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Short-term market implications of Mexico’s energy reforms

Sr Emerging Markets Analyst

Must-know: Mexico proposes an influential energy reform (Part 3 of 4)

(Continued from Part 2)

The Mexican and U.S. markets

The Mexican market is closely linked to the U.S. market, so as the U.S. market continues to recover, Mexico will be boosted as well.

The reason for this close relationship is that Mexico’s geographic proximity to the United States made the United States Mexico’s most important trade partner. Mexico’s major exports are from the auto and related industries (think auto supplies), so a strong recovery in the U.S. auto industry usually boosts the Mexican market as well.

Tapering quantitative easing

Interestingly enough, Mexico’s exposure to China is quite limited, as their trade is very limited. This has helped Mexico weather to some degree the weakness in China, though the reduced flows to emerging markets did affect the Mexican market.

The approval of the energy reform is expected by the end of September or early October at the latest. If the energy reform were to happen in September, it would be quite timely if U.S. quantitative easing tapering begins in the same month.

The threat of a reduction in the Federal Reserve’s bond buying program has triggered significant outflows in emerging markets, and once tapering is confirmed, emerging markets are likely to be affected negatively.

Continue to Part 4

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