DionRabouin.com (sort of)

Trump makes Mexican peso great again; investors see more gains ahead

Posted in Uncategorized by dionrabouin on February 9, 2017

Mexico’s peso has improbably been the world’s top-performing currency since Donald Trump’s presidential inauguration, and an increasing number of emerging market fund managers said it could rebound further from its nosedive following the U.S. election.

Even before its inauguration comeback, a number of emerging market fund managers were betting that the peso had seen its worst days and was poised to outperform in 2017 along with other Mexican assets.

“We’ve gone from an outright short late last year to an overweight position relative to the index, just because there’s a lot of bad news priced in,” said Jim Barrineau, Schroders’ head of emerging markets debt and portfolio manager for its multi-sector bond fund.

“The real exchange rate is very, very cheap relative to history, and at this point, the bond yields are competitive with the higher yielding countries in EM.”

The peso was up 8 percent since Trump’s inauguration on Jan. 20 despite his proposal last week of a 20 percent border tax on Mexican imports and the collapse of a scheduled face-to-face meeting with Mexican President Enrique Pena Nieto.

The peso also made a technical breakout Friday, rallying through a resistance point at the 20.56 level, around where it closed on Thursday. That level marks a 38.2 percent Fibonacci retracement of its sell-off since the Nov. 8 election.

“Perceiving the 20 percent import tax comment as a starting point for negotiations, the market took some solace because it could have been much higher, say 30 percent or 35 percent,” said Gordian Kemen, global head of emerging market fixed income strategy for Morgan Stanley.

The peso has continued its tear even as Trump has reiterated concerns about the North American Free Trade Agreement, saying on Thursday he would like to speed up talks to either renegotiate or replace the deal.

Kemen said investors were relieved Trump did not move to unilaterally withdraw from NAFTA or rule out talks entirely.

PRICED IN

And though investors have in the past wagered at their peril that Trump’s often extreme rhetoric would not be matched by his real-world actions, many are betting that the current price of Mexico’s peso already reflects the worst of any potential U.S. action against the country.

Deutsche Bank asset managers said earlier this week they believed the peso had hit a near-term bottom.

Similarly, Michael Gomez, PIMCO’s head of emerging markets portfolio management, said that while he expects the background to remain noisy, “Mexican assets and the peso specifically already incorporate much of the expected downside risk.”

UBS strategists recently said in a research note that even the border tax had been 70 percent priced into the peso’s value.

That’s not to say big risks do not remain, especially given the recent bounce.

“The peso is cheap certainly and absent a big unfavorable change to NAFTA, you will make great money investing in Mexican bonds. But a change to NAFTA that’s unfavorable, and who knows,” said Kieran Curtis, investment director at Standard Life Investments in London, adding that he still sees Mexico as a “deteriorating credit.”

Each firm calculates a currency’s “fair value” differently, but generally valuations are derived by comparing the ability to buy the same goods in different countries or measuring the value of income and investment an economy takes in against what it spends.

Fund managers interviewed by Reuters largely agreed that the peso was at a level inconsistent with the reality of its economy, but some remained wary of further Trump-related surprises.

While he holds slightly overweight positions in Mexican debt, including local currency bonds, Gorky Urquieta, co-head of emerging market debt at Neuberger Berman, said aggressive unilateral U.S. imposition of tariffs or an unwind of NAFTA would likely hit the peso again.

“As much as we think the currency is undervalued, it could become even more undervalued before it begins a sustained recovery,” he said.

Ecuador election may be Latin America’s next big score: investors

Posted in Uncategorized by dionrabouin on February 9, 2017

Image result for dion rabouin ecuador

After seeing big payoffs in Brazil and Argentina following market-friendly leadership changes, some fixed-income investors are betting on a similar bonanza in Ecuador where a presidential election takes place this month.

Outgoing President Rafael Correa is one of the few remaining left-wing leaders in South America after Brazil’s Dilma Rousseff was ousted in August and Argentina’s powerful Peronist bloc was voted out of the Casa Rosada in 2015.

Both countries, while still struggling economically, turned to leaders who championed the private sector and have worked to undo the policies of their predecessors, backing austerity measures favored by investors.

“Ecuador has the potential to be a breakout story depending on how the elections go,” said Arif Joshi, emerging markets debt portfolio manager at Lazard Asset Management, who said Ecuador was one of his top picks for 2017.

“If the opposition wins you will likely see the same type of spread compression that you saw in Argentina and Brazil,” Joshi said.

The spread between yields on U.S. Treasury bonds and Argentinian and Brazilian sovereign bonds both narrowed by more than 100 basis points ahead of the election of Mauricio Macri in Argentina and Rousseff’s removal in Brazil.

Correa’s former vice president, Lenin Moreno, leads the field but probably lacks enough support to win in the Feb. 19 election without having to compete in a second-round runoff.

Guillermo Lasso, a conservative former economy minister who served as executive president of Banco de Guayaquil GYL.GQ, is second in current polling. But some analysts think Lasso is poised to win the backing of other opposition contenders and go on to beat Moreno in a second round.

Combined support for the three main opposition candidates is greater than Moreno’s, nationwide polls show.

“Should Lasso win as expected, he will move quickly to improve the policy outlook,” Eurasia Group analysts Risa Grais-Targow and Agata Ciesielska said in a note to clients this week. “This includes going to the IMF for a full program and aggressively looking to attract foreign direct investment.”

Ecuador’s deteriorating economy – it fell into recession last year after posting more than 5 percent growth multiple times during Correa’s period in office – is expected to play to Lasso’s favor.

For Ecuador’s widely held bonds maturing in 2022, the spread over U.S. five-year Treasuries has narrowed by more than 300 basis points since spiking on Nov. 14.

During that time, Ecuador’s JPMorgan EMBI bond .JPMEGECU has risen 13.3 percent, while the JPMorgan EMBI plus .JPMEMBIPLUS, which tracks its overall emerging market index, has gained 4.5 percent.

Edwin Gutierrez, head of emerging market sovereign debt at Aberdeen, said expectations for Ecuador’s bonds are “binary” when it comes to the election.

If one of the opposition candidates wins, Ecuador’s bonds “will definitely get that positive knee-jerk reaction,” Gutierrez said.

In addition to several of Ecuador’s sovereign bonds, Gutierrez holds debt positions in state-owned oil company EP Petroecuador.

Ecuador’s bonds are already attractive to investors on a relative return basis. Those maturing in 2022 offer a coupon of 10.75 percent, compared with 6.875 percent, for example, on Argentina’s recently issued five-year sovereign bonds.

The Andean nation has a speculative grade B credit rating average, however, and Fitch Ratings Agency, which holds a negative outlook on Ecuador, warned late last year about the negative effects of a buildup of its debt, which has roughly doubled in the past four years.

The country’s economy is also highly dependent on oil prices.

“It’s really an oil story,” said Rahmila Nadi, co-head of Deutsche Bank’s Enhanced Emerging Markets Fixed Income Fund. “But when you’re talking about 8-plus percent yields, it’s hard to not be excited about.”

Click tmsnrt.rs/2jG86AN for graphic comparing Equador’s 2022 bonds against the 5-year U.S. Treasury

Amid Trump selloff, Brazil turnaround story outshines Mexico

Posted in Uncategorized by dionrabouin on February 9, 2017

U.S. President elect Donald Trump gestures to diners as he departs the lobby of the New York Times building after a meeting in New York, U.S., November 22, 2016.  REUTERS/Lucas Jackson

U.S. President-elect Donald Trump’s surprise victory could be a blessing in disguise for Brazil as the country’s agenda of fiscal reform and low reliance on trade lure investors away from more vulnerable Mexican markets.

Emerging markets have sold off since the Nov. 8 election on concerns tax cuts and heavy infrastructure spending under a Trump administration could force the Federal Reserve to hike rates faster, potentially draining capital from high-yielding assets in the developing world.

Many also fear a global trade shock if Trump makes good on campaign pledges to review trade accords.

The Brazilian real tumbled 8 percent in the four days following the vote, the second-worst performing currency in Latin America behind the Mexican peso. But the real has since stabilized to around 3.40 to the dollar as the initial shock faded.

Investors say optimism over President Michel Temer’s reform agenda has lifted foreign direct investment in Brazil and left it less exposed to market volatility in the wake of Trump’s win.

Brazil’s relatively closed economy, as well as its status as a net seller of oil, make it an attractive alternative to Mexico, which sells about 80 percent of its exports to the United States. Concerns over Mexico’s budget and economy have also greyed the skies of the former market darling.

Many investors have been pivoting from Mexico to Brazil since at least July, according to a Reuters survey of fund managers, a trend that could accelerate throughout the coming months.

Steve Tananbaum, founder of GoldenTree Asset Management, said he is “quite constructive” on Brazil and Argentina, where right-leaning administrations have taken office in the past year with agendas for business-friendly reforms.

“Their currencies are down precipitously yet we think there are a lot of positive changes going on there,” he said. “Politically, they both have had changes in leadership that are pro-growth administrations.”

BRAZIL VS ARGENTINA

Even after the recent selloff, the Brazilian real and the Argentine peso remain among the world’s best performing assets this year, supported by the policies of Brazil’s Temer and Argentina’s Mauricio Macri.

Both took over from leftist predecessors who sought to stimulate the economy with loose purse strings and interventionist measures.

Their belt-tightening efforts have captivated investors, though Brazil’s roughly $2 trillion economy has yet to rebound from its deepest recession in decades.

Years of protectionism have slashed both economies’ reliance on foreign trade, sheltering them from potential shocks.

Still, Argentina remains vulnerable to sudden capital outflows, having just returned to international debt markets after years of legal wrangling, investors said.

“If there is broader risk aversion in the markets that prevents Argentina from entering and raising the funds that it needs then Argentina becomes vulnerable,” Siobhan Morden, head of Latin American fixed-income strategy at Nomura Securities, said.

BRAZIL HAS “FAT TO BURN”

While bonds and currencies slumped, emerging market stocks have been mixed since the election as prospects of infrastructure spending boosted prices of industrial metals.

Brazil’s benchmark Bovespa stock index fell 3.8 percent since the vote, in comparison to a 6.2 percent slide in Mexican equities, while an index tracking shares of basic product producers rose 13.7 percent.

Carlos Sequeira, head of research at Banco BTG Pactual SA, said Brazilian stocks, which are up 45 percent in 2016, could rise even further if Temer manages to gather lawmaker support for measures to curb public spending and limit debt growth.

That would allow the central bank to continue its rate-cutting cycle, he said, making riskier stocks more attractive in relative terms.

The fact that real rates are higher in Brazil than in most of its Latin American peers suggests there would be room for rate cuts even if a weaker real fostered price pressures.

“There is fat to burn even if U.S. rates rise more than expected,” Sequeira said.

Wall Street sees no rate hike in June; weak U.S. payrolls, ‘Brexit’ weigh

Posted in Uncategorized by dionrabouin on November 21, 2016

Wall Street’s top banks unanimously expect the Federal Reserve to leave interest rates unchanged this month, results of a Reuters poll showed on Friday, with bank economists pointing to a weakening U.S. employment scene and Britain’s pending vote on remaining in the European Union.

All 19 respondents to a poll of so-called primary dealers about the rate outlook said the Fed would leave its benchmark interest rate unchanged in a range of 0.25 percent to 0.50 percent when policymakers meet June 14-15. Most, however, still see the Fed raising the federal funds target rate range by 0.25 percentage point by the end of September.

The dealers, 23 large banks authorized to transact directly with the Fed, offered their views after Friday’s U.S. employment report showed the economy added only 38,000 jobs in May, the fewest for any month since September 2010.

“Our conviction has declined significantly since this morning,” said Tom Simons, money market economist at Jefferies and Co. “We had thought that we were on track for a rate hike in June, but the employment data this morning pretty much takes a rate hike off the table. It’s not impossible, but it seems very unlikely.”

The respondents assigned a median probability of 5 percent to a June rate hike, even as no dealer individually forecast an increase. The median probability for a hike at the Fed’s following meeting in late July was 34 percent, according to the survey.

Those odds largely mirrored those derived from interest rate futures markets, with CME Group’s FedWatch tool assigning a 6 percent chance for a hike in June and 33 percent for one in July.

A modest majority of dealers, nine of 15, expect no more than one Fed rate hike this year, with the median forecast for the midpoint of the year-end fed funds range at 0.63 percent. The Fed raised rates in December for the first time in nearly a decade and has held steady since.

The majority of economists in the survey said their conviction that the Fed might raise rates in two weeks had decreased in the last month. Most said Friday’s far weaker-than-expected U.S. job market data weighed heaviest in the downgrade of their rate outlook.

“The bottom line is the Fed needs more time and they need more data to determine what’s happening to the labor market,” said Omair Sharif, senior U.S. economist at Societe Generale in New York. “So I think that just pushes everything further back.”

In response to a question about the so-called Brexit vote, all 14 respondents said Britain’s June 23 referendum on whether to remain a member of the European Union would be at least a “somewhat significant” factor for Fed policymakers in deciding whether to raise rates this month. Nine of the 14 said the vote, seen as too close to call, would be either a “significant” or “very significant” factor.

U.S. stocks rise, bond yields fall, oil hits 2016 high after Fed statement

Posted in Articles, Uncategorized by dionrabouin on November 21, 2016

Wall Street stocks edged up, U.S Treasury debt yields fell, and oil prices rose to the highest level of the year on Wednesday after the Federal Reserve signaled it was in no hurry to change policy.

The Fed’s policy interest rate target was left unchanged at 0.25 percent to 0.5 percent as expected, and the U.S. central bank expressed confidence in the U.S. economic outlook, leaving the door open to an interest rate rise in June, but gave no indication it felt the need to hike.

The Fed said the labor market had improved further despite slow economic growth, and added that it was keeping a close eye on inflation, while removing references to worries about the global economy from its statement.

The S&P 500 index and Dow Jones Industrial Average ended higher for the day after the Fed statement, but the Nasdaq fell on disappointing earnings from Apple and Twitter late Tuesday, and the index has lost nearly 5.0 percent in the past week.

“The big takeaway here is they (the Fed) continued to be positive on the domestic economy,” said John Bailer, senior portfolio manager at The Boston Company Asset Management. “They have taken out some of the risk on the global economy.”

The Dow Jones industrial average rose 51.23 points, or 0.28 percent, to 18,041.55, the S&P 500 gained 3.45 points, or 0.16 percent, to 2,095.15 and the Nasdaq Composite dropped 25.14 points, or 0.51 percent, to 4,863.14.

Apple shares closed down 6.3 percent after the company reported its first drop in iPhone sales and its first decline in revenue in more than a decade. Twitter tumbled more than 16 percent after quarterly revenue lagged expectations.

The Nasdaq’s information technology sector fell 1.4 percent, with Facebook and Alphabet also lower.

BOND YIELDS FALL

Longer-dated U.S. Treasury debt yields fell on Wednesday for the first time in seven days, after the Fed left the door open for an interest rate rise but signaled its rate hike path still would be a very gradual one.

The 30-year yield fell 5 basis points to 2.707 percent after reaching its highest since early February at 2.764 percent on Tuesday.

“It’s a very close call in what they do in June. It’s contingent on the jobs, inflation and wage data, which may or may not confirm their economic outlook,” said Bill Irving, portfolio manager at Fidelity Investments in Merrimack, New Hampshire.

Interest rates futures implied traders see about a one in five chance of a rate hike at the June 14-15 Fed meeting, little changed from Tuesday, CME Group’s FedWatch program showed.

The U.S. dollar ended slightly lower against the euro, and was last down 0.1 percent against a basket of major currencies to 94.510.

“At first glance (the Fed statement) looked a little bit hawkish, but as expected it’s pretty much a non-event,” said Stephen Casey, senior foreign exchange trader and market analyst in New York.

“I think we did see some surprises in that they’re turning their focus back inward on the domestic economy, eliminating most of that language concerning the outside effects. But for me, this really goes to the credibility of the Fed. They’re very wishy-washy at the moment.”

The dollar was slightly higher against the yen, last up 0.2 percent against the Japanese currency at 111.40 yen JPY=.

OIL PRICES UP

Oil prices rose, with Brent crude, the international benchmark, up 3.3 percent to $47.23, its highest since early November.

U.S. crude rose 2.75 percent to $45.33 a barrel and had earlier rallied on expectations for a drop in crude oil inventories, but U.S. crude inventories rose sharply, reducing oil’s gains.

“Bullish momentum from a technical perspective, in cahoots with dovish Fed rhetoric, has this market on fire again despite the crude inventories we’re seeing,” said Matt Smith, director of commodities research at New York-based Clipperdata.