Mexican stocks hold near record high ahead of rate decision

And pause.

Mexican stocks took a breather on Wednesday after setting new record highs just 24 hours earlier as traders await Banxico’s latest interest rate decision that’s due Thursday.

The country’s benchmark IPC index slipped 0.5 per cent to 49,090.77, down from the all time high of 49,523.94 set the previous day. Shares in financial services group Inbursa and breadmaker Grupo Bimbo led the decline.

The pullback comes amid a stunning rally for Mexican stocks, which have shrugged off concerns about the Trump administration’s tax and trade policies to set three record highs over the past week.

The bourse completely erased its post-US election losses earlier this month and is now up more than 7.5 per cent this year despite Wednesday’s retreat.

After being dumped by investors in the wake of Donald Trump’s election in November, Mexican assets are fast regaining favour as the markets deem Mr Trump’s bark to be worse than his bite and the economy proved to be more resilient than many had predicted.

Indeed, more conciliatory statements made by the Trump administration on Nafta in recent weeks is one reason cited by Citi in its decision to upgrade Mexican equities from ‘underweight’ to ‘market weight’ this week.

Our initial bearishness was driven by the recognition that MXN weakness was related to weak fiscal performance, despite perceived strong fiscal credentials….We now think the latest macro forecasts (see inside) discount the bad news on growth and inflation. We believe a limited re-set of NAFTA could happen by December, given incentives for the US and Mexican administrations as well as US corporates and their Washington lobbies. The recently stronger MXN reflects investor confidence in this outcome, in our view.

Likewise, a stabilisation in oil prices since November and more dovish comments from the US Federal Reserve over the pace of future interest-rate rises have also helped anchor sentiment. Oil income represents a fifth of Mexico’s national budget while a less aggressive Fed would ease pressure on the country’s own central bank to step up its own tightening cycle.

It will be a welcomed respite for Mexican businesses and consumers – which have in the span of 15 months seen Banxico more than double its benchmark rate from 3 per cent to an eight year high of 6.25 per cent.

Still – despite the recent rally in Mexican assets (the peso is also within striking distance of its returning to its pre-election levels) some analysts remain cautious.

Bank of America Merrill Lynch warned that given the unpredictability of the Trump administration, the balance of risks remains skewed to the downside.

Our main view…is that growth and inflation will deteriorate in the coming months and that the central bank will continue hiking rates, even though the end of the hiking cycle is near.