:quality(75)/cloudfront-us-east-1.images.arcpublishing.com/bloomberglinea/H7DE43PDEJAN7KF6P4BAIEVPRA.jpg "Pedestrians pass the Brasil Bolsa Bacao (B3) stock exchange in São Paulo, Brazil. Photographer: Patricia Monteiro/Bloomberg")
A roundup of Monday’s stock market results from across the Americas
👑 Chile’s IPSA bucks the LatAm trend:
Chile’s IPSA index (IPSA) was the only one to close higher in Latin America on Monday, closing 1.14% higher, powered by shares of the industrial sector. The day’s best performing shares were Cia Sud Americana de Vapores S.A. (VAPORES) and Sociedad Química y Minera de Chile S.A. (SQM/B), which gained 4.87% and 4,14%, respectively.
However, Chile’s central bank confirmed Monday that the country’s economy grew less than expected at the end of last year, rising 0.1% in the fourth quarter from the previous quarter, less than the median estimate of analysts surveyed by Bloomberg of 0.6%. Compared to a year earlier, the economy contracted 2.3%.
The Colombian and Mexican stock exchanges remained closed Monday due to public holidays.
📉 A bad day for the Ibovespa:
Meanwhile, Brazil’s Ibovespa (IBOV) closed with the sharpest decline, dragged down by the shares of Petrobras (PETR4) and JBS (JBSS3).
Brazil’s fiscal framework is still on the radar of investors, with key meetings between President Lula da Silva and Finance Minister Fernando Haddad, and which, once is fleshed out, will have to be submitted to Congress.
Argentina’s Merval (MERVAL) and Peru’s S&P/BVL index (SPBLPGPT) also closed lower, down 0.31% and 0.05% at the close of trading.
🗽On Wall Street:
Stocks finished higher as regulators worldwide rushed to shore up market confidence, with the recent financial turmoil spurring speculation on a slower pace of tightening from major central banks.
An earlier flight-to-safety bid waned, with all 11 groups in the S&P 500 gaining. A gauge of US lenders climbed after last week’s 15% rout. First Republic Bank plunged 47% to a record low, missing out on a rebound by its regional peers led by New York Community Bancorp. UBS Group AG rose as investors focused on the upside of its Credit Suisse Group AG takeover.
The S&P 500 closed 0.89% higher, the Dow Jones Industrial Average 1.20% and the Nasdaq Composite (CCMPDL) 0.39%.
Following the biggest weekly surge for the Nasdaq 100 since November, the tech-heavy measure underperformed as a recovery in risk appetite sent Treasuries slumping. Global central banks witnessed no dash for dollars after uniting with the Federal Reserve to ease access to supplies of the US currency — an indication that the latest bout of banking turbulence may not be causing undue stress to the financial system.
To a large extent, the market feels the turmoil is not systemic and there will be a solution to “contain the damage,” according to Chuck Cumello, chief executive officer at Essex Financial Services. That doesn’t mean there won’t be other “landmines” out there, so that’s going to be a challenge, he added.
“Monday’s session was relatively tame versus what we anticipate will be a week of elevated realized volatility,” said Ian Lyngen at BMO Capital Markets. “Conviction is scarce in the current environment and this observation applies not only to the Fed, but also to the evolution of the banking sector stress.”
Just a couple of weeks ago, investors were betting the Fed would raise rates close to 6% and the European Central Bank would hike past 4%. Now markets imply the tightening cycles are almost over and wager on four rate cuts in the US by year-end. Overnight indexed swaps price in a 75% chance of a quarter-point hike by the Fed this week.
‘Dovish hike’
Swap traders currently see the Fed’s benchmark ending the year around 4% — a whole percentage point below the central bank’s rate estimate in the December “dot plot” that comes as part of the quarterly economic projections. In keeping with the theme of instilling confidence in the banking system, Fed Chair Jerome Powell will possibly reiterate that further progress needs to be made toward the goal of price stability, Lyngen noted.
A “dovish hike” remains our bias, he added.
“We expect a 25 bp hike and higher dots in the dot plot,” said Chris Low, chief economist at FHN Financial. “50 bp would be reckless, but no hike would suggest the bank crisis supplants the fight against inflation. 25 bp seems just right. Of course, our view from midtown Manhattan may not be quite the same as the Fed’s from central DC. If the Fed chooses not to hike, the language they use to couch that choice in will be key to shaping the entire yield curve.”
Market easing expectations have “run wild” because the media blackout has restrained Fedspeak, according to Win Thin at Brown Brothers Harriman. While nobody knows the extent to which the recent turmoil is impacting the rate hike debate, Fed officials will likely fall in line with ECB President Christine Lagarde, who last week stressed that there is no trade-off between price and financial stability.
“This was a very strong statement that suggests any banking sector issues won’t derail the tightening cycle,” he noted. “We think this view is held by pretty much every central bank, including the Fed, which supports our call for a 25 bp hike this week.”
‘Vicious’
Morgan Stanley’s Michael Wilson said the stress in the banking system marks what’s likely to be the beginning of a painful and “vicious” end to the bear market in US stocks.
“This is exactly how bear markets end — an unforeseen catalyst that is obvious in hindsight forces market participants to acknowledge what has been right in front of them the entire time,” Wilson wrote.
Bank failures, market turmoil and ongoing economic uncertainty as central banks battle high inflation have increased the chances of a “Minsky moment,” according to JPMorgan Chase & Co.’s Marko Kolanovic.
The term, named for the late American economist Hyman Minsky, refers to the end of an economic boom that has encouraged investors to take on so much risk that lending exceeds what borrowers can repay. At that point, any destabilizing event may force investors to sell assets for cash to repay their loans, sparking a market meltdown.
“Even if central bankers successfully contain contagion, credit conditions look set to tighten more rapidly because of pressure from both markets and regulators,” Kolanovic wrote.
$304 billion in debt
The Federal Home Loan Bank System issued $304 billion in debt last week, according to a person familiar with the matter, who asked not to be identified discussing non-public data. That’s almost double the $165 billion that liquidity-hungry lenders tapped from the Fed.
In the likely volatile period ahead, high-quality, defensive assets should be sought out, while diversification will be increasingly important, said Seema Shah at Principal Asset Management. Keith Lerner at Truist Wealth, says he also prefers staying defensively positioned even as the market appears to be fairly resilient.
“Although a Fed pause or pivot could trigger a short-term rally, we don’t see this as a cure-all, especially if the economy falls into recession later this year,” Lerner added. “The Fed’s reaction function to current events will likely be less aggressive in providing monetary support relative to past periods given the conundrum of still-elevated inflation.”
The banking-sector turmoil combined with a previous increase in funding pressures has left financial markets also keenly attuned to what the Fed will say about its $8.6 trillion balance sheet.
Until this month that had been shrinking as part of the Fed’s efforts to return it back to pre-pandemic levels. But now it has started to expand again as the Fed acts to bolster the banking system through a slate of emergency lending programs. Its latest step came Sunday, when it moved with other central banks to boost US dollar liquidity. Some say financial-stability concern may spur policymakers to dial back the runoff of its bond portfolio, a process known as quantitative tightening that’s designed to drain reserves from the system.
🍝 For the dinner table debate:
2023 is not set to be a great year, neither for the world economy in general, nor for the Latin American economy in particular. This is evidenced by the pessimism in the growth forecasts of the Inter-American Development Bank (IDB).
According to the latest IDB report, the baseline scenario forecasts that the region comprising Latin America and the Caribbean will grow by 1% this year after achieving better-than-expected growth (3.9%) in 2022. A 1.9% growth scenario in 2024 assumes that the United States will avoid a recession in 2023 and that there will be a global downward trend in inflation.
“This low growth projection reflects, among other factors, lower global growth, higher interest rates, continued tight monetary policy in the world and in the region, gradual fiscal consolidation and relatively high debt levels,” the IDB document notes.
The IDB’s base scenario contemplates growth of 1.9% for 2024 and 2.3% for 2025.
Leidys Becerra, a content producer at Bloomberg Línea, and Rita Nazareth of Bloomberg News, contributed to this report.
