COLOMBIA: Morgan Stanley: Keep Somewhat Defensive Stance In Near Term
May-30 17:19
- While the results of the first round of the presidential election suggest stronger-than-expected momentum for a scenario somewhat favouring policy continuity, Morgan Stanley think that volatility is bound to pick up going into the second round of the election, as the gap between the two candidates should narrow.
- In addition, MS think that uncertainty around reforms addressing growth initiatives or tackling Colombia's wide fiscal imbalance remains high regardless of the potential winner of the election, suggesting that more structural rallies in local assets remain unlikely for now.
- They prefer to keep a somewhat defensive stance in the near term, as more clarity on the proposed policies of both candidates develops, particularly those of Rodolfo Hernández.
- In this environment, MS close their long USD/COP trade, but stay paid 10-year IBR, which also remains a cheap portfolio hedge against upside risks in US Treasuries.
- On economics: Colombia’s next president will have to tackle macro imbalances, with uncertainty likely to linger: Colombia runs very wide current account and fiscal deficits (together amounting to nearly 12pp of GDP) at a time when external financial conditions are deteriorating sharply. Accordingly, to help to reduce those MS think that Colombia’s next president should pursue structural reforms in the fields of tax, infrastructure/productive diversification, pensions and labor.
- Failure to tackle those challenges could lead to increased macro stability risks over time, in their view. In this regard, each candidate should face their own set of challenges. For instance, Mr. Petro’s proposal to gradually halt concessions of oil exploration contracts could risk widening the external imbalance. Meanwhile, Mr Hernández could face challenges to advance reforms in Congress given his party’s small representation there (roughly 1% of the Lower House and no representation in the Senate).
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USDCAD TECHS: Corrective Pullback
Apr-29 20:00
- RES 4: 1.2964 High Dec 20 2021
- RES 3: 1.2936 2.0% 10-dma envelope
- RES 2: 1.2901 High Mar 8
- RES 1: 1.2880 High Apr 28
- PRICE: 1.2804 @ 16:59 BST Apr 29
- SUP 1: 1.2648 50-day EMA
- SUP 2: 1.2568 Low Apr 22
- SUP 3: 1.2459 Low Apr 21
- SUP 4: 1.2403 Low Apr 5 and a key support
USDCAD remains bullish and added to the week’s gains Thursday. However, the pullback from 1.2880, Thursday’s high, highlights potential for a short-term correction. A key near-term support lies at 1.2648, the 50-day EMA. A clear break of this support is required to suggest scope for a deeper pullback. For bulls, a resumption of gains would refocus attention on 1.2901, the Mar 8 high. This is also the bull trigger.
US TSY FUTURES: BLOCK, Late 10Y Buy
Apr-29 19:57
- +7,500 TYM2 119-00.5, buy through 119-00 pst-time offer at 1551:35ET
US TSYS: Data-Driven Vol, Yields Higher, Stocks Extend Wk Lows
Apr-29 19:54
FI markets traded weaker after the bell, off early session lows amid data-driven vol in the first half. Quiet second half trade ensued even as equities fell back to late Tuesday levels (SPX -3.6% to 4128.0)
- Rates trade weaker, curves bear flattening with short end underperforming (Block sale: -10,000 TUM2 105-10.88, sell through 105-11 post-time bid at 0841:030ET) after Personal Income: +0.5%/MoM vs. +0.4% est, Spending +1.1%MoM vs. +0.6% est, PCE Deflator in line at +0.9%, Employment Cost Index is +1.4% vs. 1.1% est.
- FI levels rebounded sharply after April Chicago Business Barometer™ fell to 56.4 vs. 62.0 est. Prices Paid ticked up a modest 0.4 points to 86.1 with over three-quarters of firms citing higher prices this month. The Ukraine war was cited as inflating steel, plastics and lumber costs.
- Data driven volatility evaporated by midday with rates hold to a relative narrow range, yield curves flatter but off lows (2s10s -1.116 at 18.994 vs. 13.399L; 5s30 -1.867 at -3.742 vs. -6.508L).
- Focus turns to next Wednesday's FOMC policy annc, 50bp expected, Tsy refunding early Wednesday as well.
- The 2-Yr yield is up 7.7bps at 2.6943%, 5-Yr is up 7.3bps at 2.9124%, 10-Yr is up 5.9bps at 2.8811%, and 30-Yr is up 4.9bps at 2.9413%.
