Volatility surge in markets unlikely to derail synchronized growth

Global Economy
Asset prices correction unlikely to derail the global recovery
The market selloff reflects U.S equities adjustment to higher interest rates, but it does not seem to result from higher economic risks. The global recovery is deepening: we revised up our 2018 GDP forecasts for the U.S., Euro area, Japan and China.

Synchronized global growth boosts activity in LatAm
Activity is recovering more visibly and growth in the region is set to be markedly higher this year. While most central banks in the region reduced policy rates recently, cycles are getting close to an end (or have already ended) almost everywhere.

Benign scenario for emerging markets supports the BRL and reduces inflation
Despite recent asset price volatility, we have trimmed our year end BRL forecast to 3.25, from 3.50, as a result of the sovereign risk retreat seen in recent months.

Inflation trouble
The Central Bank cut the policy rate twice in January and affirmed that the conditions for disinflation are better in 2018, but reiterated it will be cautious ahead. We do not expect further rate cuts in the near term, as the next inflation-related data releases will likely be unfavorable.

AMLO leads, but the race is not yet over
In spite of anti-establishment candidate López Obrador’s dominant position in the polls, Mexico’s presidential race is still quite uncertain. Meanwhile, the most recent NAFTA renegotiation round increased the confidence that a deal can be reached.

Tailwinds begin to help
With higher copper prices, improving confidence and stronger global growth, we now expect 3.3% GDP growth this year (previously, 3.0%). Higher copper prices also led us to move towards a slightly more appreciated exchange rate forecast, at 620 pesos per USD by the end of the year (previously, 635).

Political crisis goes on
Even though President Pedro Pablo Kuczynski overcame the impeachment attempt in December, his situation remains far from comfortable. Due to disappointing data in 4Q17, we revised our GDP forecast for 2017 down to 2.3% (from 2.7%).

Unwilling to cut more?
The central bank cut its policy rate in January to 4.5% and signaled the end of the easing cycle. Nevertheless, we believe there is room for more easing, given that growth is still below potential, the current account deficit is narrowing and the CLP appreciation should ease inflationary pressures.

Stronger growth, higher commodities prices
Commodity prices continued to rally in January, due to strong global growth and dollar weakness. In this environment, we increased our energy and metal prices forecast.

Fuente: ITAU

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