Colombia’s COLCAP Leads LatAm Gains; US Markets Close Mixed

Colombia’s market rallied following the investiture of President Gustavo Petro, while chip maker Nvidia’s shares tumbled following disappointing results

Colombia's new President Gustavo Petro
By Bloomberg Línea and Bloomberg News
August 08, 2022 | 08:00 PM

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

👑 Colombia, Latin America’s leader:

Latin American stock markets started the week in good spirits, with a day of gains for the main markets in the region.

The Colombian market celebrated the end of uncertainty after the first signs of Gustavo Petro’s government and the beginning of the debate in Congress on the tax reform, which will bring more taxes to the highest income earners.

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The bill proposes a permanent annual wealth tax of 0.5% on assets over $630,000, among other decisions.

Colombia’s Colcap (COLCAP) advanced 2.54% after, according to analysts, the stock market was discounting the impact of the change of government. The Brazilian stock market rose 1.81% thanks to increases in Magazine Luiza (MGLU3), Via (VIIA3) and Meliuz (CASH3) shares.

Petrobras (PETR3, PETR4) and Vale (VALE3) shares also rose on a day of gains for oil and iron ore, while the Mexican stock market also closed higher, with gains in the financial, materials and industrial sectors boosting the S&P/BMV IPC (MEXBOL).

🗽 On Wall Street:

Stocks failed to hold onto gains, with a gloomy forecast from Nvidia Corp. weighing on technology shares and traders awaiting inflation data for clues on the pace of Federal Reserve rate hikes.

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The S&P 500 erased a rally that reached 1% earlier in the day, while the Nasdaq 100 underperformed after an advance that briefly drove the tech-heavy gauge 20% above its June low. Nvidia tumbled almost 6.5%, dragging down chipmakers. Treasuries climbed.

Investors remain wary of US inflation data to be released this week, with economists at JP Morgan Chase (JPM), Evercore ISI (EVR) and LH Meyer expecting a further hike following the solid employment data announced last week.

Mounting risks to growth have sparked earnings downgrades, with prominent Wall Street voices warning that cuts are only set to ramp up after gross domestic product shrank for a second straight quarter.

“The economy still has to digest all this tightening, and that will materially slow things,” wrote Tom Essaye, a former Merrill Lynch trader who founded The Sevens Report newsletter. “That hasn’t even really started to occur yet, so celebrating the resilience of earnings and economic data when we’re still in an expanding economy (regardless of the GDP prints) seems to be the equivalent of a coach declaring victory because the game plan should work.”

Investors should modestly trim stock holdings and shift the money to commodities after equities outpaced other assets amid receding recession fears, according to JPMorgan strategists led by Marko Kolanovic. That doesn’t mean they expect stocks will fall. In fact, they see equities rising through year-end, bolstered by robust corporate earnings.

Morgan Stanley’s Mike Wilson, who correctly predicted this year’s equity selloff, called the recent rebound a “bear-market rally” amid growing fears of a recession. While he believes inflation has peaked and “will probably fall faster than the market currently expects,” that still doesn’t bode well for stocks as it’ll reduce operating leverage and weigh on earnings, he said.

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Nvidia (NVDA) shares tumbled following the microchip maker’s disappointing second-quarter results, with earmings of $6.7 billion, below analysts’ expected $8.1 billion.

The S&P 500 dropped 0.12% and the Nasdaq Composite (CCMDPL) 0.10%, while the Dow Jones Industrial advanced 0.09%.

Consumer expectations for US inflation over the coming years declined sharply in the latest survey by the Fed Bank of New York, with a recent drop in gasoline prices playing a big part in those results and likely contributing to a lower headline rate of inflation for July when the Labor Department releases the data on Wednesday. Still, almost all inflation measures are running well above the Fed’s 2% target.

As equities climbed last week, global hedge funds unwound risky bets -- highlighting a sentiment gap between professional speculators displaying a risk-off mood and price action in the stock market.

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“Countertrend rallies are characteristic of secular bear-market downtrends, and from that perspective, 2022 has been remarkably similar to previous bear markets in history,” said Seema Shah, chief global strategist at Principal Global Investors. “Until inflation abates and the Federal Reserve rebalances its priorities away from inflation and toward growth, tempting rallies are likely to remain unsustainable.”

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On the currency markets, the Bloomberg Dollar Spot Index fell 0.2%, the euro rose 0.1% to $1.0194, the British pound was little changed at $1.2081 and the Japanese yen was little changed at 135.06 per dollar

🔑 The day’s key events:

Oil prices closed with gains in the first session of the week, despite volatility during the day. Investors continue to weigh the impact that an economic slowdown and high inflation, which has already hit gasoline consumption in the United States, may have on demand.

Adding to the session’s volatility were developments in the Iran nuclear deal negotiation after the European Union submitted a draft text that must now be analyzed by the US and the Asian country, an official with knowledge of the matter told Bloomberg.

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Negotiators concluded more than 15 months of talks in Vienna on Monday and now EU foreign policy chief Josep Borrell will send a message telling U.S. and Iranian leaders they have “a few weeks” to choose whether to accept it, Bloomberg reported.

“A slightly weaker dollar also provided a boost for commodities, but that may not last. (...) Much attention is being paid to the Iran nuclear deal talks, but a breakthrough seems unlikely in the near term,” added Edward Moya, an analyst at Oanda.

🍝 For the dinner table debate:

The idea of Latin America having a single regional currency was revived during the inauguration of President Gustavo Petro after a speech delivered by the president of the Colombian Senate, Roy Barreras.

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However, the possibility is far from materializing for now, according to Chilean President Gabriel Boric, who met with Petro the day after the official investiture ceremony on Sunday.

Boric did not completely rule out the idea, but said that some stages and achievements in Latin American integration must still be completed in order to move forward on these issues, citing the euro as an example.

“These are long term processes, we have much to advance before (...) but we are available for it to be part of the conversations without prejudice that, I insist, there are many issues to advance before”, he said, adding that in the meeting between both presidents the proposal to revitalize the Andean Community as a regional integration mechanism was discussed.

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

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