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Mexican reform momentum gathers pace as the Fed prepares for Tapering II

Weekly investor research

11 November 2013

Elections will dominate the outlook for Emerging Markets (EM) in 2014. This year we had a taster of things to come in the shape of Mexico’s reform effort. A review of market moves in Mexico over the past year or so shows that global events as much as Mexico-specific factors drove the price action. In the past week Mexico passed an important fiscal reform and is now moving onto the equally important energy reform. We expect this reform to pass and believe that the outlook for Mexico continues to brighten. Meanwhile in the United States the Fed is getting ready to have another go at tapering. This time they are likely to replace Bernanke’s ineffective verbal intervention (‘tapering is not the same as rate hikes!’) with a commitment to keeping rates low until unemployment gets really low. But even with enhanced forward guidance how exactly will the Fed prevent the market from selling the long end absent direct market intervention via QE? The mortgage market may be part of the answer, but on its own may not resist a speculative movement if fast money tries to push long-term yields higher again.

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