast BRL 103.5 billion, or a 6.6% y/y increase in real terms.
  • In Mexico, INEGI will announce September’s unemployment rate (Fri.). We expect the unemployment rate to post 3.6%. 
  • In Chile, the BCCh will hold its monthly monetary policy meeting (Thu.). We expect the board to keep the rate unchanged at 2.5%. 
  • In Argentina, the fiscal accounts for September will see the light (Fri.). We expect the government to meet its official target deficit of 4.2% of GDP in 2017. 

For details, refer to our Monthly Strategy Report.

For details on Brazilian markets, refer to our Handbook - First edition.

Today's editor: Pedro Correa



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