Itaú BBA - LatAm markets remain stable, but the risks are mounting

Latam FI Strategy Monthly

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LatAm markets remain stable, but the risks are mounting

October 14, 2016

Our analysis indicates that non-economic factors have played a role in the performance of the MXN, the Cop and the BRL.

For the full report, see enclosed file


  • The global economy remains stable. Steady but lackluster growth has marked the global economy this year, in line with the norm since the global financial crisis. The U.S. economy continues to grow at a moderate pace, reducing the likelihood of both recession and overheating. Monetary policy also remains expansionary in other G7 economies. In China, the recent stability is likely to extend into 2017, as the political transition favors growth-friendly policies and housing is no longer a drag, among other factors. Thus, the external environment continues to be supportive for EM assets.


  • But the risks for the global economy have increased and should be monitored closely, as they have the potential to signal a sudden deterioration in the environment for EM assets. At the moment, the main risks are: i) the U.S. elections; ii) the market reaction to a probable Fed hike in December, as well as to signs that monetary policy in advanced economies may turn less accommodative, for a variety of reasons; and iii) political and financial issues in Europe.


  • Our analysis hints that the political uncertainty in the U.S. continued to be a drag on the MXN in September. Also noteworthy, we estimate that the unexpected “no” victory in Colombia’s peace referendum and the accompanying risks to the country’s needed tax reforms added up to a negative impact of 4% on the COP’s monthly return. According to our models, the BRL is somewhat rich, but we do not think that a short position is adequate, because the strong momentum behind the fiscal reforms and the possibility of higher-than-expected inflows due to the repatriation bill are likely to delay a correction in the short term. Despite our model’s signals, we maintain a bullish medium-term view on the CLP, in light of our revised growth scenario for China and the Chilean authorities’ commitment to fiscal responsibility.


  • In this month’s Box we develop a valuation model to price Brazilian 5-year CDS spreads. The model will be employed to monitor market distortions in conjunction with our short-term FX models.


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