Merval Leads in Latin America as Powell’s Optimism Boosts US Stocks

US stock markets rose after the Fed president denied the country is in a recession

Stocks rallied and Treasury yields fell with the dollar as Jerome Powell said the Federal Reserve will slow the pace of rate increases at one point.
By Carlos Rodríguez Salcedo (EN) and Bloomberg News
July 27, 2022 | 07:55 PM

Bloomberg Línea — This is a roundup of Wednesday’s stock market results from across the region.

🥇 The Leader:

The rebound in the US stock markets led to a positive day for almost all Latin American markets.

The gains, following the optimism triggered by Fed President Jerome Powell’s remarks, were led by Argentina’s Merval (MERVAL), which closed with a gain of more than 5%.

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Shares of Central Puerto (CEPU), Grupo Supervielle (SUPV) and Transportadora de Gas del Sur (TGSU2) were among the session leaders.

This week, Supervielle announced a buyback plan, stating that the stock’s decline is linked to the increase in the country’s risk and it does not reflect the real value of the company’s assets.

Analysts consulted by Bloomberg Linea dismissed the Fed’s decision as a relevant factor in the case of a rise in the Argentine stock market.

Pedro Siaba Serrate, of Portfolio Personal Inversiones, did not hesitate to define Wednesday’s hikes as a “slight stabilization”, as he does not find “a macro or fiscal reason beyond rumors placing (Sergio) Massa close to joining the cabinet.”

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The optimism seen in the U.S., however, boosted risk appetite, leading to gains also in Brazil’s Ibovespa (IBOV) and Mexico’s S&P BMV IPC (MEXBOL).

Commodities performance, with oil, iron ore and copper prices up, drove the Latin American stock markets’ rally.

🗽 On Wall Street:

Stocks rallied and Treasury yields fell with the dollar as Jerome Powell said the Federal Reserve will slow the pace of rate increases at one point, while adding that officials would refrain from offering “clear guidance” on the magnitude of their next move.

About 85% of the S&P 500 companies rose, while the Nasdaq 100 soared over 4%, the most since November 2020. Two-year US yields tumbled as much as 10 basis points. Expectations for the pace of Fed hikes eased -- with swap markets showing 58 basis points of tightening priced in for September.

The lack of forward guidance on rates was seen as positive by several traders, with officials trying to boost their credibility as they fight the hottest inflation in four decades. However, Wednesday’s market reaction was met with skepticism. The upside for markets is “very much capped” and the Fed needs tighter financial conditions to achieve slack in the labor market and bring inflation down, according to former New York Fed President Bill Dudley.

“It seems traders aren’t thinking another large move will be justified in September,” said Ed Moya, senior market analyst at Oanda. “A clear greenlight to buy up risky assets won’t happen until we see evidence inflation is coming down.”

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For Bloomberg Economics’ Anna Wong, the July Fed decision signaled the central bank is nowhere close to pausing rate hikes. “Market expectations of a Fed put are premature. Looser financial conditions could end up making the Fed’s task of reining in inflation more challenging,” she added.

The Fed’s boss rejected speculation the US is in recession and said the central bank is moving “expeditiously” when it comes to dealing with inflation. Powell also noted that another unusually large boost in rates would depend on data after officials hiked by 75 basis points Wednesday, taking the cumulative June-July increase to 150 basis points, the steepest since the early 1980s.

Fresh economic data reduced the odds the US will report two straight quarters of a contracting economy and avert what is commonly regarded as a recession. Economists at Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs Group Inc. boosted their estimates for second-quarter gross domestic product after government reports showed firmer durable-goods shipments, a narrower trade deficit and gains in inventories last month.

Earnings:

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  • Meta Platforms Inc. (META), parent company of Facebook and Instagram, reported its first ever quarterly sales decline, as economic turmoil caused advertisers to shrink budgets.
  • Qualcomm Inc. (QCOM), the biggest maker of chips that run smartphones, gave a lackluster forecast for the current period, fueling concern that weaker consumer spending will hurt demand for mobile devices.
  • Ford Motor Co. (F), preparing to slash thousands of staffers to help fund its electric-vehicle future, reported second-quarter earnings that beat Wall Street estimates.
  • Best Buy Co. (BBY) cut its profit forecast, saying high inflation was hammering demand for consumer electronics.

🔑 The Day’s Key Events:

The International Monetary Fund (IMF), which yesterday raised its growth forecast for Latin America and the Caribbean, published its estimates for the region’s largest economies. Acoording to the IMF, Colombia’s performance will stand out, doubling the regional increase.

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The Colombian economy is expected to head the region’s largest economies with a 6.3% growth in 2022, followed by Argentina with 4%. In the case of Central America, growth is forecast to reach 4.7% this year.

The IMF expects that Latin America and the Caribbean will have grown by 3.0% by the end of 2022, which represents an increase of 0.5 percentage points compared to the previous April’s forecast. According to the report, the upgrade is driven by a strong performance at the end of the first semester.

Despite this, the IMF cautioned on the impact inflation could have, as it predicted that it will reach levels not seen for 25 years.

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In the case of the region’s top five economies, tallies indicate that inflation will exceed the upper limit of central banks’ target ranges by about 400 basis points on average.

📉 At the end of a bad day:

The Peruvian stock market was the only one to break away from the positive performance in Latin America and was in the red towards the end of the trading day.

The S&P/BVL Peru (SPBLPGPT) closed with a slight drop of 0.12%, dragged down by the decline in the materials and financial sectors.

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Shares of Minas de Buenaventura (BVN), Credicorp (BAP) and Cementos Pacasmayo (CPACASC1) were among the day’s falling stocks.

Besides, the IMF cut its forecasts for the Peruvian economy, being the only major country in the region to suffer a downward revision.

The Peruvian economy had already decelerated in recent months with May in particular seeing a contraction, due to the adverse performance of key sectors such as mining.

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Peru has been affected by mining blockades, adding to the ongoing challenges the global economy is already facing from high inflation.

🍝 For the dinner table debate:

Latin America’s Gen Z was key to streaming company Spotify’s (SPOT) Q2 results, with this demographic a strong contributor to year-over-year growth in the wake of new music releases.

Total monthly active users grew 19% year-on-year to 433 million, , the company reported. In addition to the growth of users from the younger generation in Latin America, the company highlighted the quarterly performances in India, Indonesia and the Philippines.

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During an investors’ call, Spotify’s CEO Daniel Ek said emerging markets have a far greater future potential than the so-called “developed market.”

“The great story is that we believe we can upsell more podcasts, audiobooks, so users spend more time and increase our revenue opportunities there [in emerging markets],” said Ek.

Last quarter, Spotify also pointed to LatAm as the main reason for users’ growth. In the first quarter, the streaming service said it benefited from outperformance in Latin America, driven by Brazil and Mexico.