Itaú BBA - Weekly Fixed Income LatAm Strategy: Brazil rallies on positive news; Mexico undeperforms

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Weekly Fixed Income LatAm Strategy: Brazil rallies on positive news; Mexico undeperforms

November 19, 2018

Signs of improvement in the global scenario for EMs have been benefitting Brazil, Colombia and Chile.


BRAZIL: The rally in local rates resumed last week, with the belly tightening around 25bps and the long-end around 40bps. Signs of improvement in the global scenario for EMs, mainly due to a possible truce in the U.S. – China trade war, were the main drivers, but Brazilian rates, as well as other markets, outperformed. Locally, last week ended with greater clarity on the shape of the economic team. Roberto Campos Neto will be the new BCB governor, and Carlos Viana will remain as Economic Policy Director and member of the board, which signals policy continuity. Also important, Treasury Secretary Mansueto Almeida will be maintained at the job. We took profits after a strong rally in the belly of the curve, and have no position in Brazil today. Long-term real interest rates are the most attractive part of the curve at this point in our view, but clearer signs on the reform agenda are required for us to fully recommend receiving.

This week, keep an eye on the news flow regarding the election for speakers of the Lower House and the Senate, as well as on a possible Congress vote on central bank formal independence. On the former, the election is only in February 2019, but political articulations are being made. Rodrigo Maia (DEM) has reportedly scheduled a meeting with recently elected Lower House members this week, as he seeks to be reelected as speaker. On the data front, we will have formal sector job creation (CAGED) in October, which we expect at a healthy +70k (NSA, 60k SA). We will see the release of the November mid-month inflation preview, IPCA-15 on Friday - we see it at 0.27% MoM, 4.47% YoY (from 4.53% previously).

MEXICO: Mexican rates were the only ones in Latam that did not tighten last week (see charts). Rates in the belly increased by 2/3bps, while those in the long end widened by almost 10bps. The Mexican market continues to be affected by concerns on domestic policy. We have no position in Mexican local markets today, despite rates being at historically high levels.

This week, in addition to the ongoing news flow on economic policy, CPI inflation (Thu.) and GDP growth (Fri.) figures will be released.

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