Latin American markets, which made huge gains in the last 11-months, suffered a day of selling on Friday as investors pulled cash out of stocks, bonds and currencies on fears over select European sovereign risks. US jobs data, a key proxy for global economic strength, gave a mixed picture.
Overall jobs were unexpectedly cut last month but factory payrolls rose for the first time since 2007 and the unemployment rate, based on a different survey, dropped to a five month low of 9.7 percent. But it was the persistent worries about fiscal stability in euro zone nations such as Greece and Portugal that prompted a risk sentiment readjustment that has hit global markets hard. European policymakers scrambled to reassure markets about the stability of the 16-nation currency bloc, and Portugal backed a law that may push its swollen deficit higher.
Some of the selling is considered precautionary ahead of the weekend. "Undoubtedly, we had very tight risk spreads to start with, in Latin America primarily. That is being shocked back to reality through the guidance of southern Europe," said Enrique Alvarez, head of Latin American debt strategy at IDEAglobal.
"The dollar trade is smoking out the speculators in commodities and the carry trade currencies. There is also a reversal from the heavy overexposure to equities in Latin America, Brazil in particular. This also plays along with the theme of a more doubtful global recovery," he said.
Yield spreads widened by four basis points to 320 basis points between emerging market sovereign debt and US Treasuries, according to the J.P. Morgan Emerging Markets Bond Index Plus. MSCI's Latin American stocks index retraced some of its lost ground but was still trading at levels not seen since mid-September. The index was down 1.61 percent at 3,594.74. Year-to-date the index was down 12.6 percent but that was after it surged 98.141 percent in 2009.
Separately, J.P. Morgan Chase warned investors to reduce their exposure to Brazil's local markets. "We reduced our Brazil position as the domestic trade is overowned, exposed to rising local volatility associated with the rate cycle, foreign exchange rate and asset reflation concerns, and presidential election noise," J.P. Morgan analysts, led by Ben Laidler, said in a note to clients.
The Bovespa was the world's best-performing stock market last year, fuelled by an ease in risk aversion and perceptions over Brazil's strong stand during the global recession. Since a recent peak on January 11, the Bovespa has dropped more than 13.5 percent. The Chilean peso rose 1.02 percent to trade at 538.5 against the US dollar, making just a small rebound compared to recent losses. At the root of the rebound was Chile's economic activity index, the IMACEC, rising a bigger-than-expected 3.9 percent in December from a year earlier, the central bank said. That boosted the peso and signalled an end to the first recession in a decade.
Economic activity rose a seasonally adjusted 0.6 percent in the December compared to November. In November, economic activity grew a seasonally adjusted 1.2 percent from October. As recently as January 18 the peso traded as strong as 488.50 before investor confusion over rule modifications for pension fund currency hedging set off a torrent of US dollar buying.