Bounce In Metals Prices To Bolster Equities

With our Commodities team highlighting potential for metals prices to get a reprieve from the substantial selling pressure seen in recent months ( see 'Temporary Reprieve For Metals', August 8 ) , we see increasing likelihood of a relief rally in Latin American equity markets . In particular, we highlight Brazil's Bovespa, Peru's IGBVL and Chile's IPSA . These benchmarks have seen significant declines in the year-to-date as one of our key themes for 2013, namely that regional industrial metals exporters would be hit hard by slowing growth in China, has played out in equity markets ( see 'Our Key Themes For 2013', December 12, 2012 ) . While we remain cautious towards these indices over a multi-quarter time horizon due to our expectation of weaker economic activity in China and lower average metals prices, we believe they are highly overstretched, underpinning our view that a bounce is likely in the coming weeks. Indeed, we initiated a bullish view on Chile's IPSA equity index in our Americas Asset Class Strategy t able on August 12, as we believ e that rising metals prices, stronger-than- expected Chinese trade data and Manufacturing PMI released in recent days, and a constructive technical picture point to further upside for the index in the coming weeks ( see 'Bullish Chilean Equities', August 12 ). We believe that these dynamics are likely to continue buoying equity markets in other regional metals exporters in the short term as well .

While we previously highlighted a deteriorating technical picture for Brazil's Bovespa equity index ( see 'Deteriorating Technical Picture Indicates Potential For Retracement', August 5), the benchmark has done an about-face in recent days, rallying sharply on the back of rising investor optimism towards the Chinese economy. Although the Bovespa's fundamentals remain weak given a sluggish economic recovery and high inflation, we believe that the bounce in industrial metals prices and improving sentiment mean that the index could be in for a continued relief rally in the new few weeks.

The Bovespa has broken through resistance around the 50,000 level at the time of writing, and appears to be heading towards trendline resistance around 53,500, a break of which would spell the end to the index's recent downtrend, at least for the time being. Basic materials stocks, like iron ore miner Vale, have also performed well on the back of the above dynamics in recent days. After breaking through short-term resistance around BRL29, the stock has rallied by 5.8% since August 8, and we see potential for the rebound to continue in the near term.

Relief Rally In The Making?
Generic 3-Month LME Copper, US$/tonne And 200-Day MA (LHS) & Gold Spot, US$/oz (RHS)

With our Commodities team highlighting potential for metals prices to get a reprieve from the substantial selling pressure seen in recent months ( see 'Temporary Reprieve For Metals', August 8 ) , we see increasing likelihood of a relief rally in Latin American equity markets . In particular, we highlight Brazil's Bovespa, Peru's IGBVL and Chile's IPSA . These benchmarks have seen significant declines in the year-to-date as one of our key themes for 2013, namely that regional industrial metals exporters would be hit hard by slowing growth in China, has played out in equity markets ( see 'Our Key Themes For 2013', December 12, 2012 ) . While we remain cautious towards these indices over a multi-quarter time horizon due to our expectation of weaker economic activity in China and lower average metals prices, we believe they are highly overstretched, underpinning our view that a bounce is likely in the coming weeks. Indeed, we initiated a bullish view on Chile's IPSA equity index in our Americas Asset Class Strategy t able on August 12, as we believ e that rising metals prices, stronger-than- expected Chinese trade data and Manufacturing PMI released in recent days, and a constructive technical picture point to further upside for the index in the coming weeks ( see 'Bullish Chilean Equities', August 12 ). We believe that these dynamics are likely to continue buoying equity markets in other regional metals exporters in the short term as well .

Relief Rally In The Making?
Generic 3-Month LME Copper, US$/tonne And 200-Day MA (LHS) & Gold Spot, US$/oz (RHS)

While we previously highlighted a deteriorating technical picture for Brazil's Bovespa equity index ( see 'Deteriorating Technical Picture Indicates Potential For Retracement', August 5), the benchmark has done an about-face in recent days, rallying sharply on the back of rising investor optimism towards the Chinese economy. Although the Bovespa's fundamentals remain weak given a sluggish economic recovery and high inflation, we believe that the bounce in industrial metals prices and improving sentiment mean that the index could be in for a continued relief rally in the new few weeks.

Upside Breaks Presage Further Near-Term Gains
Brazil - Benchmark Bovespa Equity Index (LHS) & Vale Share Price, BRL (RHS)

The Bovespa has broken through resistance around the 50,000 level at the time of writing, and appears to be heading towards trendline resistance around 53,500, a break of which would spell the end to the index's recent downtrend, at least for the time being. Basic materials stocks, like iron ore miner Vale, have also performed well on the back of the above dynamics in recent days. After breaking through short-term resistance around BRL29, the stock has rallied by 5.8% since August 8, and we see potential for the rebound to continue in the near term.

Ripe For A Bounce
Peru - Benchmark IGBVL Equity Index & MACD And RSI (Daily)

After being hit hard by significant declines in copper and gold prices in recent months, Peru's benchmark IGBVL index has also broken higher in recent trading. Indeed, our previously-highlighted view that a short-term rally in metals prices, as well as an improving technical picture could see a bounce in Peruvian equities take shape in the coming weeks continues to play out ( see 'Factors Beginning To Align For A Short-Term Rebound', July 23). The IGBVL has broken out of its multi-month downtrend in recent weeks, and pushed through resistance around the 15,760 level in the last few days. A bullish break on the daily chart, as well as improving technicals on the weekly chart, with the index testing long-term resistance, the MACD crossing to the upside and the RSI still near from oversold territory, mean that we believe a further bounce could be on the cards in the coming weeks.

Strong Technical Picture Highlights Upside Potential
Peru - Benchmark IGBVL Equity Index & MACD And RSI (Weekly)

Equity Markets Will Remain Vulnerable To Rebalancing Pressures

Nevertheless, we maintain our long-held view that equity markets in major industrial metal exporting economies, such as Brazil, Peru and Chile, will underperform those in Mexico and Colombia in the coming months. Indeed, the latter two economies are more geared towards the US, whose economic recovery we expect to continue gaining steam in the coming years. Meanwhile, our view for a multi-year slowdown in Chinese economic activity and lower average metals prices, due to waning demand and a stronger US dollar, mean that we anticipate a period of slower growth in Brazil, Peru and Chile in the next few years, underpinning our more cautious outlook on their equity markets over a multi-quarter time horizon.

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