Fixed-Income, FX, and Commodities Quarterly 3Q16 outlook

Transcription

1 Banorte-Ixe FI/FX Strategy Mexico Fixed-Income, FX, and Commodities Quarterly 3Q16 outlook Market Conditions The first half of 2016 finished with a quite high level of uncertainty, especially after the United Kingdom voted in favor of leaving the European Union, which could result in slower global growth as well as adverse conditions for the region going forward. In addition, concerns about the effect of a persistent slack in the global economy also steered sentiment in financial markets by the end of the previous quarter. In contrast, 2H16 has started with a strong footing, as risky assets have recovered most of the initial losses after the Brexit vote. Investors are betting on a benign scenario in which major central banks will unveil coordinated economic policies to overcome current conditions, pushing against any potential contagion coming from Brexit spillovers. Moreover, countries like Japan could be on the verge of additional and unprecedented stimuli coming from both the monetary and fiscal sides. This could even result in a less restrictive Federal Reserve ahead. However, the global environment poses several risks for financial markets in 3Q16 due to geopolitical factors (e.g. Brexit or the U.S. electoral process), economic slowdown in several regions, and China, among others. Mexico will try to face these risks by reinforcing sound and consistent economic policies July 22, Gabriel Casillas Chief Economist and Head of Research gabriel.casillas@banorte.com Alejandro Padilla Head Strategist Fixed-Income and FX alejandro.padilla@banorte.com Juan Carlos Alderete, CFA FX Strategist juan.alderete.macal@banorte.com Santiago Leal Singer Fixed-Income and FX Analyst santiago.leal@banorte.com Fixed-Income We suggest profit taking in our tactical, short term recommendation of long positions in 10- to 20-year Mbonos, particularly those maturing on Dec 24, Mar 26, and May 31 New trade idea: Buying Udibono Jun 19 (entry: 1.95%, target: 1.65%, stop-loss: 2.10%) and Mbono Jun 21 (entry: 5.60%, target: 5.35%, stop-loss: 5.80%) Foreign exchange We favor USD/MXN longs for trading purposes and see the entry level as highly attractive for directional longs, expecting it to act as a strong support during the quarter We revise higher our year-end forecast to from per dollar along our expected path for the next twelve months, with the peso still vulnerable in spite of Banxico s recent interest rate hikes Commodities Raw materials held momentum and outperformed other asset classes. Crude was benefited by a more balanced scenario going forward. We believe the path will be very volatile and will fail to break a resistance of 50$/bbl in the short-term Document for distribution among public Gold kept appreciating amid a global order in search of safe havens amid record-low yields which could still act in its favor, while copper is limited by global growth. GSCI and BCOM rallied 15.7% and 12.7%, respectively

2 Fixed-Income The first half of the year was characterized by strong risk aversion, resulting in significant demand for sovereign securities. In the aftermath, U.S. Treasuries rallied 23bps on average, with the 10-year note moving from 1.77% to 1.47% during the quarter, reaching historical lows. In Mexico, the curve observed a significant flattening bias, especially after Banxico surprised the market delivering a 50bps hike on June 30 th vs 25bps expected by the consensus. The short-end observed a 33bps sell-off, while the mid-end of the curve lost 6bps, and longer tenors rallied 15bps. In line with our expectations, the Mexican yield curve has flattened strongly along the year, but with less room for this trend to continue going forward, suggesting more attractive valuation in short-term securities. It is our take that the curve could continue with this bias in the following years, albeit with a more limited margin in coming months. The 2/10 slope in Mbonos went from 210bps at year-end 2015 to 121bps, with a limited room of 10-15bps for a further contraction for the rest of the year taking into account lower duration-adjusted carry levels. In this respect, we suggest profit taking in our tactical, short term recommendation of long positions in 10- to 20-year Mbonos, particularly those maturing on Dec 24, Mar 26, and May 31. After Brexit and Banxico s second rate hike this year by 50bps on June 30 th, markets and investors have adjusted their expectations of the central bank s stance in coming months. The market already discounts accumulated rate hikes of 59bps until 4Q16 and 75bps for the next twelve months. In terms of strategy and trade ideas, we recommend buying Udibono Jun 19 (entry: 1.95%, target: 1.65%, stop-loss: 2.10%) and Mbono Jun 21 (entry: 5.60%, target: 5.35%, stop-loss: 5.80%). In order to tackle market dynamics after Brexit and Banxico s hike, we believe it is appropriate to increase exposure in the mid-end of the curve, particularly 5- to 7-year Mbonos, a segment that has acted as an inflection point in the curve s flattening bias. Taking into account valuation and liquidity factors (primary market), we favor Mbono Jun 21. On the other hand, short-term Udibonos could be an adequate and defensive strategy even if we continue expecting inflation to end 2016 at 2.8% yoy as a much stronger expected carry in 2H16 suggests an interesting risk/reward profile in the 3-year maturity. Banorte-Ixe rates forecasts % Security Q 2Q 3Q f 4Q f 1Q f 2Q f 28-day Cetes Average End of period day TIIE Average End of period year Mexican bond Average End of period year US Treasury Average End of period year Spread Mex-US Average End of period Source: Bloomberg and Valmer for observed data, Banorte-Ixe for rate forecasts f = forecast

3 Foreign Exchange In 2Q16, the Mexican peso was again the second worst performer among major currencies only ahead of GBP, dropping 5.5% from to per dollar. In our previous outlook we began more positive in MXN up to per dollar for trading purposes and recommended switching to USD longs at that entry, actually the quarter-high by the end of April. Also as expected, volatility shot-up higher at the last leg of the period, with the currency even reaching a new historical low of 19.51, while the broad USD actually ended higher despite a more dovish Fed and record-low yields. We were caught off-guard mainly with the timing of the peso s turnaround, the Brexit result and oil rebound, China s relative stabilization, and less jitters over RMB/CNY depreciation. Time passes by but market catalysts are broadly the same as we enter 2H16. Renewed banking troubles in Europe, uncertainty over China, effectiveness of monetary policy and discussions over helicopter money, the Fed s next rate hike timing, low global growth and inflation are still very much on the radar. We believe that one of the multiple Brexit lessons for investors is to always consider the effect of the unexpected, particularly as we approach the US election. As campaigns intensify and global uncertainty stays elevated, we think a new, higher volatility regime is likely to stay with us for longer. Locally, news were mostly negative: Expected GDP growth has been gradually revised lower as industry in the US is sluggish and private consumption may be decelerating, additional spending cuts were announced (bad for the currency, ceteris paribus), and Moody s downgraded Mexico s outlook at the beginning of the quarter. Banxico tried to push against local and external headwinds hiking rates, but the effect on the MXN has been limited, which should remain the case as the peso is by far the most liquid currency in the MXN space except for CNY (with capital controls) and is very much ahead others such as TRY, RUB, ZAR, with significantly lower rate spreads to the US that make short positions relatively cheaper. In this respect, we estimate that Banxico would need to hike rates around 225bps more to compete in terms of costs, which we do not see as viable. As such, it remains very sensitive to a challenging external scenario despite still good-enough macro fundamentals. As a result, we revise higher our USD/MXN year-end forecast to from 17.60, a yearly peso depreciation of 7%. On a quarterly basis we forecast a 2.5% loss, more modest than in 2Q16 (5.5%) as a result of Banxico s increased vigilance. Further details about the drivers behind this revision will be published shortly. We favor dollar longs for trading purposes, believing that a strong support and appetite for directional positions will be observed in case of an extension of the recent move to the level, seeing this as a highly attractive entry and exactly one peso above last quarter s actual floor of per dollar. USD/MXN forecasts 1Q16 2Q16 3Q16 f 4Q16 f 1Q17 f 2Q17 f Banxico survey (median) Bloomberg (median) Banorte-Ixe (new, eop*) Banorte-Ixe (previous, eop*) * End of period. Source: Bloomberg, Banxico, Banorte-Ixe

4 Commodities During 2Q16, commodities performed strongly in all sectors amid global dynamics that positioned them as the top major asset class, both for the quarter and the first half of the year. Broad and popular indexes such as the GSCI and BCOM rallied 15.7% from 3.9% and 12.7% from 0.3% in the previous quarter, respectively. Crude oil prices were driven by relatively robust demand, lower USD pressures, and unplanned supply disruptions that scored their highest level since The two most relevant events were the armed attacks that severely damaged Nigerian infrastructure and Canada s wildfires that forced operating crew to be evacuated in a considerable share of the oil sands area. As a whole, this combination induced rapid revisions in expectations trending towards a shortage scenario, albeit not before 2017 in the best-case. Additionally, OPEC met in June and kept its strategy unchanged albeit exhibiting improved internal dialog. In terms of production among high-cost players, current prices still have eluded an effective reactivation right away, although a decent, lower-bound threshold around 60 $/bbl has recently generated some sparks in the rig count. Nevertheless, a recovery of U.S. production is still some time away, currently continuing with a downward path. The curve s structure remained in contango and mostly lower spreads have been expanding again. Price action remains very sensitive to macro factors, from which market instability is an important risk, accompanied as well by the end of a seasonally-high consumption period and persistently high inventory levels in both land and floating storage. In this context, we expect 3Q16 to witness a highly volatile rebalancing path with prices likely not exceeding a hard resistance around 50 $/bbl. After a historic start of the year, gold kept its momentum together within the precious metals spectrum. For this group, global uncertainty after the Brexit, record-low yields, and the reach for anything with a positive return in a backdrop of greater monetary lassitude hints at the potential of further appreciation. In the meantime, low global growth has been a headwind for copper, constituting its main restriction under conditions of high inventories. For grains, greater harvesting acreage in the U.S. could result in downward pressure on prices. Commodities price performance and market consensus forecasts (%) Forecasts (Median)* Commodity Unit Spot price* 2015 YTD 1Q16 2Q16 3Q16 4Q16 1Q17 2Q Energy WT I $/bbl NYMEX Futures Brent $/bbl ICE Futures Mexican Mix $/bbl ** 50** Natural Gas (H. Hub) $/MMBtu Gasoline (RBOB) $/gal Metals Gold $/t oz 1, ,304 1,311 1,296 1,283 1,287 1,250 1,238 Silver $/t oz Copper $/mt 4, ,834 4,925 5,000 4,980 4,926 5,169 5,000 Agriculture Corn /bu Wheat /bu Source: Bloomberg *as of Jul/18/2016 **Mexico's 2016 Spending Budget MoF 2017 Budget assumptions

5 Track of the latest fixed-income trade recommendations Trade idea Entry Target Stop-loss Closed Status P/L Initial date End date Long Mbono Jun' % 5.35% 5.80% -- Open Jul Long Udibono Jun' % 1.65% 2.10% -- Open Jul Receive 1-year T IIE-IRS (13x1) 3.92% 3.67% 4.10% 3.87% 1 Closed Profit 12-Nov-15 8-Feb-16 Long spread 10-year TIIE-IRS vs US Libor 436bps 410bps 456bps 410bps Closed Profit 30-Sep Oct-15 Receive 9-month TIIE-IRS (9x1) 3.85% 3.65% 4.00% 3.65% Closed Profit 3-Sep Sep-15 Spread TIIE 2/ 10 yrs (flattening) 230pb 200pb 250pb 200pb Closed Profit 26-Jun Jul-15 Long Mbono Dec' % 5.89% 6.27% 5.83% Closed Profit 13-Mar Mar-15 Relative-value trade, long 10-year Mbono (Dec'24) / flattening of the curve Closed Profit 22-Dec-14 6-Feb-15 Pay 3-month T IIE-IRS (3x1) 3.24% 3.32% 3.20% 3.30% Closed Profit 29-Jan Jan-15 Pay 9-month T IIE-IRS (9x1) 3.28% 3.38% 3.20% 3.38% Closed Profit 29-Jan Jan-15 Pay 5-year T IIE-IRS (65x1) 5.25% 5.39% 5.14% 5.14% Closed Loss 4-Nov Nov-14 Long Udibono Dec' % 0.45% 0.82% 0.82% Closed Loss 4-Jul Sep-14 Relative-value trade, long Mbonos 5-to-10-year Closed Profit 5-May Sep-14 Receive 2-year T IIE-IRS (26x1) 3.75% 3.55% 3.90% 3.90% Closed Loss 11-Jul Sep-14 Receive 1-year T IIE-IRS (13x1) 4.04% 3.85% 4.20% 3.85% Closed Profit 6-Feb Apr-14 Long Udibono Jun' % 0.45% 0.90% 0.90% Closed Loss 6-Jan-14 4-Feb-14 Long Mbono Jun' % 3.90% 4.67% 4.06% Closed Profit 7-Jun Nov-13 Receive 6-month TIIE-IRS (6x1) 3.83% 3.65% 4.00% 3.81% Closed Profit 10-Oct Oct-13 Receive 1-year T IIE-IRS (13x1) 3.85% 3.55% 4.00% 3.85% Closed Flat 10-Oct Oct-13 Long Udibono Dec' % 0.95% 1.28% 1.35% Closed Loss 9-Aug Sep-13 Receive 9-month TIIE-IRS (9x1) 4.50% 4.32% 4.65% 4.31% Closed Profit 21-Jun Jul-13 Spread T IIE-Libor (10-year) 390bps 365bps 410bps 412bps Closed Loss 7-Jun Jun-13 Receive 1-year T IIE-IRS (13x1) 4.22% 4.00% 4.30% 4.30% Closed Loss 19-Apr May-13 Long Udibono Jun' % 1.20% 1.55% 0.97% Closed Profit 15-Mar-13 3-May-13 Receive 1-year T IIE-IRS (13x1) 4.60% 4.45% 4.70% 4.45% Closed Profit 1-Feb-13 7-Mar-13 Long Mbono Nov' % 5.97% 6.40% 5.89% Closed Profit 1-Feb-13 7-Mar-13 Long Udibono Dec' % 0.80% 1.40% 1.40% Closed Loss 1-Feb Apr-13 Receive 1-year T IIE-IRS (13x1) 4.87% 4.70% 5.00% 4.69% Closed Profit 11-Jan Jan-13 Receive TIIE Pay Mbono (10-year) 46bps 35bps 54bps 54bps Closed Loss 19-Oct-12 8-Mar-13 Spread T IIE-Libor (10-year) 410bps 385bps 430bps 342bps Closed Profit 21-Sep-13 8-Mar-13 Long Udibono Dec' % -1.50% +1.20% -6.50% Closed Profit 1-May Nov-12 Long Udibono Dec' % 0.90% +1.35% 0.90% Closed Profit 1-May Dec Carry + roll-down gains of 17bps Track of the latest FX trade recommendations* Trade Idea Entry Target Stop-loss Closed Status P/L* Initial Date End date Long USD/MXN Closed Profit 20-Mar Apr-15 Short EUR/MXN n.a. n.a Closed Profit 5-Jan Jan-15 Tactical trade: Long USD/MXN n.a. n.a Closed Profit 15-Dec-14 5-Jan-15 Tactical trade: Long USD/MXN n.a. n.a Closed Profit 21-Nov Dec-14 Short USD/MXN n.a. n.a Closed Loss 10-Sep Sep-14 Tactical trade: Short EUR/MXN n.a. n.a Closed Profit 27-Aug-14 4-Sep-14 USD/MXN call spread** n.a Closed Loss 6-May Jun-14 Directional short USD/MXN Closed Loss 31-Oct-13 8-Nov -13 Limit short USD/MXN Cancelled Oct Oct-13 Speculativ e short USD/MXN Closed Loss 26-Jul Aug-13 Short EUR/MXN Closed Profit 29-Apr-13 9-May -13 Long USD/MXN Closed Loss 11-Mar Mar-13 Long USD/MXN Closed Profit 11-Jan Feb-13 Tactical limit short USD/MXN Cancelled Dec Dec-12 Disclaimer The information contained in this document is illustrative and informative so it should not be considered as an advice and/or recommendation of any kind. BANORTE is not part of any party or political trend. 5

6 GRUPO FINANCIERO BANORTE S.A.B. de C.V. Research and Strategy Gabriel Casillas Olvera Chief Economist and Head of Research (55) Raquel Vázquez Godinez Assistant (55) Economic Analysis Delia María Paredes Mier Executive Director of Economic Analysis (55) Alejandro Cervantes Llamas Senior Economist, Mexico (55) Katia Celina Goya Ostos Senior Global Economist (55) Miguel Alejandro Calvo Domínguez Economist, Regional & Sectorial (55) Juan Carlos García Viejo Economist, International (55) Lourdes Calvo Fernández Analyst (Edition) (55) x 2611 Fixed income and FX Strategy Alejandro Padilla Santana Head Strategist Fixed income and FX alejandro.padilla@banorte.com (55) Juan Carlos Alderete Macal, CFA FX Strategist juan.alderete.macal@banorte.com (55) Santiago Leal Singer Analyst Fixed income and FX santiago.leal@banorte.com (55) Equity Strategy Manuel Jiménez Zaldivar Director Equity Research Telecommunications / Media manuel.jimenez@banorte.com (55) Victor Hugo Cortes Castro Equity Research Analyst victorh.cortes@banorte.com (55) Marissa Garza Ostos Senior Equity Research Analyst Conglomerates/Financials/ Mining/ Chemistry marissa.garza@banorte.com (55) Marisol Huerta Mondragón Equity Research Analyst Food/Beverages marisol.huerta.mondragon@banorte.com (55) José Itzamna Espitia Hernández Equity Research Analyst Airports / Cement / Infrastructure / Fibras jose.espitia@banorte.com (55) Valentín III Mendoza Balderas Equity Research Analyst Auto Parts/ Consumer Discretionary / Real Estate valentin.mendoza@banorte.com (55) Corporate Debt Tania Abdul Massih Jacobo Director Corporate Debt tania.abdul@banorte.com (55) Hugo Armando Gómez Solís Analyst, Corporate Debt hugoa.gomez@banorte.com (55) Idalia Yanira Céspedes Jaén Analyst, Corporate Debt idalia.cespedes@banorte.com (55) Wholesale Banking Armando Rodal Espinosa Head of Wholesale Banking armando.rodal@banorte.com (55) Alejandro Eric Faesi Puente Head of Global Markets and Institutional Sales alejandro.faesi@banorte.com (55) Alejandro Aguilar Ceballos Head of Asset Management alejandro.aguilar.ceballos@banorte.com (55) Arturo Monroy Ballesteros Head of Investment Banking and Structured Finance arturo.monroy.ballesteros@banorte.com (55) Gerardo Zamora Nanez Head of Transactional Banking, Leasing and Factoring gerardo.zamora@banorte.com (81) Jorge de la Vega Grajales Head of Government Banking jorge.delavega@banorte.com (55) Luis Pietrini Sheridan Head of Private Banking luis.pietrini@banorte.com (55) René Gerardo Pimentel Ibarrola Head of Asset Management pimentelr@banorte.com (55) Ricardo Velázquez Rodríguez Head of International Banking rvelazquez@banorte.com (55) Víctor Antonio Roldan Ferrer Head of Corporate Banking victor.roldan.ferrer@banorte.com (55)