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Rising global yields pressure LatAm curves

June 27, 2017

Eonia swaps widened strongly after ECB Chair Draghi hinted at a tapering announcement still this year.

With information available until 6:30pm Brasilia time

Highlights

  • Eonia swaps widened strongly and the EUR jumped to 10-month highs after ECB Chair Draghi hinted at a tapering announcement still this year. The ECB president left the door open for policy steps that would signal a reduction in the pace of stimulus, without necessarily tightening financial conditions.
  • The rise in global rates put pressure on LatAm curves. In Mexico, 5-year TIIE swaps widened 11bps to 6.75%. The Chilean curve bear-steepened, as the 1s10s spread widened 2bps. The Brazilian curve also bear-steepened, additionally impacted by the political news flow. In DI futures, the Jan-19 widened 5bps to 9.01% and the Jan-21 rose strongly to 10.29% (+11bps).

Macro Backdrop

BRAZIL
  • The current account surplus totaled USD 2.9 billion in May, topping our estimate (1.9 billion) and market consensus (2.0 billion). The reading was better than the USD 1.2 billion surplus recorded in May 2016. Over 12 months, the current account deficit receded to USD 18.1 billion (1.0% of GDP). The seasonally-adjusted annualized three-month moving average points to USD 9 billion surplus in May (previous: 2.2 billion). The biggest positive contribution again came from the trade balance, with a USD 7.4 billion surplus (May 2016: 6.2 billion). The trade surplus is set to weaken this year, due to lower commodity prices and to some rebound in economic activity. Yet, the positive trade balance will continue to be the main factor supporting a low current account deficit.
  • In the financial account, direct investment in the country (DIC) added up to USD 2.9 billion, in line with our estimate and market consensus (both at 3.0 billion). Equity capital transactions accounted for USD 2.9 billion of total DIC, while intercompany loans resulted in USD 21 million outflows, as debt amortizations topped credits received from abroad. DIC accumulated over 12 months declined to USD 81 billion. Preliminary data published by BCB show thinner DIC inflows in June (USD 1.4 billion as of June 23). Foreign investment in the local capital markets was negative by USD 2.4 billion, as USD 3.2 billion outflows from fixed income outsized USD 795 million inflows to the stock market. Over 12 months, foreign investment in the local capital markets continues to decline, but outflows became less intense, at USD 7.9 billion. Preliminary BCB data released show outflows from stocks and fixed income as of June 23 (USD -1.4 billion and -1.6 billion, respectively).
  • All in all, the strong trade surplus has helped to maintain low current account deficits. We still expect large trade surpluses this year, but a rebound in domestic demand and lower commodity prices tend to produce slightly weaker readings in the next months. Thus, the current account deficit is set to widen from current levels as the year advances, but recent results pose some risks to a lower deficit estimate in 2017. In terms of financing, DIC remains resilient, reducing Brazil’s reliance on volatile capital flows. However, portfolio flows are still negative over 12 months. Full Report
  • According to FGV monthly commerce survey, confidence in the retail sector fell 3.3% in June to 85.7, possibly reflecting the increase in political uncertainty. The decline was spread out between the current situation component (-4.0%) and expectations one (-2.5%). The index had been recovering since the end of 2015, yet remains well below neutral levels (around 100).
  • Conversely, FGV’s construction survey shows a 0.3% confidence gain in June. The result might suggest that the sector was not affected by the increase in political uncertainty, but several indicators suggest construction had not yet started to recover in 2017. Therefore, construction had less room for disappointment than other sectors showing the first signs of a recovery. The small gain was evenly distributed between the current situation (0.3%) and expectations (0.2%) components. Seasonally adjusted capacity utilization in the sector has receded further to a new minimum, suggesting weak production of typical construction inputs for the month.
  • Chief Attorney Janot delivered criminal charges against President Michel Temer to the Supreme Court on Monday. The House of Representatives must vote to allow the case against Mr. Temer to go to a trial, by a two-thirds majority (342 representatives).
  • BCB placed the full offering of 8,200 FX swaps. After closing, it announced another roll over auction of up to 8,200 (USD 410 million) contracts on June 28.
MEXICO
  • The trade balance posted a USD 1,079 million deficit in May, surprising median market expectations of a USD 273 million surplus. Thus, the 12-month rolling trade deficit widened to USD 9.6 billion (previous: 8.9 billion), with the energy deficit growing to USD 15.2 billion (14.6 billion in April) and the non-energy surplus standing flat at USD 5.7 billion. The 3-month, seasonally-adjusted, annualized trade deficit widened to USD 8.5 billion in May (previous: 7.1 billion). The same measure of the energy balance set a new historical low (USD -17.7 billion vs. -17.3 billion in April). The non-energy 3-month trade balance posted a USD 9.2 billion surplus - a bit below the print recorded in April.

  • Looking ahead, we expect the trade deficit to resume a narrowing trend on the back of a larger non-energy surplus, led by higher export growth (due to a dynamic U.S. economy) and weaker domestic demand. However, the recent appreciation of the MXN and falling oil output will exert downward pressure on the trade balance. Lower oil prices can also exert downward pressure, in spite of the fact that Mexico now runs an energy deficit. In fact, energy exports (mostly crude) are more elastic to international oil prices than energy imports (mostly refined products). Full Report
ALL LATAM
  • Macro Vision: The role of external factors in the Latin American slowdown. We have identified three external factors (global growth, China's growth and EM’s sovereign credit risk) that explain a large portion of growth in each of the major Latin American countries. In fact, the bulk of the slowdown in Latin American countries over the past few years can be attributed mainly to a less supportive external scenario relative to the terms-of-trade boom period. Full Report
Market Developments
  • GLOBAL MARKETS: Eonia swaps widened strongly (5-year: +9bps to 0.04%) after ECB’s Draghi hinted at further monetary policy parameter adjustments announcement later this year, in line with our baseline scenario. The ECB president left the door open for policy steps that would signal a reduction in the pace of stimulus, without necessarily tightening financial conditions. “As the economy continues to recover, a constant policy stance will become more accommodative,” Draghi said. “The central bank can accompany the recovery by adjusting the parameters of its policy instruments - not in order to tighten the policy stance, but to keep it broadly unchanged”. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodity prices extended Monday’s gains (CRB futures: +0.86%), led by energy (Brent: +0.81% to USD 46.20/bbl) and metals (iron ore: +5.12%). The weaker dollar (DXY: -0.99%) played a role in the price action. In currencies, the EUR tested 10-month highs (+1.41%), after ECB Chair Draghi hinted at a tapering announcement still this year. The MXN traded at 17.99/USD (-0.65%), while the political noise fueled the BRL’s volatility (-0.52% to 3.3140/USD). Coming back from local holidays, Andean pairs tracked the broad EMFX weakness (CLP: -0.18% to 662.17/USD; COP: -0.28% to 3,029.46/USD). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Andean credit spreads (5-year) were mostly unchanged (Chile: 65bps; Colombia: 131bps). In contrast, risk premiums inched up 1bp in Mexico (111bps) and 3bps in Brazil (240bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The curve bear-steepened, with the political news flow fueling volatility in Brazilian assets. In DI futures, the Jan-19 widened 5bps to 9.01% and the Jan-21 rose strongly to 10.29% (+11bps). Breakevens widened 6-7bps past the 5-year; the 5y5y forward increased 5bps to 4.92%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Rising US yields put upside pressure on the Mexican curve. In TIIE swaps, the 5-year widened 11bps to 6.75%. Mbonos also shifted higher (2021s: +7bps to 6.54%), as did linkers (Udibono 2040: +3bps to 3.49%). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: The Chilean curve bear-steepened, echoing the pressure from DMs yields. In Camara swaps, the 1s10s spread widened 2bps. Chile Rates Tracker In contrast, Colombian yields narrowed softly (5-year: -3bps to 5.30%).Colombia Rates Tracker

Upcoming Events

  • In Brazil, the week’s highlight will be the National Monetary Council meeting (Thu.). The CMN will decide on the 2019 inflation target and the TJLP long term interest rate. In our view, a lower inflation target for 2019 would reinforce the outlook for lower inflation and anchored expectations. Local news have been indicating a reduction in the 2019 inflation target to 4.25% or 4.0% (from 4.5%). In addition, we expect no change to the TJLP in the near future, currently at 7.0%. Moreover, the nationwide unemployment rate for May will come out (Fri.), and we expect a 0.2% increase to 13.4% (our seasonal adjustment). On fiscal accounts, the consolidated primary budget balance for May will come through (Fri.). We expect a BRL 21.5 billion deficit.
  • In Mexico, the Ministry of Finance will announce May’s fiscal balance (Fri.). We expect the fiscal deficit indicators to continue narrowing, as fiscal consolidation makes headway.
  • Activity data is on the spotlight in Chile. The national statistics agency (INE) will publish the industrial activity indicators for the month of May (Fri.). We expect manufacturing production to decline 0.3% from last year (-7.5% in April). INE will also publish the national unemployment rate for the quarter ending in May (Fri.). We expect the unemployment rate to reach 6.9% (6.8% one year ago).
  • In Colombia, we expect Banrep to deliver another 25-bp rate cut (taking the policy rate to 6.0%) in its monthly monetary policy meeting (Fri.). The unemployment rate for the month of May will be also released (Fri.). We expect the labor market to remain weak ahead amid low dynamism of the Colombian economy and see the urban unemployment rate to rising to 10.7% in May.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza



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