Itaú BBA - AMLO stronger than expected in Mexican election

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AMLO stronger than expected in Mexican election

July 2, 2018

According to a quick count, AMLO received a higher share of votes than expected

GLOBAL: We believe this week will be marked by strong activity data in the U.S. (ISMs and Payroll) and escalating trade war risks, both of which have contributed to a stronger USD trend against all EM currencies. The U.S.-China 25% tariffs on USD 34 billion are expected to take effect on Friday.

MEXICO: According to a “quick count” of votes, the anti-establishment candidate Andrés Manuel López Obrador (AMLO) won Mexico’s presidential elections, with an even stronger showing (approximately 53% of the votes) than polls were indicating (around 50%). Results for congress are yet to be released, but given the strong performance of AMLO at national level, the odds that his coalition “Together We Will Make History” forms a majority in both houses of congress are high. In his victory speech, AMLO adopted a conciliatory tone, pledging to respect contracts, central bank independence and fiscal discipline, but also promised to cap gasoline price increases and strengthen the domestic market (reducing dependence on imports). He said Carlos Urzua, his pick for Finance Ministry, and Alfonso Romo will be in charge of economic affairs during transition. We note that both Urzua and Romo have been developing a constructive relationship with the private sector.

Mexican local rates pricing implies 23bps in hikes over the next 6 months and a spot policy rate still around 7.0% over the next 3 years. While these levels appear attractive, we believe now is not yet the time to receive, because global trade war risks are escalating and the election result is still to be digested by market participants.

BRAZIL: The very front-end of local rates (DI Oct-18 and Jan-19) continued to tighten last week, but prices still imply around 40bps in hikes in the next two Copom meetings. We took profits on our receiver position in the front-end of local rates last week. Our base-case remains that BCB will keep rates stable in upcoming meetings, but the next Copom meeting is still far away (August 1st) and the jittery global scenario, added to local uncertainties, impose risks to local rates.

Brazilian macro data this week (activity and inflation) will be distorted by the truck drivers’ strike and thus should not have much impact on the market.

COLOMBIA: Banrep kept the monetary policy rate at 4.25%, as expected. This was the second consecutive unanimous decision, repeating April’s vote composition, when the board lowered the policy rate by 25bp. The press release announcing the decision holds a neutral tone, in line with recent comments that room for additional cuts is limited by activity and consumer confidence improvement.

The local yield curve currently implies no rate cuts in the short term and around 90bps in hikes in 1 year. Our position received in 18m IBR rates currently bears a 0.20% loss. We will keep the position, as we see no need to hike rates going forward, because the economy continues to grow below potential and inflation is converging to the 3% target.

This week we expect Colombia’s June’s CPI (Thu.) to increase by 0.21%, taking the 12-month change to 3.25%.

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