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Tequila Sunrise

31 May 2019 by jbchevrel

Mexican risk got under unusual pressure during this session (CDS +15 FX -3.5%). Trade tensions escalated further with President Trump (is it useful to say, unexpectedly) imposing a 5% tariff on all Mexican goods. Allegedly to counter illegal migrants from the country. Those will be increased in phases until the immigration issue is remedied. Value date is June 10 and tariffs will be increased by +5% each month until it reaches 25%, basically (could be by October). Unless or until the flow of illegal immigrants across the border stopped. And at that point, tariffs will be removed. In corporate space, US autos were hit hard. Light vehicle exports from Mexico to the US total ~2.4 million units per year. And ~400k units would seemingly be at risk in the worst case (25%). Still on the trade topic, US/China tensions continue with China retaliating to the Huawei move with an unreliable entity list. Trade uncertainty is still weighing in the data, with China NBS manufacturing PMI 49.4 in May (Bloomie estimate was 49.9). Forward-looking metrics (new orders) also contracted, reflecting slowing demand and cautiousness from businesses. China CDS is +2.5 on day, close to 60bp. Headlines that ex-PBOC governor said 7.00 in $CNH was not threshold hasn’t helped risk. SOAF CDS followed suit, after the main focus was on the cabinet. Ramaphosa announced a leaner cabinet including Mboweni (finance minister) and Gordhan (SOEs i.e. public enterprises). It should follow global risk, waiting for the president’s June 20 speech. Over the past 3 years, SOAF had 2 technical recessions. Consensus for 2019 seems +1%, but it is possible to see current account deficit widen to -3% GDP from -2.2% in Q4.