Three Thoughts From London – Brazil In Focus, Mexican Oil Auctions, EM Portfolio Flows

1. There are two important events in Brazil today: the latest polls on government approval, and the potential vote on upholding the government’s vetoes on spending.
2. Mexico will hold its second oil block auction today
3. The IIF has just released its latest numbers on EM portfolio flows

1. There are two important events in Brazil today: the latest polls on government approval, and the potential vote on upholding the government’s vetoes on spending. A major polling company will release the latest numbers on the government’s approval ratings shortly. The previous survey was conducted in June and President Rousseff’s disapproval rating was at 83%. A poor number should be expected, but these surveys take an increasing importance now that congress is deciding whether to push forward with the impeachment process. Although there are numerous legal hoops to jump through, removing a president is essentially a political decision, and one that also depends on strong public support to give the opposition a mandate to push harder. On the positive side, congress is due to vote on the remaining presidential vetoes on spending increases today, and it appears as if the chances of maintaining the vetoes have increased. This is largely due to the horse trading ahead of the cabinet reshuffling when President Rousseff is likely to give its rebellious coalition partner, the PMDB, some important ministries. All this is happening in tandem with increased FX interventions by the central bank and the decision by Petrobras to increase prices to refineries yesterday. So markets have a lot to digest.

2. Mexico will hold its second oil block auction today.  The first auction in July was a flop, and only 2 of the 14 exploration blocks in shallow waters were awarded.  The head of Mexico’s National Hydrocarbons Commission, Zepeda, said it best:  “The lessons from the first tender were that the consortium rules were too restrictive, the financial guarantees were too high and there was the issue of the timing of disclosure of the minimum price.  The rules are now more flexible, the guarantees lower and the minimum prices were disclosed two weeks before the auction.  We did our homework. This was a learning process, and we have learnt.” But the results will speak for themselves.

3. The IIF has just released its latest numbers on EM portfolio flows. The institute estimates that portfolio flows to EMs were negative for the third consecutive month in September. It also revised the flows for July and August lower. Investors are estimated to have sold some $40 bln worth of EM assets in Q3, making it the worse quarter since Q4 of 2008, with selling about equally divided between debt and equity.