Weekly Latin America Risk Monitor
Latin American equity markets were fairly mixed, with the two markets we’ve been most bearish on YTD leading the way to the downside from a wk/wk perspective (Brazil’s Bovespa Index down -2.4%; Chile’s Stock Market Select down -4.4%). In the FX market, the Colombian peso declined sharply (down -1.3% wk/wk) on dovish commentary from Finance Minister Juan Carlos Echeverry. In the fixed income market, Brazil’s 2yr sovereign yields shot up +13bps wk/wk on renewed inflation concerns. We’ll be out with a deep dive on Brazil later in the week.
Brazil: The key callouts out of Brazil last week continued to center on inflation. From near-term perspective, the FGV IGP-M inflation index (60% wholesale; 30% consumer; 10% construction) slowed for the second consecutive month in July (-0.12% MoM), marking the second consecutive monthly decline – the first back-to-back MoM declines since July/August of 2009. We continue to see Brazilian CPI peaking in August, but remaining substantially elevated relative to the central bank, the government, and the sell-side’s expectations over the long-term TAIL. Elsewhere, Brazilian officials introduced yet another policy measure designed to slow real appreciation – this time a 25% tax on derivatives transactions. As we’ve seen in the credit market, the government’s efforts to weaken its currency and cool the economy haven’t quite had the desired effect. Rather, they’ve simply boosted government’s tax revenues for a country which the World Economic Forum already ranks dead last from a burden of taxation perspective.
Colombia: Finance Minister Juan Carlos Echeverry hit the tape with some very dovish comments regarding the future scope for interest rate policy as well as Colombia’s foreign exchange rate and the market took his word for it (COP/USD down -1.3% wk/wk; 2yr sovereign debt yields down -11bps wk/wk). We would expect to continue to see additional strength in the IGBC General Index as the combination of accelerating growth, peaking inflation, and dovish policy (on the margin) support further bids for Colombian equities (up +1.6% wk/wk).
Chile: Chile becomes the latest victim of the slowdown in global manufacturing output and sentiment, with industrial production growth slowing sequentially in June to +4% YoY (more than cut in half from +9.7% YoY prior). On the flip side, Chilean retail sales growth accelerated to +12.5% YoY in June, supporting consulting firm A.T. Kearney recent decision to jump Chile three spaces up on its 2011 Global Retail Development Index to third (behind Brazil and Uruguay). Though we continue to like countries with sound fiscal policy like Chile over the long term (last week, the government affirmed its commitment to reduce its deficit to 1% of GDP vs. 3% currently), we remain bearish on the intermediate-term TREND of Chilean economic growth. Down -10.2% YTD, Chile’s Stock Market Select Index is surely pricing this in.