A New “Pink Tide” in Latin America?

Latin America tilted further left this week as Colombian voters elected to send Gustavo Petro to the country’s presidential palace. Come August, the former Bogotá mayor and member of the violent M-19 guerrilla organization will join the region’s growing list of leftist leaders in a political shift some are likening to the “pink tide” of the late 1990s and early 2000s.

Although voters in several Latin American countries managed to flip their countries back toward neoliberalism and free-market capitalism following the pink tide, it appears a new wave of populism has caused political appetites to shift yet again.

Besides Petro, we’ve seen the recent elections of leftists such as Mexico’s Andrés Manuel López Obrador (AMLO), Peru’s Pedro Castillo and Argentina’s Alberto Fernandez.

Meanwhile, in Brazil, former president Luiz Inácio Lula da Silva, who rode the earlier pink tide to power, is leading significantly in the polls against incumbent Jair Bolsonaro. The Trumpian Brazilian president, whose popularity has taken a hit from high inflation and soaring fuel prices, is reportedly considering raising monthly stipends to millions of poor families in an effort to improve his chances of reelection in October.

Some parts of Central and South America have yet to recover from the economic damage caused by the pink tide 20 to 25 years ago.

Nicaraguan president Daniel Ortega, who “won” a fourth term in November of last year after jailing his political opponents, has transformed the small Central American country into the region’s third full-blown dictatorship after Cuba and Venezuela. In March, Nicaragua’s own ambassador to the Organization of American States (OAS) bravely condemned the Ortega government for rolling back human rights and quashing free speech and political dissent.

I’ve written many times about Venezuela—once Latin America’s wealthiest country, now home to hyperinflation and near-universal poverty due to the failed socialist policies of Hugo Chávez and Nicolás Maduro.

Nicaragua’s Daniel Ortega, Venezuela’s Nicolás Maduro, Colombia’s Gustavo Petro

Oil and Gas Companies May Find It Even Harder to Operate in Colombia

That brings me to Colombia’s Petro, who will become the country’s first leftist president. However implausible, there’s a legitimate fear that he could Venezuel-ify Colombia, one of the United States’ closest allies in the Western Hemisphere. I say “implausible” because, as things stand now, the Colombian president serves only one four-year term. But as they’ve proved time and again, autocrats find a way to hang onto power, whatever the cost.

The writer Maya Angelou once said that when someone shows you who they are, believe them the first time. Petro, 62, has shown us he’s no friend to personal property and liberties. He’s repeatedly praised Hugo Chávez and says he plans to normalize relations with Venezuela.

Embarrassingly, the president-elect retweeted a March 2021 post by liberal economist Paul Krugman in which he tried to make the case that trillions in money-printing has not caused inflation in the U.S. A year and a half after that original tweet, prices are rising at their fastest pace in 40 years. 

Despite the fact that crude is Colombia’s number one export, Petro vows to be hostile toward the oil and gas industry and has pledged to stop awarding new exploration contracts. He allegedly wants to turn Ecopetrol, the country’s primary petroleum producer and biggest company of any kind by revenue, into a wind and solar provider. As Bloomberg reports, the Colombian government owns 85% of Ecopetrol, so there’s little to stop Petro from accomplishing this.           

Shares of Canadian oil producers that operate in Colombia tumbled on Monday, the day after the election. The largest among them, Parex Resources, fell more than 10% in intraday trading before closing down 5.6%.

Latin Americans’ Growing Favorability of Cryptos

The only positive I can see from a Petro presidency derives from his surprising support of Bitcoin. As a decentralized asset, Bitcoin does not generally appeal to socialists like Petro, who seek to control all areas of the economy. However, he seems to like the cryptocurrency since it strips power from banks and eliminates the need to trust a third party.

To be fair, Petro’s favorable attitude toward Bitcoin is shared by a growing percentage of Latin Americans, many of whom have adopted crypto to get past currency controls and send money across borders, not to mention save their money for perhaps the first time in their lives. In a just-released report by Mastercard, an incredible 51% of Latin Americans have made a transaction using digital assets, including Bitcoin. I expect this figure to grow substantially over the next several years. 

Climate Policies Have Driven Much of the Inflation We’re Seeing Now

Petro’s anti-fossil fuel ambitions face challenges from not just the constraints of a single four-year term but also a potentially uncooperative congress.

But for the sake of argument, let’s say he succeeds in halting all exploration and production in the country.

Such a move would surely add to the fuel price inflation we’re already experiencing across the globe. According to the International Energy Agency (IEA), world demand for oil is set to reach pre-pandemic levels next year as more people get back to traveling for leisure and business. At the same time, global investment in oil and gas projects has not fully recovered, nor is it expected to do so for the remainder of the year.

Take a look at the chart below. It shows you the 2016-2021 investment increase in research, development and demonstration (RD&D) budgets for select areas of the total global energy sector.

Fossil fuels trailed all other areas, receiving less new financing than energy efficiency, nuclear, hydrogen and fuel cells, renewables and even “cross-cutting,” which includes “women’s participation in clean energy,” “clean energy education and empowerment” and other activities.  

Again, this is all incredibly inflationary. Without adequate investment in traditional energy sources, we’ll continue to see sky-high fuel prices.

Oil Falls Below Key 50-Day Moving Average on Recession Fears

That said, oil traded down this week on fears that a recession could crimp demand. The price of Brent crude, the international benchmark, broke below its 50-day moving average, a possibly bearish signal.

Brent still appears to have strong support, as you can see from the 200-day moving average, so this could be a head fake.

A meaningful drop in fuel costs would be welcome news for everyone, not least of all transportation-intensive companies from trucking to airlines to container shipping. Airlines have had to raise fares recently to offset surging fuel prices, while shipping rates are starting to tick back up after declining from their September 2021 peak.

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Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 5.39%. The S&P 500 Stock Index rose 6.46%, while the Nasdaq Composite climbed 7.49%. The Russell 2000 small capitalization index gained 6.00% this week.
  • The Hang Seng Composite gained 3.33% this week; while Taiwan was down 16.00% and the KOSPI fell 20.52%.
  • The 10-year Treasury bond yield fell 9 basis points to 3.134%.

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Emerging Markets

Strengths

  • The best performing country in emerging Europe for the week was Romania, gaining 2.4%. The best performing country in Asia for the week was Hong Kong, gaining 3.5%.
  • The Russian ruble was the best performing currency in emerging Europe this week, gaining 5.9%. The Pakistani rupee was the best performing currency in Asia this week, gaining 0.70%.
  • Asian technology stocks outperformed this week. The Hang Seng Technology Index gained 4.12%. Chinese electric car maker, Xpeng, was the best performing equity, gaining 25.56% over the past five days.

Weaknesses

  • The worst performing country in emerging Europe for the week was the Czech Republic, losing 0.40%. The worst performing country in Asia this week was the Philippines, losing 4.0%.
  • The Turkish lira was the worst performing currency in emerging Europe this week, losing 0.22%. The Philippine peso, was the worst performing currency in Asia this week, losing 2.1%.
  • Preliminary PMI data in the Eurozone dropped lower this week. Nevertheless, the numbers remain in expansionary territory above the 50 level that separates growth from contraction. Preliminary Eurozone Manufacturing PMI for June was reported at 52.0, down from 54.6 in May. Service PMI declined to 52.8, down from 56.1 in May.

Opportunities

  • The White House is reviewing the removal of some Chinese tariffs as part of its battle against inflation. United States Treasury Secretary Yellen commented that several tariffs on Chinese products inherited from former President Donald Trump served “no strategic purpose.”
  • Chinese equites remain in oversold territory, presenting potential buying opportunities for those who believe that the Asian nation’s Covid situation is improving, and further economic reopening will follow. Year-to-date, the Shanghai Stock Exchange is down 9%, but is already off its lowest April level. The price of the iShares China Large Cap ETF crossed above its 50-day moving average on May 31, suggesting more upside to follow.
  • Eurozone leaders have drafted a joint statement stating that the European Union is granting candidacy status to Ukraine and Moldova. The countries will be expected to meet a set of conditions related to the rule of law, justice, and anti-corruption. EU leaders will also propose to Georgia that it can achieve the same status after meeting certain conditions.

Threats

  • The world’s largest hedge fund firm, Bridgewater Associates, managed by Ray Dalio, has almost doubled its short position in Europe, increasing the amount from $5.7 billion last week to $10.5 billion this week. Now the hedge fund is holding 28 short positions against European companies, up from bets against 18 companies last week.
  • A recent survey shows that nearly one-quarter of European companies in China are reviewing their investments and “considering shifting” current or planned investments outside of China’s borders in response to President Xi Jinping’s stringent Zero-Covid policy. The survey also highlights rising fears over worsening geopolitical tensions stemming from Russia’s invasion of Ukraine, with 7% of European companies operating in China saying they were reviewing investments directly because of the war in Ukraine, according to FactSet.
  • Gazprom PJSC’s shipments through Nord Stream pipeline, the biggest pipeline to the European Union supplying energy from Russia, remain at about 40% of capacity. European gas inventories are about 55% full, with storage sites being refilled as normal. However, the supply disruption means achieving the target of 80% by November 1 will be difficult, ING Group NV said in a note. Energy costs could continue to rise in Europe on supply concerns from Russia.

Energy & Natural Resources

Strengths

  • The best performing commodity for the week was uranium, up 3.96%, as proxied by the Sprott Physical Uranium Trust. Uranium is facing a fairly tight supply future with Russian supplies facing a potential import ban. Elevated copper prices in 2020-2022 have been driven by supportive S&D fundamentals including: 1) strong recovery in underlying demand post-Covid, 2) Buying/restocking, 3) mine and refined supply disruptions, and 4) low inventories. The physical market remains tight; visible inventories are very low, and supply is still struggling.
  • Project spending by the 10 largest mining companies, including Rio Tinto PLC, BHP Group Ltd., and Glencore PLC, is expected to stay at roughly $40 billion this year and next year, according to figures compiled by Bank of America. That would put capital expenditures well below a 2012 peak, close to $80 billion, the bank’s figures show. Much like the oil industry, mining companies are responding to pressure from investors to give priority to dividends and share buybacks, rather than heavy spending. A recent push to limit the sector’s environmental damage also pinched spending.
  • Bloomberg reported on the “marker margin” spread that BP Plc and TotalEnergies SE, which have oil refining and distribution operations across Europe, earn on processing a barrel of oil. Currently, the so-called marker margin is at $38 per barrel, which is five times higher than the same period last year. Sadly, good things don’t last forever.

Weaknesses

  • The worst performing commodity for the week was cotton, down 17.11%, as worries that consumers will slash spending on clothes as inflation soars, ripped through the market. Cotton futures have fallen 36% from their decade high reached last month. Texas is on edge as fears of cotton losses mount with the worst drought in decades suppressing crop yields. The U.S. is the biggest exporter of cotton. Grains and industrial metals were also hit hard by recession fears.
  • European natural gas prices are headed for the biggest weekly gain since Russia began its war on Ukraine as Moscow’s deep supply cuts reverberate across the region. Benchmark futures rose as much as 8.4%, taking this week’s gain to about 60%. Italian oil and gas company Eni S.p.A will receive just half of what it requested from Gazprom PJSC on Friday, compared with about two-thirds the previous day. The cuts have hit some of the biggest consumers in a blow to the region that’s already struggling with surging inflation and meager growth.
  • Iron ore’s rout has extended to a seventh day, with the plunge taking prices back to levels last seen in January, as China’s Zero-Covid policy triggered concerns that disruptions to the industry will last for months to come. The steel-making ingredient has fallen about 12% so far this week, its heaviest weekly decline in more than seven months.
  • It seems reasonable to conclude that the Federal Reserve will keep raising rates until oil and gas prices move sufficiently lower to curb inflationary pressures. Indeed, this process is already underway. WTI was down 11% over the last week and natural gas was 22% lower. The problem with this dynamic is that while lower petroleum prices may play a role in reducing inflationary pressures, it doesn’t encourage increased capital spending or production growth, which is what the price signals through 2022 have been screaming for.

Opportunities

  • Zinc, like other base metals, has taken a hit from rising interest rates and now fears of an upcoming recession are packing a second punch. Jake Lloyd-Smith writes for Bloomberg that the current cash three-month spread on the LME for zinc has widened out to $160 per ton, high by historic standards, which speaks to healthy demand for the near-term supply. Against this backdrop, stockpiles on the LME have collapsed by more than 40% this quarter. Plus, on-warrant holdings, stockpiles already tagged for removal, have never been lower. Supplies are tight and if demand holds up, zinc could shine.
  • JPMorgan global equity strategists expect mining to rebound and outperform in the second half of 2022, as new policy support and easing of Covid lockdowns drive a rebound in China’s activity. The bank cites a low barrier for earnings upgrades as the 2023 consensus already forecasts a 30% EPS decline for European mining. Miners have minimal debt and 10-30% FCF yields, which should support 10% capital returns in 2022 and estimated 2023, through dividends and share buybacks.
  • JPMorgan has also commented that aluminum is likely insulated on the downside from elevated cost support levels. Regardless, Chinese supply growth continues to rebound significantly, and looser fundamentals will likely cap upside even as Chinese demand firms. Aluminum prices may average $2,750/mt in the third quarter of the year before European smelter closure risk likely boils up once again later in the year, pushing prices to average $2,850/mt in the fourth quarter.

Threats

  • Energy has underperformed the broader market (S&P 500 down 5.8% versus the S&P 500 Energy Index down 17.2%). While some of the movement can be attributed to fears of recession, there are concerns that the proposals being floated by the White House to lower prices of gasoline and diesel are too punitive for the energy sector as a whole. These include stopping refined product exports / putting a cap on refined product exports, using the Defense Production Act to boost refining capacity, re-instating the crude export ban, a windfall profit tax on oil and gas companies, and a federal gas tax holiday.
  • Cobalt prices are crashing back to earth, reports Bloomberg, as sellers offer increasingly steep concessions to Chinese buyers who have turned cold on the battery metal as demand slumps in electric vehicles and smartphones. The benchmark price for cobalt in Europe has slid more than 13% since a peak in May, and an even sharper decline in Chinese prices signals the sell-off could have further to run, the article continues.
  • Ozone levels in the Permian Basin of West Texas have surpassed federal standards for several years, according to Jeremy Nickols, climate and energy program director for WildEarth Guardians which formally petitioned the EPA to act. Texas does not have any ozone monitoring stations in the Permian Basis but in neighboring New Mexico counties, readings are showing elevated ozone levels. The EPA is now weighing labeling parts of the Permian Basin as violating federal air quality standards for ozone. Such designation would force state regulators to develop plans to curb the emission which could spur new permitting requirements and scrutiny of drilling operations.

……….

Blockchain and Digital Currencies

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Metaxa, rising 1,270.08%.
  • One of the biggest crypto lenders, BlockFi Inc., said digital-asset trading powerhouse FTX agreed to provide a $250 million revolving credit facility as concern increases across the sector about liquidity in the wake of the recent collapse in token prices, reports Bloomberg. Billionaire co-founder and CEO of FTX Sam Bankman-Fried said in a tweet that the exchange provided the support to help BlockFi “navigate the market from a position of strength,” the article continues.
  • FalconX, a digital asset trading platform and brokerage for institutional investors, has doubled its valuation to $8 billion, despite a major market downturn for cryptocurrency. FalconX’s new funding round shows that there is still some investor appetite for crypto. The company’s valuation puts it on par with some of the biggest names in the crypto space, according to Bloomberg.

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week was Chicken KFC, down 100%.
  • Recent market turmoil and the collapsing value of major stablecoins serve as reminders that “crypto is not sound money,” says the Bank for International Settlements. While the industry has exposed certain technological possibilities, cryptocurrencies do not meet other needs of usable digital money such as safety, accountability, efficiency, inclusion and openness, the institution commented in a report published this week and reported by Bloomberg. 
  • Cryptocurrency mining company Bitfarms has made an about-face on its holding strategy, selling 3,000 Bitcoin for $62 million over the past week, reports Bloomberg, to boost its liquidity amid the record-breaking bear market. Bitfarms is one of the first self-proclaimed Bitcoin hoarding miners to turn away from accumulating mined coins. The Toronto-based company is the latest of the public mining companies that have had to sell its crypto assets in order to stay afloat, the article continues.

Opportunities

  • Bitcoin may extend its rebound above $20,000, according to technical analysis. This could suggest a broader recovery across other cryptocurrencies which have also weakened significantly. Bitcoin soared 16% on Sunday ending an unprecedented 12-day drop which sent it below $18,000 for the first time since 2020, Bloomberg reports. 
  • Binance.US, the American affiliate of the largest global crypto exchange, is starting to offer zero-fee trading for Bitcoin, with plans to eliminate the charges for more tokens in the future. Users can see a live order book on the platform for matching trades and over time Binance.US expects to add more tokens to its free trading category, according to Bloomberg.
  • The company suing the U.S. Labor Department over threats to investigate cryptocurrency-friendly retirement plans is set to launch the nation’s first crypto-accessible workplace 401(k) this summer, company officials told Bloomberg Law. The rollout will likely transform what has, until now, been a theoretical showdown between fintech firms and federal regulators over the role of digital assets in employer-sponsored retirement plans, writes Bloomberg. 

Threats

  • South Korea has banned current and former employees of Terraform Labs from leaving the country, suggesting prosecutors are stepping up their investigation into the TerraUSD stablecoin collapse. Around $40 billion in market value was erased for holders of UST and its sister coin Luna when the stablecoin plunged far below its $1 peg, Bloomberg explains. 
  • Voyager Digital faces steep losses if the crypto broker is unable to recoup a loan it made to troubled digital asset hedge fund Three Arrow Capital, Bloomberg reports. Voyager said it may issue a notice of default to Three Arrows for failure to repay the loan. The broker’s exposure to Three Arrows included 15,250 Bitcoin and $350 million of stablecoin USDC, worth about $660 million based on Bitcoin’s price Wednesday morning in New York.
  • Bitcoin resumed a fall mid-week, moving in tandem with weakening stocks amid mounting concerns about a global recession. Cryptocurrencies have been moving for months in the same direction as stocks, and Wednesday’s moves were no exception as investor appetite for risk assets ebbed on growing fears about an economic downturn, according to Bloomberg.

Gold Market

This week gold futures closed at $1,827.60, down $13.00 per ounce, or 0.71%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week lower by 2.71%. The S&P/TSX Venture Index came in up 1.00%. The U.S. Trade-Weighted Dollar rose/fell 0.55%.

Date Event Survey Actual– Prior
Jun-23 Initial Jobless Claims 226k 229k 231k
Jun-24 New Home Sales 590k 696k 629k
Jun-27 Hong Kong Exports YoY 1.1%
Jun-27 Durable Goods Orders 0.2% 0.5%
Jun-28 Conf. Board Consumer Confidence 100.0 106.4
Jun-29 Germany CPI YoY 7.9% 7.9%
Jun-29 GDP Annualized QoQ -1.5% 1.5%
Jun-30 Initial Jobless Claims 230k 229k
Jun-30 Caixin China PMI Mfg 49.4 48.1
Jul-01 Eurozone CPI Core YoY 3.9% 3.8%
Jul-01 ISM Manufacturing 55.0 26.1

Strengths

  • The best performing precious metal for the week was palladium, up 3.41%, perhaps on news that Sibanye says its Stillwater Mine could be idle for up to six weeks after the Yellowstone flooding. Gold has largely held firm this week as the dollar and bond yields sank on growing concerns about an economic downturn, reports Bloomberg. This comes after Federal Reserve Chair Jerome Powell vowed to curb inflation and said that a recession could be a possibility. With markets still focusing on central bank tightening to contain price pressure and the impact of those actions on global growth, the yellow metal has been holding in a narrow range this week, the article continues.
  • Exchange-traded funds (ETFs) added 334,758 troy ounces of gold to their holdings in the last trading session, bringing this year’s net purchases to 7.27 million ounces, according to data compiled by Bloomberg. This was the biggest one-day increase since April 13. The purchases were equivalent to $615.8 million at the previous spot price. Total gold held by ETFs has risen 7.4% this year to 105.1 million ounces.
  • RBC sees the proposed Kumtor agreement as removing a significant overhang for Centerra Gold shares and increasing management’s near-term flexibility in terms of funding growth post-2024 and potential additional cash return. The terms of the agreement are materially unchanged, with the Kyrgyz government transferring the 77.4 million shares it controls for cancellation, in exchange for Kumtor. Centerra Gold will also make cash payments totaling $87 million for withholding taxes and to settle inter-company claims.

Weaknesses

  • The worst performing precious metal for the week was platinum, down 2.85% on little news. Gold miner Dacian Gold has spent years trying to engineer a turnaround story after it struggled in the early days at its $200 million Mt Morgans gold mine, reports Stockhead.com. Unfortunately, high inflation has forced the company to scale back. “In light of the current high inflationary environment, the board has taken the decision to reset the company strategy by discontinuing the current open pit mining operations at Mt Morgans,” Dacian chair Mick Wilkes said.
  • Russia’s government and parliament are seeking to change rules on the sales and management of the country’s precious metals and gem stockpiles amid the war with Ukraine. The Finance Ministry proposed this week to put a portion of the country’s precious metals and gems into a special reserve that can be accessed in times of war, according to the government documents website. If the proposal passes, the president will have more rights to decide what to do with those reserves.
  • Switzerland has imported gold from Russia for the first time since the invasion of Ukraine, showing that the industry’s stance toward the nation’s precious metals may be softening. More than three tons of gold was shipped to Switzerland from Russia in May, according to data from the Swiss Federal Customs Administration. That is the first shipment between the countries since February. The shipments represent about 2% of gold imports into the key refining hub last month.

Opportunities

  • Yamana Gold’s executive chairman Peter Marrone expects shareholders of Gold Fields to come around to the deal’s benefits. “It will become very obvious that this is two pieces of a puzzle that fit nicely together.” Mr. Marrone went on to say, “The more I learn of what their shareholders are asking in terms of information — and the little bits of what they do reveal in terms of where they’re leaning — it certainly suggests to me that they see it just as compelling for them as it is for the shareholders of Yamana.” Shareholder votes are expected in the third quarter of 2022. Gold Fields is required to secure 75% of shareholder support for deal approval whereas Yamana requires about 67%.
  • With an elevated cost of capital for developers, royalty/streaming companies are a relevant alternative for project financing. While part of the developer strategy is typically to look at value crystallization through being acquired, the mismatch between junior equity valuations and the robust nature of the majors at current metal prices make this dynamic even more poignant.
  • According to Stifel, miners are poised to deliver outsized capital returns to shareholders through dividends and share buybacks over the coming years. The phase of deleveraging following significant investment in growth over a decade ago is nearing completion. Investing in new growth has been a challenge and continues to face obstacles, further bolstering balance sheets. This leaves dividends and buybacks, and the next destination for excess cash, sitting idle on the balance sheet. While the larger miners in their analysis are already paying an attractive average dividend yield of 5%, they see room for higher returns (dividends and buybacks) in the coming years as buoyant commodity prices and a lack of sizable growth opportunities create an ideal scenario for heightened shareholder returns.

Threats

  • Angola has seized a stake in the nation’s biggest diamond miner, reports the Financial Times, giving it majority control of one of the world’s largest gem firms in a move that marks the waning influence of Chinese investors in the southern African nation. Catoca owns the world’s fourth-largest diamond mine. Catoca’s owners include Russia’s Alrosa, the world’s biggest diamond miner and subject of U.S. sanctions, Angolan state diamond company Endiama and until recently, LLI International.  With the takeover of the Catoca stake, “the government is trying to reassure investors that they are cleaning up the sector” and demonstrate its efforts to cut ties with China Sonangol, said Alex Vines, Africa program director at Chatham House and an Angola expert. 
  • Sibanye Stillwater says resumption of mining at Montana-based operations affected by flooding in the area could take up to four weeks, according to a company spokesman.  It could take at least a month to repair access roads and bridges linking to Stillwater’s East and West operations, James Wellsted said.  The East Boulder mine is operating normally; revised output guidance will be disclosed once repairs to damaged infrastructure are complete. 
  • According to Morgan Stanley, gold looks overvalued versus recent moves in real yields. However, some support is coming through from still strong inflation and rising risks of recession, and sentiment could turn if rate expectations start to reverse.

 

Read the full article at https://www.usfunds.com/resource/a-new-pink-tide-in-latin-america/

Author: Frank Holmes