Thursday, May 30, 2013

Market Analysis: Chile

Let's start with the international and domestic assessment of the Chilean Central Bank from their latest policy announcement where they kept rates at 5%:

International financial conditions show some improvement. The Eurozone
remains in recession and in a fragile fiscal and financial situation, while there is
increased optimism in the United States and Japan. Incoming indicators for
China and other emerging economies point at marginally weaker growth, while
several central banks have lowered their policy rates. The dollar has appreciated
in international markets. Metal prices receded in recent weeks, especially for

Domestically, first-quarter indicators show decelerating output and demand. The
labor market is still tight. Headline and core inflation measures remain close to
1% y-o-y, while surveys suggest that inflationary expectations over the policy
horizon remain around the target. The exchange rate has depreciated; however, in real terms it is still in the lower part of the range that is compatible with its longterm fundamentals

Copper is Chile's primary export, so it's price and the demand for the metal is obviously paramount to the economic outlook for the country.

As the weekly chart above shows, copper prices are very weak, trading near a three year low.  China's expansion is slowing, the EU is in a depression, US growth is weak and there is excess supply on the market. I detailed the market in more detail here, however, the overall condition for this market is still bearish.

As a result of the weaker copper and export market, the Chilean economy is decelerating, as seen in this chart of the year over year (Y/O/Y) percentage change in seasonally adjusted GDP:

Coming out of the recession we see large percentage year over year changes.  However this is due more to the weak comparison to the previous year's numbers then strength in the underlying economy.  Starting in 2012 we see strong consistent Y/O/Y/ growth rates in the 5% range.  While this pace has been decelerating for the last three quarters, YOY GDP growth is still printing around 5%.  But remember that growth is relative.  While this number would be remarkable for the US, the deceleration of the percentage change over the last two quarters raises concerns.

Let's look at the underlying economic numbers.

Overall PCEs have settled down from their post recession highs into a more manageable range of 1%-2%.  However, the drop in both service and non-durable expenditures in the 1Q13 is probably causing concern for the central bankers.

The drop in machinery investment is also causing concern, as it indicates the mining sector -- an important component of the Chilean economy -- is slowing its pace of investment.

Finally, there is the balance of trade:

In late 2011 and through the first half of 2012, we see a strong balance of trade.  This number went negative in the last half of 2012, but returned to a positive trend in 2013.  But the rate of change now is weaker than the numbers from the first half of 2012.

Let's take a look at the chart of the Chile ETF.

Since the beginning of February, the Chile ETF has been in a clear decline.  It has moved through all Fib levels established between June 2012 and February 2013 and is fast approaching a 100% retracement.  Prices are below the 200 day EMA and have pulled all the shorter EMAs lower as well.