Argentina’s Merval Leads LatAm Market Gains; US Stocks Climb Prior to Fed Meeting

With the next Fed meeting scheduled for later this week, investors are expecting another interest rate hike

Argentina's Merval index led the gains across Latin America on Monday
By Bloomberg Línea and Bloomberg News
September 19, 2022 | 09:40 PM

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

🥇 Argentina leads in Latin America:

Argentina’s and Brazil’s markets began the week with gains, Argentina’s Merval (MERVAL) closing up more than 3% with a strong showing among the shares of Cresud (CRES), Telecom Argentina (TECO2) and YPF (YPFD).

Investors were attentive to the International Monetary Fund’s announcement that an agreement was reached with the country despite the Argentinean government’s failure to meet its target for net reserve accumulation.

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The agreement, however, is subject to approval by the IMF’s executive board, which is expected to meet in the coming weeks. Upon completion of the review, Argentina would have access to about $3.9 billion.

Brazil’s Ibovespa (IBOV) closed more than 2% higher, due to the performance of the health, finance and non-core consumer products sectors.

Shares of education sector company YDUQS (YDUQ3) rose 14% after presidential candidate Luiz Inacio Lula da Silva consolidated his lead over President Jair Bolsonaro in the most recent polls.

A possible Lula win would boost the odds of state-sponsored education loan programs accelerating, Bloomberg explained.

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Emy Shao, an analyst at JPMorgan, had warned in a note earlier this month that education stocks, such as Yduqs, could rise as they benefited from past government programs that could revive with Lula in office.

Mexico’s stock market reversed the losses it had incurred during most of the session and remained practically stable at closing

📉 A bad day for Colombia’s COLCAP:

Colombia’s Colcap index (COLCAP) closed with the sharpest losses in the region, with Cementos Argos (CEMARGOS) shares and Grupo Aval’s and Grupo Argos’ preferential shares seeing the sharpest declines.

Colombia’s economy grew 6.4% year-on-year in July, the company’s statistics agency reported, with the country’s economy showing signs of deceleration, which has discouraged investors.

Chile’s IPSA (IPSA) remained closed for a public holiday on Monday.

🗽 On Wall Street:

Stocks pushed higher in the final hour of New York trading, with a rally in megacaps like Apple Inc. and Tesla Inc. driving a rebound that followed the worst weekly rout for the market since mid-June.

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The S&P 500 climbed 0.69%, the Dow Jones Industrial Average 0.64% and the Nasdaq Composite (CCMPDL) 0.76%.

Major equity benchmarks had a tough time finding direction Monday as traders geared for another super-sized US rate increase amid fears on whether the Federal Reserve could overtighten and raise the odds of a hard landing. Treasury 10-year yields hovered near 3.5% while the two-year rate, which is more sensitive to imminent policy moves, hit the highest since 2007.

“Volatility is expected to remain heightened through the remainder of this year at a minimum,” said Megan Horneman, chief investment officer at Verdence Capital Advisors. “Until there is consistent improvement from inflation, timing the peak in Fed rate hikes is challenging. While we do not rule out a testing of the June S&P 500 low, we would look at it as a potential buying opportunity.”

Traders are betting the Fed will hike by 75 basis points Wednesday, signal rates are heading above 4% and will then pause. The long hold strategy is rooted in the idea the central bank would avoid the disastrous stop-go policy of the 1970s that allowed inflation to get out of hand. While a case can be made for going bigger, a shock full-point boost could add to recession jitters.

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To Sam Stovall, chief investment strategist at CFRA Research, a full-point hike would jolt Wall Street as it would imply a central bank “overreacting to the data rather than sticking to its game plan.” Following the previous seven rate increases of that magnitude, the US equity benchmark fell four times each over one-, three-, and six-month periods, he added.

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Ed Yardeni, president of his namesake research firm who nailed the market bottom in 1982 and 2009, sees the Fed boosting rates by 100 basis points this month, with Chair Jerome Powell and the central bank’s economic projections looking hawkish.

He noted that could cause the S&P 500 to retest its June 16 low of 3,666.77, almost 6% below current levels.

While a policy surprise could certainly move markets, the Fed’s revised forecasts for where the policy rate will ultimately come to rest and how long it’s likely to stay at that level will be equally important. Swap contracts that forecast rates over the next two years now peak around 4.5% in March 2023 -- a full point higher than was expected after the last meeting in July.

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“The question to focus on isn’t whether the Fed will hike rates by 75 basis points or 100 basis points,” said Phillip Nelson, head of asset allocation at NEPC. “What we’re looking for is how aggressive Powell will be in the next six to 12 months. The messaging we get in the next few weeks could be a bigger data point and a shock to investors.”

In a sign of how severe the equity beatdown has been, the S&P 500 has been trading below a key technical level for the longest stretch since the global financial crisis.

Its long-term trend has turned “sharply lower recently,” and the index has closed below its 200-day moving average for 110 trading sessions, the longest streak since the bear markets of 2008-2009 and 2000-2002, according to Bespoke Investment Group.

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During the five-week period that started in mid-August and ended Sept. 7, long-only institutional investors sold $51.2 billion worth of US-traded stocks -- roughly a quarter of what they dumped in the prior 31 weeks of this year, according to an S&P Global Market Intelligence analysis. The data don’t include last week, when a surprising inflation print stoked concerns of a Fed tightening that’s more aggressive than expected.

“Due to current negative indicators including high inflation and the Fed’s upcoming rate announcement, global economic growth concerns and earnings expectations, we expect to see a continued negative pattern in the near-term,” said Mark Hackett, chief of investment research at Nationwide. “It will not take much good news to light a fire under the market, but we don’t expect that good news to come in the next few weeks.”

Regarding currencies, the Bloomberg Dollar Spot Index was little changed, the euro was little changed at $1.0024, the British pound rose 0.1% to $1.1436 and the Japanese yen fell 0.2% to 143.17 per dollar.

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🔑 Key events of the day:

A strong earthquake shook Mexico on Monday, the same day that residents were carrying out a national drill, traditionally held on September 19, the day on which fatal quakes also struck the country, in 1985 and 2017.

Monday’s quake occured around 1:05 pm local time (8:05 pm GMT) and left one person dead and minor material damage, according to preliminary official data.

According to the National Seismological Service, the quake registered 7.4 on the Richter scale and the epicenter was in Michoacán state, around 475km west of Mexico City.

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State-owned utility Comisión Federal de Electricidad reported 1.3 million customers without electricity.

🍝 For the dinner table debate:

After commemorating a year since its launch, Bloomberg Línea presents its second edition of the 500 Most Influential People in Latin America, a list of the people who move business, economy and finance in the region.

The 2022 list includes some CEOs and founders of startups that achieved the mythical status of unicorn between 2021 and this year.

Some figures who continued to play a leadership role in the region, such as Carlos Slim, Daniel Servitje, Stanley Motta, Luis Carlos Sarmiento, Eduardo Logemann and Carlos Alberto Sicupira, also kept their places in the list.

This year, some 200 people make their debut on the list and 175 women are included, a sign of diversity and the gender drive to break glass ceilings.

The selection of the 500 people was made through an analysis of the most relevant initiatives carried out by entrepreneurs, executives, investors, researchers, public servants, as well as celebrities who have a drive beyond their artistic or sports activities.

View the 500 Most Influential People in Latin America list here.

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

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