Market/Economic Analysis: Colombia

From the latest Minutes of the Colombia Central Bank on May 31:

The latest information on the performance of the economy in the first quarter of 2013 suggests that this slowed down in comparison to what had been seen at the end of last year as was predicted in earlier reports.  The indicators for that period are influenced by the lower number of working days in February and March.

In the first quarter of the year, household consumption grew at rates that were slightly lower than the ones registered in the fourth quarter of 2012.  According to the figures from the Retail Monthly Sample (MMCM in Spanish) published by DANE in March, the annual growth of sales was 0.9% in the first quarter (less than the 3.3% for the last quarter of 2012).  This performance could be explained by an annual drop in the sales of vehicles (-11.4%).  In contrast, sales of other goods grew 4.0% in the first three months of the year.  

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With regards to the supply indicators, the news shows mixed performance.  Production of coffee continues to expand at favorable rates.  Energy related mining showed positive growth in petroleum production while coal production was affected by labor problems and environmental penalties.  The industrial sector registered significant deterioration during the quarter.  In March, the index of industrial production excluding threshing shrank 11.5% in annual terms.  Based on this rate, industrial production showed an annual contraction of 6.0% in the first quarter.  

So households are still spending, albeit at slower rates.  The real problem is in industrial production.  This exact same situation is playing out in the US.

As a result, the central bank has been cutting rates for stimulate growth:

Colombia sure likes to keep the markets on their toes.

On Friday, the country cut its benchmark interest rate for the fifth consecutive month. While previous cuts came in at 25bps increments, the central bank took out the axe this time around and chop rates by 50bps to 3.25 per cent – the lowest in Latin America.

So, let's take a look at the Colombia ETF's daily chart:

 Since the beginning of February, the market has been moving lower.  But remember that this move lower has been very disciplined.  There has not been a massive volume spike indicating a selling climax.  Instead we see a nice pattern of lower lows, followed by consolidation, followed by another disciplined move lower.  Prices are below the 200 day EMA are are using the 10 and 20 day EMAs as technical resistance.  While the CMF is indicating some volume moving into the market, momentum is negative.

The weekly chart shows that the current price level is around the 38.2% Fib level for the 4Q11-1Q13 price move. While we do see a slight uptick in volume over the last few months, it does not indicate a selling climax.

South American ETFs Are Selling Off

Consider the following weekly price charts:

The Chilean ETF has an uptrend connecting the mid-2012 and end of 2012 lows.  Prices broke that trend a few weeks ago and are now below the 200 week EMA.  Additionally, they are sitting at price support established in mid-2012.  Momentum and volume readings confirm the break-down.

The Mexican ETF actually broke trend earlier this year, but consolidated sideways between the 70 and 76 price level.  Prices have bee moving lower for the last few weeks, breaking price support established earlier this year.  Momentum is dropping and volume is flowing out of the market.

The Columbian ETF broke its uptrend earlier this year.   Over the last few weeks we've seen some volume spikes as the selling has accelerated.  Momentum is dropping and money is flowing out of the market.

Peru's ETF had a solid uptrend that lasted over a year and a half.  But prices moved lower about 6-7 weeks ago, printing strong bars lower.  Also note that momentum is declining and the CMF is negative.

Brazil has been trading at low levels for the last year because of a slowing economy.  However, prices have dropping sharply over the last few weeks, bringing momentum down and leading to a slightly negative CMF reading.

Market Analysis: Colombia

Consider the following chart of GDP growth:

Colombia has seen a slowdown in GDP growth the last two quarters.  This led to the Colombian Central Bank lowering interest rates 50 basis points at their last meeting.  Here was their reasoning:

• Colombia’s trading partners are likely to grow less than expected. If this provides to be the case, the contribution to the country’s economic growth stemming from external demand would remain low.  Moreover, if the trend observed in prices for Colombia’s major exports continues, terms of trade would average less in 2013 than they did last year. Consequently, aggregate spending in 2013 would see no additional boost from an increase in national revenue.

• The new data on economic growth in 2012 (4%) show a slowdown from the high levels witnessed in 2011 (6.6%). The major loss in momentum came during the second half of the year and was explained largely by a significant reduction in investment growth. The rise in private consumption slowed during 2012, reaching rates similar to its historical average. The increase in exports also declined compared to 2011, with a significant drop during the fourth quarter.

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• As for the first quarter of 2013, the deterioration in trade expectations and the drop in the consumer confidence index and auto sales suggest less momentum in private consumption.  The value of exports in dollars during January was similar to the figure posted a year earlier, and industrial exports saw positive annual growth. However, indicators of business confidence suggest industry continues to contract. This momentum denotes current economic growth below potential and, hence, an increase of the shortcomings with respect to use of industrial productive capacity.

• The decline in annual inflation from 2.0% in January to 1.8% in February was similar to what the technical team predicted. This slowdown is explained largely by the reduced rate at which food prices increased, mainly those for processed foods. All measurements of core inflation declined as well.  The average for these measurements is below the target (3%), as are inflation expectations. The recent decline in international prices for energy and other commodities means less pressure on domestic inflation.

Put more generally, GDP growth has slowed.  And the slowdown has been seen across all GDP accounts: personal consumption, investment and exports.   That's not the kind of data that warms a central bankers heart.  In fact, it does just the opposite.  The one good piece of data was the dropping of the inflation rate, which gave the bank the room to lower rates.

Let's place all of this information into a market context:

On the weekly chart, we see that prices recently hit multi-year highs at the 22.5 level -- where they rose to in mid-2012.  Prices dropped after their first visit to this level, probably in reaction to the EU situation.  Prices then dropped to the 50% Fib level from the late 2011-mid-2012 rally.  They moved higher after that, hitting the 22.5% peak again at the beginning of this year.  But prices have been falling since then as the economy overall has slowed.

 The daily chart shows that for the last five months, prices have made a near-perfect arc.  However, since cresting after the first of the year, prices have continually moved lower, broaching both the upward trend line started last summer and the 200 day EMA.  Also note the declining MACD and negative CMF reading.

The recent action by the central bank has probably stopped the market bleeding for now.  However, there isn't much room for rallying optimism right now.