EM LATAM CREDIT: Colombia Fiscal Rule Threatened - Negative
(COLOM; Baa2neg/BB+neg/BB+neg)
"Colombia Assets Extend Drop on Reports Fiscal Rule May Be Paused" - BBG
We've been writing about Colombia's fiscal challenges all year. Our post from late April discussing the IMF's suspension of the Flexible Credit Line (FCL) pending a consultation over fiscal policy with the government provides a good summary of the main issues:
https://mni.marketnews.com/4mU9mfy
To put this in context, Colombia's fiscal deficit was 6.8% last year and some expect it to be north of 7% this year. That deficit has to be financed and with both hard currency yields and local currency rates elevated it makes the interest cost more expensive.
Additionally you have a high external debt to GDP which is near 50% when in Brazil by comparison its closer to 5% so an FX devaluation like the one we have seen over the past couple of years makes the USD denominated debt that much more expensive.
You have a lack of willingness of the government to cut spending and President Petro seems to be committed to increased spending for social welfare, healthcare and various other reforms. Recent tax reform efforts have failed too.
Former Colombia central bank president and Oxford educated economist Juan Jose Echavarria published an opinion piece last week criticizing not only the size of spending but the quality of it as well as tax policies.
Finance Minister German Avila will speak at a banking conference later today, according to Bloomberg, where possibly he may comment on the potential use of an "escape clause" to temporarily disregard the fiscal rule.
The autonomous fiscal committee known as CARF already said in April that the government would need COP46tn (USD11.1bn) to close the budget gap. Please see our post from early May: https://mni.marketnews.com/3ZiRX5U
We expect an updated budget plan to be presented next week. The initial plan presented in February projected a fiscal deficit of 5.1%, a target of 60.6% debt/GDP, GDP growth of 2.6% and CPI of 3.6% at year end 2025. The IMF projects 2.4% real GDP and 4.7% CPI for 2025.
COLOM 8% 2035 notes were last quoted T+360bps, 8bps wider today, 4bps tighter QTD and 27bps wider YTD. Much lower rated El Salvador (ELSALV;B3/B-/B-) 2035s are quoted only 15bps higher in yield.
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GERMANY: Border Control Order Risks Difficult Conversations For Merz w/Polish PM
Bild reports that Germany's Interior Minister Alexander Dobrindt has, on his first day in officee issued an order to halt all undocumented migrants at the country's external borders, even if they make claims for asylum. Bild: "In addition, Dobrindt – also today – revoked in writing a verbal instruction to the Federal Police from former Interior Minister Thomas de Maizière (71, CDU) from 2015. According to this instruction, "Third-country nationals without residence permits and who submit a request for asylum are to be permitted entry." Dobrindt has now stopped that."
- The order, intended to indicate that the 'grand coalition' gov't, headed by conservative Chancellor Friedrich Merz, will take a hard line on immigration, risks a tense meeting with Polish PM Donald Tusk for the new head of gov't in the hours ahead.
- Merz has sought to use his first full day in office to tout his commitment to European security with the Weimar Triangle alliance (Germany, France, Poland) leading the way.
- However, closing Germany's external border to undocumented migrants risks a rift with Poland, both on the issue of where those undocumented migrants end up and on the functioning of the internal market (given the importance of exports to Germany for Polish economy). Indeed, Politico reported earlier this week "“The current controls at the German-Polish border are already a problem for daily border traffic and the functioning of the EU internal market,” Poland’s chief diplomat in Berlin, Jan Tombiński,[said] “We therefore do not want to see a tightening of border controls.”
US 10YR FUTURE TECHS: (M5) More Stable Off Recent Lows
- RES 4: 113-22 1.382 proj of the Apr 11 - 16 - 22 price swing
- RES 3: 113-04 76.4% retracement of the Apr 7 - 11 bear leg
- RES 2: 112-20+ High May 1 and key new-term resistance
- RES 1: 112-01+ High May 2
- PRICE: 111-12+ @ 16:56 BST May 7
- SUP 1: 110-27+ Low May 6
- SUP 2: 110-16+/109-08 Low Apr 22 / 11 and the bear trigger
- SUP 3: 110-00 100-dma
- SUP 4: 108-26+ 76.4% retracement of the Jan 13 - Apr 7 bull cycle
Treasury futures are more stable off recent lows, however the latest pullback has undermined the recent bull cycle. The contract has breached the 20-day EMA, and pierced support at the 50-day EMA, at 110-31. A clear break of this average would strengthen a bearish threat and expose 110-16+, Apr 22 low. For bulls, price needs to trade above key short-term resistance at 112-20+, the May 1 high, to reinstate a bullish theme.
US STOCKS: Midday Equity Roundup: Cautious Optimism at Bay
- Stocks are trading near steady (SPX eminis) to mixed late Wednesday morning, the Dow trading higher after trading weaker since Monday - sentiment cautiously buoyed ahead US/China trade talks expected in Geneva over the weekend - not to mention event risk ahead of today's FOMC announcement at 1400ET.
- Trade negotiations have been less than transparent since the "Liberation Day" tariff announcement on April 2 followed by a 90 day pause a week later. Despite Treasury Sec Bessent stating the US is negotiating with "17 major trading partners" Tuesday, nothing substantive has been announced.
- Currently, the DJIA trades up 220.6 points (0.54%) at 41051.33, S&P E-Minis up 6.5 points (0.12%) at 5632.5, Nasdaq down 52.4 points (-0.3%) at 17638.13.
- Consumer Services and Information Technology sectors underperformed in the first half, interactive media and entertainment shares weighing on the former. Notably, Alphabet trades -6.45% on the back of Apple's Cue, who talks up that they're exploring adding an AI search function to their native browser - and may select Perplexity or Anthropic as options for the product.
- Laggers in the IT sector included Arista Networks -6.71%, Super Micro Computer -6.07%, Crowdstrike Holdings -4.01% and Apple -2.37%.
- On the positive side, Financial and Consumer Discretionary sectors outperformed in the first half, leading gainers in the former included banks and services: Franklin Resources +1.94%, State Street +1.92%, Invesco +1.83% and Assurant +1.81%. Meanwhile, Discretionary stocks included broadline retailers: Best Buy Co +2.83%, Deckers Outdoor +2.31%, Tapestry +2.17%.
