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Pacific Spread

17 April 2019 by jbchevrel

Today Latin American risk underperformed in the EM sovereign CDS universe, despite +/- stable energy and metal prices, while Asia performed strongly. Argentina 5y CDS lagged the complex (wider +28 vs CDX EM tighter -1.3). Yesterday March inflation rose +4.7% MoM (core CPI @ fresh record highs at 55.5%). The BCRA announced afterwards that the banks of the $ARS non-intervention zone would be kept unchanged until EOY. That helped stabilize ARS (+0.6% in the short term). The government has also just announced it will freeze prices on 60 food products until at least the end of NOV. One month after the election. Which I think is the tail risk for Argentina. If it would be fairBrazil CDS also underperformed (wider +3) on pension reform uncertainty. The Constitution and Justice Committee session has now started. A vote on the pension reform proposal is still possible today. The only possible positive outcome seems to be if the proposal passes this stage without any changes. Reports suggest that centrist parties are demanding pension text changes. Even if the proposal goes through today, it is worrying that the pension reform is stumbling at such an early stage of Lower House approval. A long way to go. Mexico CDS was stable (just -1). AMLO cancelled the education reforms from previous administrations via a memorandum. No economic impact, but AMLO exerting his authority via memorandums does not bode too well. Reversely, Asian names were rather strong. Chinese data were all beating expectations. GDP q1 6.4% y/y vs exp 6.3% and 6.3% prev. IP 6.5% y/y vs exp 5.6% and 5.3% prev. Retail Sales 8.7% y/y vs exp 8.4%. Fixed Assets 6.3% y/y as exp and 6.1% prev. China CDS was thus tighter -2. New post-GFC tight for China @ 39 ¼ and Indonesia even stronger (-3 ½) as the incumbent Jokowi won a 2nd five-year term, based on unofficial private co counts (reliable in past). Indon CDS @ 90 still 10bp above Jan-18 dip.