Wednesday, May 29, 2013

Market Analysis: Mexico

On May 16th, I highlighted the current Mexican president's reform agenda along with an upgrade in Mexican debt -- both of which were positive developments for the economy.

Yet the next day, 1Q GDP was issued, and the news was decidedly bearish:

Gross domestic product in the first three months of the year rose 0.8 percent from the year-ago period, less than the 1.1 percent median estimate in a Bloomberg survey of 18 economists. GDP grew 0.5 percent from the previous quarter, an annualized rate of 1.83 percent. The median estimate from seven analysts surveyed by Bloomberg was for a 0.3 percent gain. 

The economy is growing at its slowest pace since GDP contracted 6.2 percent in 2009 in the aftermath of Lehman Brothers Holdings Inc.’s collapse. Today’s report showing industrial output is contracting increases the probability policy makers will cut rates as soon as July, said Gabriel Casillas, chief economist and head of research at Grupo Financiero Banorte SAB.

“It’s a very low growth figure and shows the economy is decelerating,” Casillas, who is based in Mexico City, said in a telephone interview. Mexico was hurt by “the slowdown in manufacturing of the U.S. that started in the fourth quarter of last year.” 

And retail sales have contracted on a year over year basis for the second month in a row:

Mexico’s retail sales (MXWRTRYO) surprised analysts in March by contracting for a second straight month for the first time since 2009, bolstering bets policy makers will cut interest rates again this year. 

Sales fell 2.4 percent from a year earlier, the national statistics agency said today, more than forecast by any of the 19 analysts surveyed by Bloomberg. The median estimate was for an increase of 0.3 percent. Retail sales climbed 0.25 percent from the previous month. 

Also consider that recent fund flow data indicates that foreign investors are decreasing their inflows. 

Other economic data in recent days have added to the worries. Foreign direct investment last year plunged to $12.7 billion, from an average of around $23 billion during the past decade, according to CEPAL, a UN-linked research organisation. It said the figure was affected by one-offs, such as a decision by Spain’s Banco Santander to list its Mexican subsidiary, raising $4 billion. That counted as an outflow of foreign investment. Some economists pointed to concerns that high levels of drug-related crime may also be taking a toll on investment, notably in tourism. Last year Mexico slipped out of the top ten of global tourist destinations.

As a result the Mexican market has sold off over the last week:

Technical support for the ETF was around the 70 level.  Prices moved through that level last week in a convincing manner on large volume spikes.  Support exists at various Fib levels; currently, the 61.8% Fib level from the June-April rally along with the middle Fib fan are supporting prices.