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What’s behind today’s significant market surge in Latin America?

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Latin American markets are experiencing bullish movements today. But what’s behind this rise, which includes countries like Brazil, Colombia, or Mexico? The answer lies on the other side of the Pacific.

The recovery of the Chinese market, the main trading partner and destination for exports of many countries in the Latin American region. The CSI300, the main index of mainland China, has risen by over 3.5% overnight, driving up assets related to Latin America and other emerging markets.

Additionally, China has the greatest weighting in the ETF with the largest assets under management dedicated to tracking emerging markets. The iShares Emerging Index Fund (EEM) also includes other high-weighted countries such as India.

As depicted on the chart, EEM experienced a notable upward gap opening today. It is likely to move towards testing the upper boundary of the triangle pattern. However, its movement is heavily contingent on China, given that assets from Mainland China and Taiwan collectively constitute more than 40% of the ETF’s holdings.

In other words, it’s important to recognize that there is a direct relationship among emerging markets. Particularly, there is a correlation between the prices of those assets whose exports depend on China. A clear example of this is the iron ore Brazilian company Companhia Vale do Rio Doce, better known as VALE, whose price depends on China’s activity and GDP, where it exports 65% of its production.

The problem with some countries in the Latin American region is precisely this partial dependency on the Chinese economy.

China’s in Trouble

The major financial centers in the West and Asia present striking disparities. While the S&P 500, the most important in the United States, is reaching historic highs, the Shanghai Shenzhen CSI 300, is currently at its lowest point in the last 5 years.

As a matter of fact, in just three years, the value of Chinese stocks has experienced a decline of approximately $6 trillion, which is roughly twice the annual economic output of Britain.

The second-largest economy in the world grapples with a multitude of challenges. These encompass a record decline in real estate, mounting debt, a declining birthrate, and a shrinking workforce.

Another major factor contributing to the current bear market in the Chinese market is the deterioration of relations with the United States and the West in general. In recent years, tensions between the West and China have escalated due to an increase in China’s assertiveness in economic and military expansion.

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Ignacio Teson
Ignacio Teson
Economist and Financial Analyst
Ignacio Teson is an Economist and Financial Analyst. He has more than 7 years of experience in emerging markets. He worked as an analyst and market operator at brokerage firms in Argentina and Spain.
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