Strong 7y UST auction leads to firm rally in belly, long-end USTs; Gilts bear-steepen after £15bn fiscal package; 10y BTP-Bund spread narrows, risk assets outperform; JGBs bear-steepen, 20y JGBs sell off 5.3bp, to 0.75%; Mexico 1y rates sell off post-May Banxico Minutes; US 10y at 2.747% (+0.2bp).
Latin America:
Latam currencies appreciated as the US dollar weakened during the session. Global risk sentiment also improved throughout the session, highlighted by a strong rally in US equities and commodities. BRL and CLP were key outperformers, rallying 1.3% and 1.1%, to 4.77 and 823, respectively. PEN followed, rallying 0.8% to 3.66. MXN was the main laggard, rallying only 0.2% to 19.78, continuing its relatively weak performance over recent weeks.
In local rates, curves ended mixed as most curves diverged from US rates. After the release of more hawkish Banxico May meeting minutes, 1y rates in Mexico shifted 12bp higher to 8.94% while the 10y also rose, but only 4bp to 8.41%. Chile followed with rates across the curve generally 6-9bp higher. 5y CLPxCAM rates ended 9bp higher to 6.32%. In Brazil, DIs staged a relief rally as January 2027s ended the session 18bp lower to 11.91%. This follows a shift higher in rates over the last two session (following a higher than expect inflation print earlier in the week).
Colombia Elections aftermath
Bottom line the presidential election should be read as positive for Colombian assets. Having leftist Petro as base case scenario until last week, for most, especially in the foreign investors community, is not now a that path as clear as it looked. Voting came as follows:
Petro 40.3% (8.5M votes)
Hernandez 28.2% (6M votes)
Gutierrez 23.9% (5M votes)
The momentum that Hernandez regained in the last week until the final poll published one week before the elections, proved to be right. Hernandez came through as runner-up, and now contender against Petro in the second round to be held on June 19.
For those closely following local politics, the endorsement from Gutierrez to Hernandez as soon as last night, with no strings attached, should generate a more powerful transition of votes from his camp to Hernandez, than the alternative and expected scenario of having had Gutierrez contender against Petro. Therefore we see this as positive for the market, as Hernandez may be able to capture the vast majority of votes from Gutierrez. In fact, most political analysts at this point are in agreement that Petro is once again in a tough spot with a deficit of at least 1.5M votes.
Hernandez, 77, former Bucaramanga major, is seen as an outsider – he is a businessman, mostly on the real estate sector, who came into politics later in life. Apart from having a slogan of fighting corruption head-on, he has not been very vocal on any major type of reform or who his team and cabinet members would be. When asked, his response on such matters has been along the lines of “I’m not an expert on everything, but I will bring the best people”. Also worth noting he has rejected all invitations from traditional political parties and his strategy has been mostly digital. The only visible politician who has adhered to his campaign is former candidate Ingrid Betancourt, who was running in this election after having been abroad since she was freed from Farc guerrilla in 2008.
All-in-all, Hernandez, while unknown is being seen as less of a risk to institutions. If anything, he is someone who will need even more consensus in congress, since as opposed to Petro, he has no representation in any of the chambers.
USDCOP closed at 3930 on Friday and as I mentioned this should be read as positive in all things related to Colombian assets.
Sentiment towards COP although negative is not near its peak, so I would expect to see some short covering (selling of USDCOP) and outperformance against peers between 1.5% and 2%. Offshore players have been more neutral than in recent past and locals, especially corporates, who have shown strong interest to buy dollars, by frontloading need for dollars as anticipation of adverse environment due to elections, which the pressure that was brought forward into the FX rate that in any case will not be present some time in the future.
With Monday being a holiday both in Colombia and US, additional volatility can be build into the market to determine a fair level but my best guess is to see COP trading in the mid to lower end of the 38 handle (i.e. 3840).
Client Call Starting Soon: Colombia Election Results with Political Analyst Andrés Mejía Vergnaud
Gustavo Petro took 40% of Sunday’s presidential election first round vote, but counter to consensus expectations, will face Rodolfo Hernandez (28% of the vote) instead of Federico Gutierrez (24%). Petro and Hernandez will go head to head into the second round run off on June 19.
Our trader Daniel Perez provides a local update on the presidential election outcome in Colombia Elections aftermath. Bottom line? The presidential election should be read as positive for Colombian assets. Having leftist Petro as the base case scenario until last week, for most, especially in the foreign investors community, is not now a path as clear as it looked. Sentiment towards COP although negative is not near its peak, so we would expect to see some short covering (selling of USDCOP) and outperformance against peers between 1.5% and 2%. With the Monday holidays, additional volatility can be built into the market to determine a fair level but his best guess is to see COP trading in the mid to lower end of the 38 handle (i.e. 3840).
OVERNIGHT NEWS
# Bond yields extend gains as Brent crude advances to $123/bbl following EU ban on Russian oil imports. Treasuries catch up with Bunds after strong euro inflation yesterday, 10y UST +9bp to 2.83%. FOMC’s Waller backs 50bp hikes for several meetings.
# Day ahead: Eurozone flash CPI, SG forecast 7.9% yoy. US consumer confidence. Canada, Turkey and Czech 1Q GDP. Hungary CB forecast to hike 50bp to 5.90%.
# EU agrees to ban 70% of Russian oil imports ‘relatively quickly’ and ‘almost 90%’ by the end of the year. Deal comes with exemptions/ concessions for Hungary, Slovakia, Bulgaria and Czech Republic.
# China manufacturing PMI rose to 49.6 in May from 47.4 in April, services improve to 47.8 from 41.9, composite recovers to 48.4 from 42.7. USD/CNH steady at 6.67/
# France CPI accelerates to 5.8% yoy in May from 4.8% in April. Food prices +4.8% yoy, goods +2.6%, services +3.2% . 1Q GDP revised down to -0.2% qoq in 1Q from flat (4.5% yoy).
# Nikkei -0.33%, EUR 10y IRS -2.5bp to 1.755%, Brent crude +1.85% to $123.9/b, Gold -0.1% to $1,854/oz.
Inflation in Germany and France scales new high in May
