Itaú BBA - Weekly Fixed Income LatAm Strategy: EM Relief?

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Weekly Fixed Income LatAm Strategy: EM Relief?

November 26, 2018

This is a key week for Emerging Markets, as a trade truce between U.S. and China may reduce risks to the global economy

All LatAm: This is a key week for EM assets as a U.S. - China trade truce may reduce risks to the global economy. At the G-20 (Fri.) we believe Trump-Xi may postpone tariff hikes set for January 1st 2019, while Trump may keep flexibility to monitor the implementation of the deal.

BRAZIL: Local rates continued to tighten last week at the belly and long-end of the curve. Nominal rates are now below 10% at the entire structure (up to Jan 2028, see chart). Lower than expected inflation helped rates to tighten, but the flattening of the curve indicates the market is also becoming more constructive on the the medium-term scenario. The long-end of real interest rates is the part of the curve we find most interesting to be in at this point, but we will wait for clearer signs on the reform agenda to fully recommend receiving.

This week 3Q18 GDP will be the main release (Fri.). Our preliminary forecast is 0.7% qoq/sa growth, but the uncertainty towards this release is higher than usual, because the quarterly GDP series will be revised since 1Q16. Also, 3Q18 growth will be boosted by a base effect, given that the truckers stoppage dampened economic activity in 2Q18.

MEXICO: Against the more favorable trend for EM assets in recent weeks, Mexican local rates continued to widen last week. The uncertainty about domestic policy shifts continues to affect the market. AMLO carried out another public consultation on several social/economic programs and infrastructure projects.

This week keep an eye on Banxico’s inflation report (Wed.) and the minutes of its last meeting (Thu.). In the inflation report, it will be key to monitor how the central bank’s inflation outlook changes, amid currency depreciation and downside inflation surprises. In the minutes, the market will look for the reasons behind the decision of one of the board members that voted for a 50-bp hike, instead of the implemented increase of 25bps.


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