Latin American Markets Torn Apart by Currency and Stock Trends

Latin American markets are exhibiting an unusual trend, with most currencies weakening against the US dollar while the regional stock index still managed to rise 0.2%. This divergence is largely due to differences in what's driving each asset class.

Currencies tend to be more sensitive to global market sentiment and changes in US interest rate expectations. Meanwhile, stock benchmarks can be influenced by a few large companies, which can drive up the overall index. In Colombia, the peso slipped despite optimism about the incoming government and firm oil prices supporting local shares.

Brazil's real also fell against the dollar, but its stocks rose due to a different set of factors. Santander Brasil jumped after Spain's Banco Santander offered to buy the remaining stake it doesn't already own. However, Brazil's overall budget deficit widened to nearly 10% of the economy's annual size in the 12 months through June, largely due to higher interest costs straining public finances.

Lazard, an asset manager, warned that weak fiscal math can delay rate cuts, as easier policy can put pressure on the currency and make inflation harder to control. This could keep local borrowing costs elevated, with a large deficit raising the price of lending to Brazil.