Itaú BBA - LatAm yields manage to narrow, despite political concerns in Europe

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LatAm yields manage to narrow, despite political concerns in Europe

February 7, 2017

The Mexican curve fell, overall, roughly 4 bps.

With information available until 6:30pm Brasilia time

Highlights

  • Investors remain cautious, amid political concerns in Europe; volatility increased, US corporate credit spreads widened and high-beta currencies weakened across the board (EMFX: -0.40%).
  • Within the currencies under our coverage, the BRL stood flat at 3.1210/USD and COP at 2,854.21/USD. The MXN depreciated slightly (-0.09% to 20.60/USD) as well; Moody’s noted in an statement that Mexico’s worse-than-expected fiscal performance is credit negative, amid slow economic activity and rising uncertainty in the US-Mexico trade relationship. The CLP was the regional laggard, depreciating to 647.33/USD (-1.09%).
  • Local rates performed better, as yields narrowed all across LatAm. The DI Futures curve bull-flattened, as the Jan19x21 spread narrowed 3bps. In Colombia, the IBR swaps curve also flattened, as yields narrowed 5bps in average, past the 2-year. The Mexican curve fell, overall, roughly 4 bps. Chilean rates accompanied the tightening of external yields, edging down 1-2bps.

Macro Backdrop

CHILE
  • The trade balance came stronger than expected again. The trade surplus came in at USD 720 million in January, above both our USD 590 million forecast and the market consensus (USD 455 million). As a result, the 12-month trade surplus came in at USD 4.4 billion, compared to the USD 4.6 billion last year and the USD 3.5 billion in 2015. Total exports rose 8.8% y/y (December: 19.9%), as industrial (11.4%) and mining exports (18.8%) remain the drivers behind the strong export growth numbers. Imports grew 13.4% y/y (December: -2.4%), with durable consumption goods imports up 29.2% (in line with strong retail sales numbers, falling inflation and a pick-up in consumption tourism), and energy products expanding 39.7%, responding to the recovery in oil prices. The recent gains in copper and a constrained internal demand will likely ensure that Chile retains a trade surplus, helping to keep its external deficit at manageable levels. This way, we expect a current account deficit of 1.8% of GDP this year, broadly stable from the 1.7% estimated for 2016. Restrained external imbalances will also give the BCCh added room to implement further monetary easing ahead. Full Report

Market Developments 

  • GLOBAL MARKETS: Investors remain cautious, amid political concerns in Europe. Volatility increased and US corporate credit spreads widened. Long U.S. Treasuries (10-year and 30-year) narrowed 4bps to 2.37% and 3.01%, respectively. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded lower (CRB futures index: -0.41%), amid a strong dollar (DXY: 0.38%). In FX, high-beta currencies weakened across the board (EMFX: -0.40%). Within the currencies under our coverage, BRL stood flat at 3.1210/USD and COP at 2,854.21/USD. The MXN depreciated slightly (-0.09% to 20.60/USD) as well; Moody’s noted in an statement that Mexico’s worse-than-expected fiscal performance is credit negative, amid slow economic activity and rising uncertainty in the US-Mexico trade relationship. The CLP was the regional laggard, depreciating to 647.33/USD (-1.09%). FX & Commodities Tracker 
  • CDS SPREADS & EXTERNAL BONDS: Credit Spreads remained flat all across LatAm, except for Brazil. For the 5-year tenor, while credit spreads in Brazil widened to 240 (+2bps), in Chile, Mexico and Colombia they stood flat at 77, 157 and 144, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The DI Futures curve bull-flattened, as the Jan19x21 spread narrowed 3bps. In DI futures, the Jan-19 narrowed 5bps to 10.18%. Breakevens tightened as well, as the 5y5y decreased 7bps to 5.08%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve fell, overall, roughly 4 bps. In TIIE swaps, the 1-year tightened 5bps to 7.04% and the 10-year decreased 4bps to 7.89%. The curve implies roughly 140bps in rate hikes for 2017. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Chilean rates accompanied the tightening of external yields, edging down 1-2bps. Chile Rates Tracker In Colombia, the IBR swaps curve bull flattened, as yields narrowed 5bps in average, past the 2-year. The 5-year decreased 6bps to 5.78%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, January’s IPCA consumer inflation (Wed.) will be on focus. We forecast an inflation of 0.43% m/m, this means that, in annual terms, inflation will set back to 5.4% from 6.3% in December. Two industry indicators may be released: paper cardboard dispatches (ABPO) and heavy vehicle highway traffic (ABCR). In Congress, the Special Committee that will discuss and analyze the Social Security Reform proposal may be formed on Thursday.
  • In Mexico, the INEGI (the statistics institute) will announce January’s inflation (Thu.). We expect the headline to accelerate to 4.73% y/y. Also, the Central Bank’s board will meet to decide on the reference rate (Thu.). We believe the Banxico will hike 50bps, taking the reference rate up to 6.25%. Moreover, INEGI will also publish December’s industrial production (Fri.), which we expect to contract -0.3% y/y. Finally, the ANTAD (National Association of Department Stores and Supermarkets) will announce January’s same-store-sales (Fri.). We forecast sales to grow 6% y/y.
  • In Chile, the INE will publish (Wed.) inflation data for January. We expect an inflation of 2.5% y/y (December: 2.7%).
  • In Colombia, the Banrep will release (Fri.) the monetary policy minutes from January. The minutes could provide insight on which conditions Banrep is monitoring before resuming the easing cycle.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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