Chile’s IPSA Sole LatAm Index to Close Higher; Soaring Inflation Sinks US Markets

Chile’s stock market rose as investors await a central bank decision on interest rates, while the highest inflation in the US since 1981 provoked a share selloff

The Nasdaq MarketSite in New York, US. Photographer: Victor J. Blue/Bloomberg
By Bloomberg Línea and Bloomberg News
July 13, 2022 | 06:25 PM

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

🥇 Chile, Latin America’s Leader:

The Chilean stock exchange broke away from the losses across the main Latin American markets and closed with gains on Wednesday, closing higher for the second consecutive day.

The Ipsa (IPSA) advanced by almost 0.31% thanks to the information technology, materials and communication services sectors.

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The market is attentive to the decision of the central bank of Chile, which this afternoon could increase the monetary policy rate by 50 basis points to 9.5%, according to some projections.

However, a more aggressive hike is not ruled out in order to curb the peso’s depreciation, as the monetary authority ruled out an exchange rate intervention for the time being.

“If the increase is greater than expected, it could generate some very specific downward pressure on the dollar, but with the current fundamentals it would soon resume its upward cycle,” said Ricardo Bustamante, head of trading studies at Capitaria.

📉 A bad day for the rest of Latin America:

All the other major Latin American stock markets followed the pessimism generated after the inflation data in the United States and closed with losses in Wednesday’s session.

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Colombia’s Colcap (COLCAP) accumulated the largest drop and ended with a decline of more than 2%, the most affected shares were those of Grupo Sura (GRUPOSUR) and the ordinary and preferred shares of Bancolombia (BCOLO).

Among the shares with the highest trading volume, Ecopetrol (ECOPETL) shares had the sharpest decline. The state oil company continues to be in the midst of the controversy during the presidential changeover, and a discussion has arisen over the modifications to the oil company’s operating laws, approved during a shareholders’ meeting at the end of March, which extended the term of the board of directors from two to four years.

“Don’t hold us back,” President-elect Gustavo Petro wrote on his Twitter account referring to the change.

Losses were also seen on the Brazilian and Mexican stock exchanges.

Brazil’s Ibovespa (IBOV) fell 0.40%, amid the gloomy international mood, and the drop in oil prices, while Mexico’s S&P BMV/IPC (MEXBOL) also slipped 0.40% after having the region’s best performance on Tuesday.

🗽 On Wall Street:

S&P 500 and Nasdaq 100 contracts dipped on Wednesday after a volatile US session ended with modest losses, a resilience possibly rooted in speculation over whether the 9.1% consumer-price reading marks the peak.

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The S&P 500 dropped 0.45%, the Dow Jones Industrials 0.67% and the Nasdaq Composite (CCMPDL) 0.15%.

Traders shifted toward expectations of an historic one percentage-point Fed interest-rate hike later this month. Fed Bank of Atlanta President Raphael Bostic said “everything is in play” to combat price pressures.

Treasury two-year yields, which are sensitive to imminent Fed moves, climbed while longer-maturity rates fell. The inversion between two-year and 10-year yields -- a potential recession indicator -- hit levels unseen since 2000.

The euro snapped back after briefly falling below $1, while the loonie gained as the Bank of Canada raised rates by 100 basis points. Crude oil held this week’s plunge on demand fears.

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Bitcoin headed back toward $20,000.

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The big question for markets is whether the latest inflation print marks the peak. Commodity prices, pushed up this year in part by supply disruptions related to Russia’s war in Ukraine, have moderated somewhat of late.

But if higher costs prove to be persistent and come alongside an economy buckling under rate hikes, that could be toxic for a range of assets already nursing heavy losses this year.

“Stubbornly high inflation increases the risk that the FOMC continues to hike aggressively and triggers a recession,” Kristina Clifton, senior economist at Commonwealth Bank of Australia, wrote in a note. That’s increasingly the market’s base case and recession fears will continue to support the dollar, she added.

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Swaps referencing Fed meeting dates are priced for the policy rate to peak at almost 3.7% this December, up from the current target range of 1.50%-1.75%.

Traders then expect the Fed to start cutting rates, with more than three quarters of a percentage point of reductions priced in between the expected peak and the end of March 2024.

🔑 The Day’s Key Events:

Oil prices rose slightly but have yet to rise back above the $100 barrier amid fears about the US inflation data and the impact on demand prospects.

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Bloomberg reported that US gasoline demand fell last week to 8.06 million barrels per day, less than the same week in 2020 and the lowest for the season since 1996, according to US Energy Information Administration data.

This adds to the impact that further lockdowns in China, the world’s top oil importer, could have if Covid-19 continues to advance.

Pessimism also rose after the International Energy Agency said oil prices pose a high risk to global economic recovery, with signs that fuel costs are beginning to “take their toll” on demand growth.

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🍝 For the Dinner Table Debate:

Latin American startups continue to feel the pinch of slower economic growth, and the list of companies that are opting to downsize continues to grow.

Brazilian individual health insurance provider Alice, for example, confirmed that it laid off 63 employees in its sales department last week and said that those affected will receive extra pay.

At Mexican credit fintech Tribal, a competitor of Jeeves, a person familiar with the matter who asked to remain anonymous said the cuts were 15% of the total, and mostly from the company’s sales team.

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In June, Jokr, a delivery group to which Brazil’s Daki belongs, said it was closing its US operation to focus on Latin America. The closure of its Boston and New York offices implied laying off 50 US employees.

The cuts are part of a global move to reduce costs at a time when rising interest rates are making investment in technology firms more expensive.

-- Carlos Rodríguez Salcedo, a content producer for Bloomberg Línea, and Sunil Jagtiani of Bloomberg News, contributed to this report