Roller coaster month ends on high: jitters keep market volatile, U.S. job recovery pulling local stocks up.

Volatility has ruled the bolsa in the last month as investors continue undecided on the short-term direction of the market. Since last month's sharp sell off spurred by expectations of a rise in the U.S. Federal Reserve's base interest rate, the market had recovered almost all its lost ground through June 10. However, it has not been a smooth ride and investor anxiety is evident in the market's volatility and widely varying daily volumes.

Concurrently, the peso has shored up notably, while the benchmark government bonds, the 28-day Cetes, have seen their yield fluctuate between 6.4 and 7%. The main reason for nervousness has been the worldwide geopolitical situation and its effect on oil prices. Although the supply-demand side of the business is stable, recent attacks in Saudi Arabia have created fear of more violence in oil-rich nations, which has pushed up the risk premium for black gold.

U.S. CONSUMERS TO THE RESCUE

As a result, volatility has ensued in oil dependent world markets. Second-tier markets, like Mexico, have suffered indirectly. If Americans, for example, spend more on oil, they will spend less on imported goods. Moves by OPEC in early June eased some of the tension, but the main propellants behind the bolsa's upward trajectory have been closer to home.

First, the double-edged sword of growing U.S. employment is generally falling in Mexico's favor. While a strong recuperation will likely prompt the Fed to raise rates to take some steam out of the recovery, thus pulling funds from overbought markets such as Mexico into U.S. bonds, greater employment means increased consumer spending and confidence. The U.S. market added 250,000 new jobs in May, according to a report released in June, signaling a turning point. In response, Mexican stocks shot up over 4% in two days as America's "jobless recovery" looks like it may soon be able to drop the adjective.

At home, the feeling of a recovery is also taking hold. Macro figures released during the month have consistently beaten analysts' expectations. For example, consumer confidence in May hit a two-year high. Industrial production in April soared 4%. Gross fixed investment in March leapt 7.1%. In fact, the government has already increased its forecast for GDP growth in 2004 from 3.5 to 4%.

ALL HAIL CONSTRUCTION

One sector that has fueled this boom has been construction. At the moment, both the construction, and consequently, mortgage sectors are booming. As BUSINESS MEXICO went to print, a third IPO was getting lined up on the Bolsa--that of homebuilder Homex. It will be the third IPO this year, all of which have been in the construction sector.

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With the sector dominated by medium-sized players--GEO being the market leader--some consolidation within the industry in the short term cannot be ruled out. The building boom has been the cornerstone of President Fox's strategy. At the moment, Fox is doing a very good job of keeping his nose clean in the face of political challenges on many fronts. As his approval rating still hovers around 6.5 out of 10, according to a June poll in Reforma newspaper, the chances are growing that his National Action Party (PAN) may retain power in 2006.

Should this become increasingly likely, other factions within the PAN may rally to the banner, while opposition parties may start looking to compromise with the incumbent. Congressional approval of sought-after reforms may be sneaking within reach.

Although this may seem like crystal ball speculation, there is a further sweetener up the government's sleeve. The same oil prices that have caused markets to stutter have been a blessing to oil producers like Mexico. In last year's budget, the price of Mexican mix was estimated at US$20 per barrel and so far this year, prices have averaged US$28.50. Some of the windfall has already been distributed to the states. The rest could serve as a very useful weapon during the presidential race.

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Index                            31 March   NOMINAL

                                            Monthly  Accrued

Stock Market                       INDEX

IPC                              10,036.29    0.9%    14.1%

INMEX                            567.84       1.3%    15.7%

Mutual Funds

Equity                           2,960.04     0.4%    11.1%

Debt for Individuals             4,183.98     0.2%     1.5%

Debt for Corporations            1,640.63     0.3%     1.8%

Economic Activity

Industrial                       4,162.61    -2.9%    22.4%

Retail                           14,533.91    5.4%    26.1%

Non-Financial Services           6,855.55    -6.8%     7.8%

Insurance and Banks              4,630.87     0.8%    11.7%

Broker Firms                     414.03       0.0%     0.0%

Financial Groups                 384.27       0.7%    14.9%

Sector

Mining                           10,711.31   -5.2%     3.1%

Industrials                      3,274.66    -2.3%    11.1%

Construction                     17,305.81    0.6%    18.3%

Retail                           17,091.21    1.4%    11.5%

Communications & Transportation  42,820.29    1.5%    16.6%

Services                         1,399.85     0.8%    26.9%

Holding Companies                3,506.01     2.6%     9.6%

Index                                    REAL (1)           DOLLARS (2)

                                 Monthly  Accrued  Monthly  Accrued

Stock Market

IPC                               1.1%     12.4%    -0.1%    12.0%

INMEX                             1.5%     14.0%     0.3%    13.6%

Mutual Funds

Equity                            0.6%     9.4%     -0.6%     9.0%

Debt for Individuals              0.4%     0.0%     -0.8%    -0.4%

Debt for Corporations             0.5%     0.3%     -0.7%    -0.1%

Economic Activity

Industrial                       -2.7%    20.6%     -3.8%    20.1%

Retail                            5.6%    24.3%      4.3%    23.8%

Non-Financial Services           -6.6%     6.2%     -7.7%     5.8%

Insurance and Banks               1.0%    10.0%     -0.2%     9.6%

Broker Firms                      0.2%    -1.5%     -1.0%    -1.9%

Financial Groups                  0.9%     13.2%    -0.3%    12.7%

Sector

Mining                           -5.0%    1.6%     -6.1%    1.2%

Industrials                      -2.1%    9.4%     -3.3%    9.0%

Construction                      0.8%   16.5%     -0.4%   16.0%

Retail                            1.6%    9.9%      0.4%    9.4%

Communications & Transportation   1.7%   14.9%      0.5%   14.4%

Services                          1.0%   25.0%     -0.2%   24.5%

Holding Companies                 2.8%     8.0%     1.6%    7.6%

(1) May inflation: -0.25% January-May inflation: 1.46% (2) May
depreciation: 1.1% January-May depreciation: 1.88%

Commentary by Gianluca Baratti

Gianluca Baratti is a stock market analyst at Finamex Casa de Bolsa.