EMERGING MARKETS-Falling commodity prices pressure Latam assets amid US fiscal concerns

By Nikhil Sharma

May 22 (Reuters) - Latin American assets fell on Thursday, pressured by a drop in commodity prices and mounting anxiety over the U.S. fiscal cliff which subdued investor appetite.

MSCI's gauge for regional equities .MILA00000PUS extended its slide from the prior session, shedding 0.11%.

Trepidation over America's ballooning national debt reached a fever pitch. This came as the U.S. House of Representatives passed President Donald Trump's landmark tax and spending overhaul – a bill widely anticipated to saddle the world's largest economy with a significantly heavier debt burden.

The nonpartisan Congressional Budget Office projects this legislative package will inject approximately $3.8 trillion into the federal government's already $36.2 trillion debt ledger over the coming decade.

This mounting fiscal pressure was a key catalyst behind Moody's decision last week to strip the U.S. of its top-tier credit rating.

Investors, already skittish from Trump's unpredictable tariff pronouncements, are increasingly voting with their feet, trimming exposure to U.S. assets in a bid to cultivate more geographically diversified portfolios.

This pivot has provided a tailwind for emerging market currencies, as fears of an economic slowdown in the U.S. begin to erode the dollar's once unshakeable safe-haven allure.

The MSCI regional currencies index .MILA00000CUS held steady, though its 2025 year-to-date performance boasts a 13% gain.

PESO TICKS UP

In Mexico, the peso MXN= ticked up 0.1% after the country's headline inflation rose more than expected in the first half of May, data showed, jumping outside the central bank's target range for the first time this year.

Separate data revealed the economy shrank 0.4% in March from February, while expanding 2.5% from March of 2024.

These challenging indicators throw a wrench into the Bank of Mexico's monetary easing ambitions. The central bank, having last week delivered a 50 basis-point cut to its benchmark rate and hinted at further reductions, now faces a delicate balancing act.

"The situation here is very complicated. Banxico will have to cut interest rates, but the bad news is that inflation is also trending higher, which will limit the room for maneuver of Mexico," said Andres Abadia, chief LatAm economist at Pantheon Macroeconomics.

"Mexico will probably have to cut interest rates gradually, modestly, from now on."

The country's main stock index IPC .MXX fell 0.38%, dragged by bottler FEMSA FEMSAUBD.MX and mining company Grupo Mexico GMEXICOB.MX.

Brazil's real BRL= was trading flat, with a drop in crude prices keeping gains in check. Oil prices fell on global supply risks following a report that OPEC+ is discussing a production increase for July. O/R

The country's central bank, which hiked rates earlier this month without providing any forward guidance, stressed the need for stable inflation before it could halt its policy tightening cycle.

The local benchmark stock index .BVSP shed 0.2%, with energy and mining constituents bearing the brunt of the sell-off.

Revenue from commodity exports such as copper, iron ore, crude oil and agricultural products is a key income for Latin American economies.

Chile's peso CLP= was down 0.19%, as investors returned to trading a day after a public holiday.

The Colombian peso COP= fell 0.31%, while the Peruvian sol PEN= managed a 0.27% gain.

Elsewhere, Ukraine's bonds with 2035 XS2895057177=TE and 2036 XS2895057334=TE maturity fell nearly 2 cents to the dollar as tension with Russia escalated after Moscow said it had shot down 105 Ukrainian drones over Russian regions, including dozens heading towards Moscow.

Key Latin American stock indexes and currencies: