EM LATAM CREDIT: Federative Republic of Brazil (Ba1pos /BB /BB): China Meeting
“With Lula’s China trip, Brazil seeks progress in key shipping projects” – Valor International
Neutral for spreads
• Brazil President Lula plans to visit China May 12 with further meetings possible at the BRICS summit July 6th in Rio de Janeiro and then in November at COP30 in Belem, Brazil.
• This could affect U.S. policies towards Brazil in the weeks to come amidst heightened tensions with China regarding trade and national security.
• Upon visiting Argentina earlier this week, U.S. Treasury Secretary Bessent commented on China’s influence in Latin America. President Trump has cited Chinese influence near the Panama Canal as a national security threat.
• Improving shipping routes is a key focus in getting goods over from the Atlantic to the Pacific side of South America so they can be exported to Asia.
• The Bioceanic Railway is a project proposed over ten years ago to connect a Brazil port on the Atlantic side with a port in Peru on the Pacific side. It seems that roughly 2/3rds of this railway have been built on the Brazil side already but the difficult task of completing the project in Peru and Bolivia remains.
• China may want to help build and finance the railway. The port of Chancay in Peru where the railway would terminate was financed by China and opened last November according to Valor.
• Brazil 10-year bonds issued February 2025 at T+220bps were last quoted T+263bps, 17 bps wider than at March 2025 month end. For comparison, Republic of Chile (CHILE; A2 /A /A-) 12-year notes issued at T+105bps in January were last quoted T+133bps and have widened 8bps since month end.
• China is already Brazil’s largest trading partner, accounting for over 30% of exports. If China tariffs on U.S. imports are maintained that could give Brazil an advantage in exporting more to China. Please see our previous post for more information: https://mni.marketnews.com/4iEdxJ7
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US STOCKS: Early Equities Roundup: Interactive Media, Discretionary Shares Lag
- Stocks trading lower Tuesday - reversing Monday's gains with major indexes back to late Friday levels ahead midday. Currently, the DJIA trades down 253.37 points (-0.61%) at 41585.29, S&P E-Minis down 65 points (-1.13%) at 5665.75, Nasdaq down 326.4 points (-1.8%) at 17477.72.
- Communication Services and Consumer Discretionary sectors underperformed in the first half, interactive media and entertainment stocks weighing on the former: Alphabet -4.65%, Meta Platforms -4.65%, Alphabet -4.53%, Netflix -3.06% and Live Nation Entertainment -1.71%.
- The Discretional sector weighed on by Tesla and cruise lines: Royal Caribbean Cruises -6.05%, Tesla -5.41%, Norwegian Cruise Line Holdings-4.29% and Carnival -3.64%.
- On the positive side, Real Estate and Energy sectors outperformed in the first half, investment trusts buoyed the former: Crown Castle +2.08%, Kimco Realty +1.78% and American Tower +1.47%. Meanwhile, oil and gas stocks supported the Energy sector: Coterra Energy +2.45%, EQT +2.09%, Marathon Petroleum +1.43% and Valero Energy +1.19%.
GERMANY: Fitch: Pressure On AAA Rating Could Arise Absent Growth Improvements
Fitch Ratings write that although “Germany has substantial fiscal headroom to accommodate the planned major shift to much larger military and infrastructure spending”, pressure on its AAA/Stable rating “could arise over the longer term if this spending increase is not eventually offset by consolidation measures or a lasting improvement in growth prospects”.
- The Bundestag vote on incoming Chacellor Merz’s fiscal reforms is currently ongoing, with the Bundesrat vote due on Friday March 21. Fitch expect the bill to be passed “broadly as envisaged”.
- Fitch pencil in “EUR900 billion-1 trillion (21%-23% of 2024 GDP) of additional government expenditure over the next decade”, with new spending expected to be scaled up gradually.
- “Under this assumption, Germany's debt-to-GDP ratio would approach 70% by 2027, the highest among ‘AAA’ rated peers (median at 36.5%), but still below the 80% peak of 2010. Germany's status as the eurozone’s benchmark issuer and its large, diversified economy also enhance its debt-carrying capacity”.
- “Our initial estimate is that the new spending could directly add on average about 0.4pp to GDP in 2025-2027, but we expect higher US tariffs to offset this in 2025 and forecast growth of just 0.1%”…. “However, fiscal stimulus will allow the German economy to recover modestly next year, when we forecast growth of 1.1%”.
- “Germany faces significant structural challenges, including rising competition from China, tariff risks due to its export-oriented economy, and competitiveness issues in the manufacturing sector caused by increased energy and labour costs, bureaucratic hurdles, and high corporate taxes”… “he additional spending will support growth and enhance competitiveness, but it is unlikely to substantially improve Germany's longer-term growth prospects in isolation”.
GERMANY: CORRECTION: Fiscal Bill Only Now Up For Vote, Results Around 15:00 GMT
The key German fiscal bill on higher military and infrastructure spending by CDU/CSU and SPD was only now up for vote in Bundestag, until 14:50 GMT. Vote collation took around 10 minutes for the last drafts, meaning results should be in around 15:00 GMT.
- The previous bill up for vote was a second one by pro-business FDP, which, as expected, failed to gain the required 2/3rds majority of votes.
- Threshold for passing sits at 489 votes in favour.
