We continue to observe the political situation in Mexico with the election due 1st July, however, it is still early days and it could still evolve in a number of ways. Broadly, campaigning has not yet officially started, nor has the ruling party PRI candidate officially been confirmed but is widely expected to be Meade. The key issue is whether Meade will connect with the voter base and gain traction – he is unquestionably qualified to do the job and is perceived as honest which is important as corruption and violence are a key issue for voters. Andrés Manuel López Obrador who stands for the AMLO party, a hard left candidate, has run before. In fact, this is his third time, he is a very good speaker, and is currently ahead in the polls. Ricardo Anaya is another candidate for the PAN party who is currently also polling ahead of Meade: the PAN and PRD and Citizens Movement parties have entered into an alliance as the ‘For Mexico in Front’ coalition, rather Trump like we think.
A Meade victory would be positive for markets as it represents no major change to policy. The AMLO candidate Obrador represents more of an unknown in terms of policies such as energy privatisation, he has not been pro-privatisation and opening up the sector. Of course NAFTA is an item for all the parties, but at this stage we do not know if a NAFTA agreement will be made before the election which could water down that particular risk.
Our Mexican sovereign and quasi-sovereign bond holdings have held up well and the market has been very resilient. Our positions continue to trade attractively on a credit notches basis, and offer a good level of yield. We will continue to monitor the political situation.
Closer to home, Bank of England Governor Mark Carney's comments that he and his peers can now be more conventional, inflation-fighting policy makers is being affirmed by the positive correlation between the pound and expectations for price bets. Broadly, inflation expectations and sterling are moving in the same direction reflecting a market driven by fundamentals. But what about the all-important housing market a prime driver of the UK economy in past economic experiences. A report yesterday suggests that only a third of households currently have a mortgage and the portion of fixed rate mortgages has risen to 60% and although about a fifth of mortgage holders have hardly seen a rate rise, debt has fallen on aggregate relative to income, and deposits have risen faster than income over the past decade. Therefore the impact of further BoE tightening on household cash flows may not be as pronounced as in the past.