Itaú BBA - Mexican CDS reaches 32-month low amid outlook revision

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Mexican CDS reaches 32-month low amid outlook revision

August 3, 2017

The 5-year Mexican country risk fell to 99bps (-1bp) – below the 100bps level for the first time since December 2014.

With information available until 6:30pm Brasilia time

Highlights

  • The 5-year Mexican country risk fell to 99bps (-1bp) – below the 100bps level for the first time since December 2014 – after Fitch revised the country’s rating outlook to stable from negative (see Macro Backdrop). 
  • In LatAm FX, Andean pairs appreciated (CLP: +0.35% to 649.09/USD; COP: +0.32% to 2,954/USD). On the other hand, the MXN is trading at 17.8436/USD (-0.12%) by the time of writing. Finally, the BRL was broadly stable at 3.1146/USD (-0.03%). 

Macro Backdrop

BRAZIL
  • The House of Representatives blocked the indictment filed by the Prosecutor-General against the President. 263 representatives voted against authorizing the Supreme Court to put Mr. Temer on trial, 227 lawmakers voted in favor and there were 21 abstentions. 
MEXICO
  • Fitch affirmed the BBB+ rating and revised Mexico’s Long Term Foreign and Local Currency Issuer Default Ratings outlook to stable from negative. The agency cited reduced downside risks to the country’s growth outlook and expected stabilization of the public debt burden. In addition, according to Fitch, “a moderating US stance appears to be setting in with respect to the […] Nafta renegotiation”.
CHILE
  • Business confidence remains above levels recorded in 2016 but room for recovery persists. Think-tank Icare’s July business confidence index remained in pessimistic territory (below 50) for the 40th consecutive month, but it did pick up nearly 3 percentage points from July 2016 to reach 42.4 points (previous: 43.2). This was the fifth consecutive month business sentiment has been above the level recorded one year prior. The mining sub-index remains the sole indicator in optimistic territory (51.8), although it did fall slightly over the 12-month period (52.5 points in July 2016). Commercial confidence sits near the neutral level at 48.6 points broadly stable in the 12-month period. Meanwhile, industrial confidence increased 3.5 points to 41.4 points and construction confidence rose 9.8 points to 26.4 points. Our expectation of an activity recovery into 2018 considers a confidence improvement that would lead to an improved investment performance. 

ARGENTINA

  • The latest survey of expectations showed that analysts revised their inflation forecasts upward again for this year and next. While survey participants still forecast a reduction in interest rates, the expectation is now for a more gradual pace and a higher level for the reference rate by year-end 2017. The analysts kept unchanged their growth forecasts for this year and 2018. Inflation expectations for 2017, measured by the national index, increased by 0.4%, to 22.0%, probably due to recent adjustments in regulated prices and the exchange rate weakening. The CPI for July will come out next week, and it is expected to post a 2% month-over-month gain (up from 1.2% in June). Our forecast by year-end also stands at 22%, above the target set by the central bank (12%-17%). 
  • Consistent with the more challenging inflation picture, expectations for the year-end reference rate (7-day repo) increased to 23.75% (from 22% in June). Analysts expect the reference rate to start to fall by the end of September, to 25.50%, from a current level of 26.25%. We have increased our forecast for the repo rate to 25% by December, and we don’t expect changes until there is more clarity on the result of the mid-term elections. Economists maintain their GDP growth expectations for this year at 2.7% (our forecast: 2.5%). For 2018, analysts expect 3.0% growth (slightly higher than our 2.8% forecast). Full Report
Market Developments 
  • GLOBAL MARKETS: US Treasuries narrowed (5-year: -4bps to 1.79%) after ISM non-manufacturing PMI came in below expectations. In July, the index declined to 53.9 from 57.4 (consensus: 56.9). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities posted losses in the session (CRB futures: -0.73%). The main drag was the fall in oil prices (WTI: -1.27% to USD 49.10/bbl). In FX, currencies under our coverage were mixed. Andean pairs appreciated (CLP: +0.35% to 649.09/USD; COP: +0.32% to 2,954/USD). On the other hand, the MXN is trading at 17.8436/USD (-0.12%) by the time of writing. Finally, the BRL was broadly stable at 3.1146/USD (-0.03%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads narrowed substantially in the session. For the 5-year tenor, CDS in Chile inched down 1bp to 99bps. In Brazil, spreads fell 3bps to 201bps. In Colombia, however, country risk was stable at 123bps. Mexican 5-year CDS fell to 99bps (-1bp) – below the 100bp level for the first time since December 2014 – after Fitch revised the rating outlook to stable (see Macro Backdrop). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields narrowed in the session. In DI futures, the Jan-19 fell 6bps to 7.96% and the Jan-21 went down 6bps to 9.17%. For the remainder of the year, the curve is currently pricing 155bps in rate cuts. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Once again, Mexican yields traded range bound. In TIIE swaps, while the 1-year inched up 1bp to 7.30%, the 5-year fell 1bp to 6.85%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates narrowed on falling US treasuries. In Camara swaps, the 1-year fell 2bps to 2.29% and the 5-year went down 3bps to 3.31%. For the remainder of the year, the term premium adjusted curve is pricing another 25-bp cut. Chile Rates Tracker In Colombia, the curve steepened in the session. In IBR swaps, while short rates narrowed (9-month: -2bps to 5.09%), long ones widened (10-year: +3bps to 6.41%). Colombia Rates Tracker

Friday Events

  • In Brazil, Anfavea’s auto production will be released. 
  • In Mexico, the statistics institute (INEGI) will publish May’s gross fixed investment. We forecast 1.5% year-over-year growth (up from a sharp 8.6% contraction in April). 

Latam Macro Calendar

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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