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Fallout spreads from Brexit bomb

Investor concerns over Brexit are causing short term volatility in LatAm assets, and the long term effects of Brexit could cause global volatility in the region and beyond.

Jun 14, 2016 // 5:14PM

The Brexit cloud hovering over both developed and emerging markets across Europe appears to be casting a long shadow over other EM regions far removed from the continent.

According to Schildershoven Finance, LatAm currencies are being pressured by heightened investor concerns over the upcoming vote on Brexit in the UK.

The Mexican peso recently peaked at 19.0244 to the US dollar before settling at 18.9804, whilst the Brazilian real reached 3.5017 before falling to 3.4951 to the dollar, according to data from Bloomberg.

“The main channel through which LatAm would be affected is through the higher uncertainty across the markets that Brexit is generating,” said Shelly Shetty, Head of Latin American Sovereign Ratings at Fitch Ratings.

She added that concerns over Brexit could lead to greater financial asset volatility, which would impose further pressure on a region that is already suffering from low commodity prices, weak external demand from China and subdued investor risk appetite for emerging market assets.

As a higher yielding asset class, LatAm bonds, although not significantly underperforming, have suffered from short term volatility as a result of Brexit fears.

“The market has been in a risk-off mood over the last few days given investors’ position on Brexit,” said Luis Olguin, Portfolio Manager of EM Debt at NN Investment Partners.

Mexico’s 10-year government bonds have gained 2bp over the course of the day, according to Bloomberg.

Olguin stated however that longer term fundamentals should take hold once Brexit volatility subsides on the fixed income front, citing the improving fundamentals of domestic economies.

Although other factors are more likely to have a direct impact on LatAm in the longer term, the extent of the fallout from a Brexit could still have a significant impact on LatAm economies.

“Global markets are increasingly interconnected as capital mobility reaches all regions. While geographically separate, LatAm is not independent enough to coast through a period of global uncertainty,” said Olguin, highlighting the economic effects of a rise in separatist movements across Europe which could result from Brexit.

Global Macro Americas

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