Itaú BBA - Long Brazilian yields widen on profit taking

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Long Brazilian yields widen on profit taking

February 16, 2017

The belly of the DI futures curve was pressured following the LTN and NTN-F auction and some profit taking.

With information available until 6:30pm Brasilia time

Highlights

  • The belly of the DI futures curve was pressured following the LTN and NTN-F auction and some profit taking. The long end of the curve (past Jan-19) shifted up 9bps, on average.
  • In LatAm FX, most currencies under our coverage depreciated. While the CLP edged up (+0.05% to 638.76), the MXN (-0.33% to 20.34) and the COP (-0.16% to 2,876.40) registered losses. The BRL was the regional laggard, trading at 3.0898/USD (-1.05%).

Macro Backdrop

BRAZIL
  • As we expected, IBC-Br activity index decreased in December. According to the Central Bank, the index fell 0.26% m/m, in line with our forecast (-0.3%) and consensus (-0.2%). Relative to December 2015, the IBC-Br shrunk 1.8% y/y. In 4Q16, IBC-Br fell 0.4% q/q, suggesting another drop for GDP (as measured by census bureau IBGE in its Quarterly National Accounts) in that period (we forecast -0.6% q/q).
  • According to FIESP, São Paulo state industry employment fell 0.24% m/m in January. Along with other economic activity data, we forecast a contraction of 36k formal jobs (CAGED) in January, which means closings of 4k jobs in seasonally adjusted terms (3mma will reach -55k, from -81k). Release date for the January Caged report is not defined yet.
  • Confidence in the industrial sector increased 6.7% m/m in February. According to CNI, the confidence reached 53.1 points. Coming out on February 20, we forecast a 3.0% increase for FGV’s industrial confidence in February (preview). 
  • BCB placed the full offering of 6,000 FX swaps. After closing, the Central Bank called a roll over auction of up to 6,000 contracts on February 17.

Market Developments 

  • GLOBAL MARKETS: Markets traded in a risk-off tone. Volatility decreased and most major equity markets were on the red. Long DM rates tightened (3bps on average) and all US Treasuries traded lower (10-year: -4bps to 2.45%). The movements were probably a correction from the upbeat global sentiment in the last few days. The Fed funds futures implied probability of a March hike fell to 38% from 44% as of Wednesday. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were mixed and metals fell on some profit taking. The CRB futures index registered losses (-0.26%), mostly due to the decrease in soybean prices (-1.59%), iron ore (-1.41%) and copper (-1.07%). Brent edged down to USD 55.70/bbl (-0.09%). In LatAm FX, most currencies under our coverage depreciated. While the CLP edged up (+0.05% to 638.76), the MXN (-0.33% to 20.34) and the COP (-0.16% to 2,876.40) registered losses. The BRL was the regional laggard, trading at 3.0898/USD (-1.05%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: All over LatAm, the 5-year tenor credit spreads widened for the second consecutive day. In Chile, spreads increased 2bps to 80bps. Colombian risk premium went up to 144bps (+4bps). Mexican CDS increased to 154bps (+4bps). Meanwhile, the Brazilian spread increased the most, trading at 227bps (+6bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The belly of the DI futures curve was pressured following the LTN and NTN-F auction and some profit taking. The long end of the curve (past Jan-19) shifted up 9bps, on average. The Jan-19 went up 10bps to 10.16% while the Jan-21 increased 9bps to 10.33%. The curve now implies roughly 325bps in rate cuts for 2017. Accordingly, long breakevens widened. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve bull flattened. The 1-year tightened 3bps to 7.21% and the 10-year went down 4bps to 7.93%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Camara rates had a quiet session. The 1-year went up to 3.01% (+1bp) and the 10-year stood flat at 4.19%. Chile Rates Tracker The long end of the IBR curve widened. The 1-year edged up, but stood flat at 6.62% and the 10-year went up to 6.40% (+6bps). Colombia Rates Tracker

Friday Events

  • In Brazil, January's Current Account Balance will be released.  We expect the current account deficit to reach USD 5.6 billion.  Then, direct investment in the country (former FDI) in January will be released, for which we expect to sum up to USD 10 billion. 
  • In Colombia, the trade balance is on the limelight. DANE will publish the December trade balance. We expect a trade deficit of USD 455 million, smaller than the USD 1.4 billion deficit recorded one year ago.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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