Secondary Rout Gains Momentum

Fresh panic selling in Europe battered LatAm markets Thursday and while some observers say EM may again decouple from the developed world, the region appears vulnerable to further losses. The Bovespa hit a 6-month low at 58,192, down 2.5% on the day and more than 8.2% on the week. Mexican stocks meanwhile lost 2.0% to 30,368 and are down over 4.5% so far this week. “[European debt troubles are] definitely setting the tone for these markets,” Will Landers, manager of BlackRock’s $8.5bn LatAm equity funds, tells LatinFinance. “I think we just need to see things settle down – VIX around 20 – and we can have a more constructive market environment.” The VIX fear index hit its highest on an intraday basis since April 2009, rising 27.86% to 45.16 as US stock indices shed over 3%, according to Reuters. Currencies also got beaten up. And the EMBIG spread over rallying UST flared 22bp to 354bp, while the yield surged 11bp to 6.68%, near the May 7 high of 6.71%, with higher-beta credits taking the biggest hit. “Sentiment today will be dictated by announcements out of the eurozone and progress on US bank reform,” says JPMorgan. “Expect every risky asset price to fly, as investors take advantage of the new age of financial immorality,” says BCP, which describes the Europe bailout as “a new level of moral hazard in an increasingly immoral world.” Meanwhile, Barclays echoes a sentiment expressed earlier in the week by major investor Ashmore, that fear is masking fundamental strength and will provide attractive buying opportunities. “The sell-off largely reflects de-positioning rather than a more fundamental reappraisal of EM,” says the UK bank. Elsewhere, the IMF does not expect lasting damage from contagion in Europe. “We are of the view that it will not [spark a LatAm crisis],” says Nicolas Eyzaguirre, director of the IMF’s Western Hemisphere department. He adds that trade links are not a source of vulnerability, since only 3% of LatAm GDP is traded with Europe. Nor does Eyzagui