Itaú BBA - COP sells off alone while peers bounce back

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COP sells off alone while peers bounce back

November 1, 2017

The COP was the regional laggard (-0.76% to 3,065/USD – weakest since July) as oil prices posted losses.

With information available until 6:30pm Brasilia time


  • In FX, the COP was the regional laggard (-0.76% to 3,065/USD – weakest since July) as oil prices posted losses (WTI: -0.20% to USD 54.48/bbl). The MXN (+0.16% to 19.1163/USD) reversed earlier losses as Banxico sold completely the USD 500 million FX hedges in NDF auction and the BRL appreciated 0.16% to 3.2666/USD. 
  • In rates, Colombian yields widened on the back of a weaker COP (-0.76%). In IBR swaps, the 1-year went up 2bps to 4.61% and the 5-year increased 10bps to 5.46%. 
  • In Chile, markets were closed due to a national holiday. 

Macro Backdrop

  • Industrial production increases 0.2% in September and extends gradual rebound. Industrial production increased 0.2% in September, below the median of market estimates and our forecast (0.6% and 0.7%, respectively). The negative aspect is that diffusion was weaker than the headline reading suggested. On the bright side, the disappointment was caused by the decline pharmaceutical production. In addition to that, capital goods and construction material indicators reinforce the outlook for a seasonally-adjusted quarterly increase in investments in 3Q17. Finally, available coincident indicators (industrial confidence, capacity utilization, weekly foreign trade figures, power consumption, auto sector data, among others) point to a 0.3% advance in industrial production in October (5.4% yoy), extending the gradual upward trend.  Full Report
  • The trade surplus reached USD 5.2 billion in October, slightly above our forecast (USD 5.0 billion) and somewhat below market consensus (USD 5.3 billion). Exports totaled USD 18.9 billion, falling 0.5% mom/sa. Meanwhile, imports totaled $13.7 billion, declining 2.2% mom/sa. Compared to October 2016, exports climbed 31.1% and imports went up 14.5%. Over 12 months, the trade surplus increased again to USD 67.7 billion and the year-to-date figure is the highest in the historical series started in 1992. The seasonally-adjusted annualized quarterly moving average remains around USD 65 billion, reflecting stability of the trade balance at the margin.
  • October figures showed stabilization of the trade surplus at the margin. Good export performance and the fact that imports remain at low levels have ensured all-time high trade surpluses throughout the year. The latest readings represent upside to our forecast for 2017, currently at USD 62 billion. Full Report
  • According to Fenabrave, vehicle sales reached 203k in October, falling 2.3% mom/sa. Nonetheless, vehicle sales show an improvement trend since late 2016, and are 17% up year-to-date (seasonally adjusted). Additionally, the year-over-year growth figure stands at 27.5% and was slightly better than noticed yesterday by some newspapers using preliminary data. The breakdown shows a 2.5% mom/sa decrease in “passenger cars + light vehicles” and a 5.6% increase in  “trucks + buses” (our seasonal adjustment), after two consecutive declines. At last, our forecast for auto production (Anfavea) is 255k in October (45% yoy, -4.9% mom/sa). 
  • Banxico published October’s expectations survey, which shows a moderate decrease of inflation expectations. Median inflation expectations for 2017 decreased to 6.24% (from 6.30% in September’s survey), and showed a larger decrease for the longest tenor (average of next 5-8 years, down to 3.30% from 3.45%). Turning to the exchange rate, median MXN expectations increased substantially for year-ends 2017 (to 18.80/USD, from 18.05/USD) and 2018 (to 18.50, from 18.15). Moving on to economic activity, median GDP growth expectations were unchanged for 2017 (2.10%) and 2018 (2.3%), but decreased a bit for the average of the next 10 years (2.60%, 2.7% previously). Finally, on monetary policy, median expectations show that economists believe Banxico will leave the policy rate at its current level for the rest of 2017 (7%, unchanged) and cut rates in 2018 (to 6.5%, unchanged). As per the survey, the first 25-bp cut would come in 3Q18, and the second in 4Q18.


  • The treasury announced a tax reform proposal aimed at encouraging investment and reducing economic distortions. The plan would have a direct fiscal cost of 1.5% of GDP over the next five years; a cost the treasury assumes will be offset by higher growth. The bill would implement a steady reduction in the corporate income tax rate, which would fall from 35% today to 25% by 2021, for companies that do not distribute dividends. In addition, to encourage the formalization of employment, the government would set a minimum threshold for paying contributions to the social security system (on the excess over a nominal wage of ARS 12,000, or USD 685). 
  • To partly offset the fiscal impact of the tax cuts, the government is seeking to eliminate the tax exemption for revenues originating in financial assets held by individuals (time deposits, federal and provincial bonds, and corporate bonds). The tax rates on the previously exempted revenues would be 15% for foreign-currency-denominated instruments and 5% for peso-denominated instruments. The tax on assets in local currency is lower due to the still-high level of inflation. Under the plan, the government would eventually increase this tax rate once inflation declines. Equity holdings would remain tax-exempt. Finally, taxes on alcoholic and sugar-sweetened beverages would be hiked, while those on electronics, motorcycles and cars would be eliminated. 
  • We don’t expect a significant impact in fiscal accounts in 2018 as the first cut in corporate income tax is scheduled for 2019. Looking at the medium-term, we note that while the reform is pro-investment, the final impact on growth is difficult to estimate and the reform introduces some additional strain to the fiscal consolidation sought by the government in the next years.


  • Market Conditions Index: market conditions deteriorate in October. Financial conditions in the region as a whole receded at the margin to -0.04 (down from 0.55 in September), and are now close to neutral territory. Nevertheless, the three-month moving average reached 0.59 (vs. 0.50 in the previous month). Brazil (with declines in the financial and commodity components), Mexico (falling stock market and exchange rate depreciation) and Colombia (falling stock market and exchange rate depreciation) contributed to the slowdown during the month. Meanwhile, Chile (rising stock market, offsetting the lower copper prices) and Peru (overall improvement across components, except for the sliding gold price) stood out positively.  

​​​​​​​Full Report

Market Developments
  • GLOBAL MARKETS: Equity markets were on the green and volatility gauges narrowed on the day of the FOMC meeting. As broadly anticipated, the Fed left rates unchanged at 1%-1.25%. The statement showed that the board now sees the US economy growing at a “solid rate”, compared to “moderately” in September. In all, the communiqué is consistent with the market´s baseline scenario of a rate hike in December. The Fed funds futures implied probability of a rate hike in December increased to 88% from 83% as of Tuesday. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices fell (WTI: -0.20% to USD 54.48/bbl) as the weekly DOE report showed that US crude stocks fell less than expected. Moving to agriculture, corn climbed 1.80% and sugar fell 0.88%. In metallic commodities, copper posted gains of 1.34% and iron ore fell 0.37%. In FX, the COP was the regional laggard (-0.76% to 3,065/USD) as oil prices posted losses. Then, the MXN reversed earlier losses as Banxico sold completely the USD 500 million FX hedges in NDF auction. At last, the BRL appreciated 0.16% to 3.2666/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor were mixed in LatAm. In Brazil, CDS fell 1 bp to 171bps. Meanwhile, Colombian and Mexican country risk increased to 112bps (+2bps) and 108bps (+1bp). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Long Brazilian yields widened once again. In DI futures, while the front end was broadly stable (Jan-18 at 7.22%), the long end increased up to 10bps (Jan-21: +9bps to 9.27%). Brazil Rates Tracker
  • LOCAL RATES – Mexico: The Mexican curve shifted 2-3bps upwards in the session. In TIIE swaps, the 1-year widened 3bps to 7.56%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, markets were closed due to a national holiday. In Colombia, yields widened on the back of a weaker COP (-0.76%). In IBR swaps, the 5-year increased 10bps to 5.46%. Colombia Rates Tracker

Upcoming Events

  • In Chile, INE will publish the private consumption activity indicators for September (Fri.). We expect the commercial activity index to have increased 3.2% from last year.
  • In Argentina, the car-makers association (ADEFA) will release October’s data on production, exports and domestic sales to car dealers (Fri.).

For details, refer to our Monthly Strategy Report.

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

Today's editors: Eduardo Marza, Pedro Correa

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