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)

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