• York Investment & Finance

Global Markets Overview: Latin America

By Tom Ives, Analyst at the York IFS Global Market Telegraph

From 22 September to 6 October 2020

Despite a strong trading session on Friday (2nd October), which was prompted by the prospect of additional US fiscal stimulus measures, Latin American equities were unable to reverse earlier losses as the MSCI Latin America index closed the week 2.7% lower[i]. Regional equities initially posted sharp declines towards the beginning of the week as the pandemic continues to devastate Latin American economies. WHO regional director Carissa Etienne has cast further doubts on a potential economic recovery for the world’s worst-hit region after claiming that Latin America has resumed “normal life” too soon. The decision to ease lockdown measures could subsequently fuel a surge in coronavirus fatalities during times “when COVID-19 still requires major control interventions”.

Although Latin America saw portfolio inflows of US$1.6 billion over September[ii], the index is set to face its largest monthly sell-off since March, as a rejuvenated dollar and escalating political uncertainty tied to the upcoming U.S. presidential election subdue risk sentiment in the region’s financial markets. This comes after the Institute of International Finance (IIF) forecasted a substantial “risk-off” shift. Regional equities prices are expected to plummet by similar proportions to pandemic-fuelled crash in March, with Latin Americans markets likely to replicate capital flight from other emerging markets. FDI outflows amounting to US$ 10.6 billion towards the end of September managed to surpass those from China when Chinese yuan was heavily devalued in 2015. This marks worrying times ahead as the loss of key revenue will weigh heavily on many firms’ profitability[iii].

Brazilian stocks led the falls despite promising economic data as the Ibovespa index extended its losing streak to a third consecutive session. Investors shrugged off the news that national manufacturing expanded at a record rate during September. The index fell by 2% as concerns surrounding the nation’s fiscal standing continues to dominate the news[iv]. Traders weighed the implications of Bolsonaro’s new fiscal aid package as sentiment dampened amidst concerns Brazil will overshoot its arguably most important fiscal anchor, its spending cap. The Argentinian S&P Merval index traded flat this week after investors reacted to the news that the nation’s current account surplus has risen considerably in the second quarter. However, the index remains close to its lowest level in the last 3 months following the government’s decision to impose tighter capital controls. The additional tax placed on US dollar purchases places significant strains on firms struggling to service their dollar-denominated debts.

A strengthened dollar resulted in Brazilian materials sector extending their recent declines, despite iron ore prices continuing to rise. The Ibovespa index was pulled down by Vale and Rio Tinto, who slipped by 4.9% and 2% respectively after investor sentiment dampened on the news of a court ruling restricting the output for Vale[v]. However, the Chinese demand looks very likely to rise following the news of China’s manufacturing PMI reaching a 2-year high at 51.5.[vi] Investors will keep an eye on whether the firms can capitalise on the uptake in demand, with both Vale and Rio Tinto posting solid earnings reports. The Chile IPSA index rose by 2.3% on Wednesday to post its best returns in 3 months despite copper prices sharply declining on Thursday by 5%[vii]. The commodity has rallied over the past 6 months but has now plummeted to US$ 6408 p/t to its lowest level since the 18th March.

This article was first published in University of York Investment and Finance Society's Global Market Telegraph (GMT) Edition 9.1 in early October 2020.

Reference List:

[i] https://www.marketwatch.com/investing/index/892000?countrycode=xx [ii] https://uk.finance.yahoo.com/news/outflows-point-risk-off-brewing-101433495.html [iii] https://uk.finance.yahoo.com/news/outflows-point-risk-off-brewing-101433495.html [iv] https://finance.yahoo.com/quote/%5Ebvsp [v] https://finance.yahoo.com/quote/VALE [vi] https://www.scmp.com/economy/china-economy/article/3103585/chinas-economic-recovery-underlined-manufacturing-services [vii] https://www.spglobal.com/platts/en/market-insights/videos/market-movers-americas/092820-market-movers-americas-california-outages-rbob What do you think? Let us know in the comment section below!

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