Argentina’s Merval Leads LatAm Market Gains; Fed Posture Continues to Weigh on NYSE

Mexico saw the sharpest losses in Latin America on Monday, while US markets continue to be dragged down by the announcements at last week’s Federal Reserve meeting

A trader works on the floor of the New York Stock Exchange (NYSE) in New York, US. Photographer: Michael Nagle/Bloomberg
By Bloomberg Línea and Bloomberg News
August 29, 2022 | 09:05 PM

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A roundup of Monday’s stock market results from across the region

👑 Argentina, Latin America’s leader:

Latin American stock markets experienced a mixed day, amid the risk aversion generated after Powell’s speech in Jackson Hole.

The Merval (MERVAL) had the best performance among the region’s peers, with an increase of 1.66%. The rise came amid increases in the shares of YPF (YPFD), Mirgor (MIRG) and Transportadora de Gas del Sur (TGSU2).

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Brazil’s stock market also climbed in the midst of the sell-off generated by the Fed’s restrictive stance. The Ibovespa (IBOV) closed higher on a positive day for Petrobras (PETR3, PETR4) shares, amid oil price increases.

On the domestic agenda, the Central Bank’s Focus report showed a drop in inflation expectations this year and next.

For 2022, projections now point to an increase of 6.70% (vs. 6.82%), while for 2023, the expectation was reduced from 5.33% to 5.30%.

Chile’s IPSA (IPSA) also decoupled from the international pessimism and reached highs not seen since June 2018. The local market is projecting a triumph of the rejection of the new Constitution project whose future will be defined on Sunday, September 4 in the plebiscite scheduled for that day.

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📉 A bad day for Mexico’s BMV:

Investors’ caution in the face of expectations of further interest rate increases affected the performance of the Mexican stock market, which closed with the largest drop in Latin America.

Mexico’s S&P/BMV IPC (MEXBOL) closed with a decline of more than 2%, amid the poor performance of the materials, finance and industrial sectors. Shares of Grupo México (GMEXICOB), Grupo Elektra (ELEKTRA*) and Grupo Financiero Inbursa (GFINBURO) saw the sharpest losses on Monday.

“The Fed and the European Central Bank made it clear that they will continue to raise rates during 2022 and that they will keep them high for a longer period of time, despite the fact that this could provoke a greater slowdown in the global economy,” said Actinver analysts in a note.

🗽 On Wall Street:

US stocks and Treasuries fell again Monday as the realization that interest rates are likely to remain elevated for an extended period continued to force a repricing across assets.

The S&P 500 and the Nasdaq 100 dropped a second day, adding to the rout that started Friday when Jerome Powell made it clear the Fed is willing to let the economy suffer as it fights inflation. Treasury yields rose, with the 10-year rate hovering around 3.11%. The two-year yield had climbed to its highest level since 2007 earlier in the day before paring the advance. Oil notched gains on supply risks.

The S&P 500 fell 0.67%, the Dow Jones Industrial Average 0.57% and the Nasdaq Composite (CCMPDL) 1.02%.

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Powell’s speech during the Jackson Hole symposium underscored that expectations for any reversal of Fed tightening next year was unlikely unless inflation reverted toward the central bank’s long-term target. The latest consumer price reading in the US put inflation above 8%. He had also warned of the potential for economic pain for households and businesses as the central bank continues to be aggressive.

“The Fed Friday took away the punch bowl from the party and equities were the drunkest asset class at the party,” Jeff Schulze, investment strategist at ClearBridge Investments, said in an interview. “We’re going to deal with the hangover as a consequence. So I think investors are reassessing recession risks and are recognizing that the Fed is prioritizing price stability over economic stability.”

Minneapolis Fed President Neel Kashkari said the recent stock-market losses show that investors have understood that Powell and his colleagues are serious about tackling inflation.

August and September also tend to be the worst months for the S&P 500 Index, with the index averaging declines of 0.6% and 0.7%, respectively, over the past 25 years.

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“Since World War II, the S&P 500 posted the worst average monthly price change in September, joining February as the only two months to register declines,” Sam Stovall, chief investment strategist at CFRA wrote in a note. “Yet, September stands alone as the only month in which the market fell more frequently than it rose. What’s more, the best September return places it in the bottom quarter of all months, while its deepest one-month decline was among the four worst.”

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Going forward, weaker earnings -- not higher interest rates -- could pose the largest threat to US stock prices, Morgan Stanley strategists led by Michael J. Wilson said in a research note Monday. The bank’s leading earnings model, which projects a steep fall in earnings per share growth over the next several months, confirms that view.

“The path for stocks from here will be determined by earnings, where we still see material downside,” the strategists said. “As a result, equity investors should be laser focused on this risk, not the Fed.”

Seema Shah, chief global strategist at Principal Global Investors, echoed the sentiment.

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“While earnings season has been positive, persistent challenges indicate an increasingly difficult operating environment, likely limiting profit persistence in the second half of the year,” she wrote.

On the currency markets, the Bloomberg Dollar Spot Index rose 0.1%, the euro rose 0.3% to $0.9995, the British pound fell 0.3% to $1.1703, and the Japanese yen fell 0.8% to 138.70 per dollar.

🔑 The day’s key events:

Oil prices continued their rebound as signs continue to arrive that the market will remain tight. On the one hand, investors are awaiting the effect of the conflict in Libya, which has led to new clashes in the country’s capital.

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Clashes between militias of two political factions claiming power left more than a dozen dead over the weekend, according to local media reports. Although oil exports have remained stable, the market is alert to any consequences that could be generated by the clashes.

On the other hand, despite the optimism generated in recent weeks, Iran assured that negotiations with the European Union and the United States to revive the nuclear agreement will be extended until September, according to Bloomberg.

The announcement cleared bets that the international oil flow would increase in the short term, as if an agreement is reached Iran’s crude could return to the international market.

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“What’s also helping oil today is that even though risk aversion has run amok, the dollar rally is on hold,” added Edward Moya, an analyst at Oanda. More expensive dollar prices make commodities priced in that currency less attractive.

🍝 For the dinner table debate:

Although inflation has become the main challenge for consumers and central banks, there is another problem that is starting to unveil itself to top executives of Latin American companies.

The economic slowdown has become one of the most recurring themes among business leaders, according to a Bloomberg Línea analysis of investor conferences, and while high prices continue to be their main headache, mentions of slower economic growth increased 280% year-on-year.

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The impact of a possible recession in the US and a downward trend in growth expectations were among the concerns most mentioned.

While some Latin American economies are benefiting from high commodity prices, both the IMF and ECLAC have already warned that the region is heading towards a slower growth trend.

The analysis took into account Bloomberg’s compilation of the region’s six major stock exchanges following their second quarter results.

-- Carlos Rodríguez Salcedo, a content producer at Bloomberg Línea, and Isabelle Lee of Bloomberg News, contributed to this report.