Swaps Show Anxiety Rising as Mexico Frontrunner Solidifies LeadBy
Traders are concerned by leftist’s lead with two months to go
Lopez Obrador has replaced Nafta as biggest investment risk
Mexico’s debt rose to the riskiest in almost a year after leftist presidential front-runner Andres Manuel Lopez Obrador widened his lead ahead of the July 1 vote.
The cost to protect Mexico’s bonds against default for five years has jumped by more than a fifth since mid-January after Lopez Obrador opened up a lead of almost 20 points over his closest rival, Ricardo Anaya, according to Bloomberg’s Mexico election tracker. The cost jumped to 1.20 percentage point on Thursday. A close at that level would be the highest since last May, when investors balked at President Donald Trump’s threat to quit the North American Free Trade Agreement.
Nafta risks haven’t completely dissipated, as the U.S. pushes for rules for car production that include a wage requirement that Mexico says can’t be met. Yet after positive comments in recent weeks from Trump and his Mexican and Canadian counterparts, investor attention has turned to perceived risks from a victory by Lopez Obrador, known as Amlo, according to Marco Oviedo, chief Latin American economist at Barclays Plc. The candidate plans to boost spending, slow an energy-industry opening and scrap a $13 billion airport project.
"It’s political risk," Oviedo said of the weakness in swaps. "We don’t know if Amlo wins if we’re going to see a radical Amlo, a fundamentalist. That is the question that the market has at this point."
Credit-default swaps aren’t the only asset reflecting concern about Lopez Obrador. The peso fell to a three-month low on Wednesday and traded near that level on Thursday afternoon.
Once investors begin to factor in potential for Lopez Obrador’s and his Morena party to dominate not only the presidential vote but also congressional elections and several governorships, risk aversion and pressure on Mexican assets could increase, Esteban Polidura, chief Mexico investment officer at UBS Global Wealth Management, said in a note on Wednesday.
Nafta talks are set to continue with a meeting between cabinet officials in Washington on Monday as the Trump administration pushes for a deal this month in order to get it passed in the current U.S. Congress.