Itaú BBA - Long DI futures widen on domestic concerns

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Long DI futures widen on domestic concerns

August 21, 2017

In Brazil, the long end of the curve widened and the BRL (-0.57% to 3.1651/USD) weakened on market conjectures over domestic headlines.

With information available until 6:30pm Brasilia time

Highlights

  • In Brazil, the long end of the curve widened and the BRL (-0.57% to 3.1651/USD) weakened on market conjectures over domestic headlines. In DI futures, the front end narrowed marginally (Apr-18: -1bp to 7.84%) while longer yields went up (Jan-21: +8bps to 9.50%). Similarly, linkers increased in the session (Aug-22: +3bps to 4.81%). 
  • Elsewhere in LatAm, yields narrowed marginally in tandem with US Treasuries and currencies posted gains. In Mexico, long TIIE swaps fell 1-3bps (10-year: -2bps to 7.10%) and the MXN gained 0.29% to 17.6595/USD. In Chile, the curve shifted 1-2bps downwards (1-year: -2bps to 2.36%) and the CLP (+0.60% to 642.61/USD) outperformed its peers on stronger copper prices (+1.33%). 
  • In Colombia and Argentina, markets were closed due to national holidays. 
Macro Backdrop

BRAZIL

  • IPCA inflation expectations virtually unchanged for 2017. According to Focus survey, inflation expectations slightly increased to 3.51% (+1bp) for 2017, while it has remained flat for 2018 at 4.20% and 2019 at 4.25%. Year-end Selic expectations remained flat at 7.50% for 2017 and 2018, and at 8.00% for 2019. The BRL marginally appreciated for 2017 and 2018: to 3.23/USD for 2017 (from 3.25/USD); to 3.39/USD for 2018 (from 3.40/USD); while it has remained flat for 2019 at 3.45/USD. Finally, GDP growth expectations did not change for 2017 (0.34%), 2018 (2.00%), and 2019 (2.50%). See BCB Report
Market Developments 
  • GLOBAL MARKETS: Global markets were cautious as investors seem to focus on this week’s Jackson Hole gathering of central bankers (August 24-26). The 5-year US treasury yield fell 1bp to 1.75%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices tumbled (WTI: -2.24% to USD 47.57/USD), reversing substantial gains from Friday. Conversely, metallic commodities posted widespread gains (iron ore: +3.21%; copper: +1.33%). In FX, the CLP outperformed its LatAm peers amid rising copper prices, closing at 642.61/USD (+0.60%). By the time of writing, the MXN gained 0.29% to 17.6595/USD. Bucking the regional trend, the BRL depreciated 0.57% to 3.1651/USD on market concerns over domestic headlines. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: All across LatAm, credit spreads for the 5-year tenor remained unchanged (Brazil: 203bps; Chile: 61bps; Mexico: 108bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The long end of the Brazilian curve widened as the BRL sold off. In DI futures, the front end narrowed marginally (Apr-18: -1bp to 7.84%) while longer yields went up (Jan-21: +8bps to 9.50%). Similarly, linkers increased in the session (Aug-22: +3bps to 4.81%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican yields narrowed 1-3bps. The 1-year TIIE swap inched down 1bp to 7.31% and the 5-year fell 2bps to 6.87%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: The Chilean curve shifted 1-2bps downwards. In Camara swaps, the 1-year narrowed 2bps to 2.36%. Chile Rates Tracker In Colombia, markets were closed due to a national holiday (Assumption Day). 

Upcoming Events

  • In Brazil, August’s IPCA-15 consumer inflation preview will be released (Wed.). We forecast a 0.40% monthly increase, with year-over-year inflation slowing to 2.7% from 2.8%. Also, the TLP (new Long Term Interest Rate) report was scheduled to be voted on Wednesday at 15:00 (SPT) in the joint commission (Lower House and Senate) built to discuss this topic. Moreover, July’s tax collection may also be released next week, for which we forecast BRL 108.3 billion. On the economic activity front, FGV will release its industrial business confidence preview for August (Tue.). We expect a 1.0% mom s.a. increase. Still, retail and consumer monthly surveys for August, also from FGV, will be released (Fri.). Onto the balance of payments report (Wed.), we expect a USD 3.5 billion current account deficit and direct investment in the country (DIC) to register inflows of USD 5.5 billion in July. 
  • In Mexico, the statistics institute (INEGI) will publish Q2’s GDP growth (Tue.). We expect it to post a 1.7% year-over-year growth. Also, INEGI will publish (Tue.) June’s monthly GDP proxy (IGAE), which we forecast at 2.7% year-over-year. Moreover, INEGI will announce June’s retail sales (Wed.). We estimate that retail sales slowed down to 2.5% year-over-year. Moving forward, INEGI will publish CPI inflation figures for the first half of August (Thu.). We expect bi-weekly inflation at 0.25%. Then, Banxico will publish the minutes of the latest monetary policy meeting (Thu.). Finally, INEGI will announce July’s unemployment rate (Fri.). We expect the unemployment rate to post 3.4%. Shortly after, Banxico will publish 2Q’s current account balance. We expect the current account deficit to come in at USD 3,800 million. 
  • In Colombia, think-tank Fedesarrollo will release the July Industrial and Retail confidence (Thu.). We expect confidence levels to remain low in the months ahead as an activity recovery is not imminent. 
  • In Argentina, the central bank will hold its biweekly monetary policy meeting, to decide on the reference rate (Tue.). We do not expect changes in the monetary policy rate until 4Q17, after the mid-term elections. Moreover, the INDEC will publish the EMAE (official monthly GDP proxy) for June (Thu.). We expect activity to grow 3.6% year over year in June (+0.6% mom/sa). Then, the IGA (GDP proxy published by OJF consulting firm) for July will see the light (Thu.). Furthermore, the trade balance for July will also come out (Thu.). We expect a trade deficit of USD 50 million.  Finally, Universidad Di Tella will publish its consumer confidence report for August (Thu.). 

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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