Brazilian financial market reacts negatively again to the noise surrounding the pension reform. According to professionals, this morning’s news brought more negative elements about the possibilities of the government being able to approve the reform, which was reflected in the dollar, interest rate hikes and in the fall of the Ibovespa stock index at the opening of the trading session.
But, half an hour after business started, prices have worsened, reacting to comments from House of Representatives president, Rodrigo Maia, that would have expressed a more pessimistic reading regarding the number of votes to approve the reform.
This market behavior confirms the investors’ sensitivity to the pension plan reform news, something that has already been happening in the last sessions and that intensifies as the deadline for voting approaches.
The importance of this reform for the Brazilian stock, currency and interest markets has already been explained in this article from June in this blog.
The Brazilian economy has not confirmed the brief improvement in April. The Economic Activity Index Central Bank (IBC-Br) fell 0.51% in May, after growing 0.07% in April (revised), which was the first increase in 15 months. In the year, the decline was a significant 5.79%.
In the 12 months ending in May, the IBC-Br indicates a decrease of 5.43% in the series without adjustment and 5.51% in the adjusted data. Due to the constant indicator review, the IBC-Br measured for 12 months is more stable than the monthly measurement. Compared with May 2015, there was a low of 4.91% in the series without adjustment and 5.32% with adjustment.
The results came worse than expected by the market players. The average of forecasts made by 21 financial institutions suggested a decrease of 0.24% in the month. Estimates ranged from a decrease of 0.9% and increase of 0.1% for the monthly variation.
In the June Inflation Report, the central bank projected a drop of 3.3% in the GDP for 2016, against the previous forecast of a 3.5% decline. Analysts consulted for making the Focus Bulletin also point to a decrease of 3.3% for the Brazilian economy this year.
Brazilian’s most traded stock ETF in the US, EWZ soared 46.5% in the same 6 months:
In the beginning of the year, the perspective for the Brazilian market was not good with the country in recession and inflation sky rocketing. However, in the middle of February, the inflection started fueled by a global recover in commodities prices and an improvement in the expectations for the economic policies, which became known as the impeachment rally.
Besides, the downside event of the semester, the Brexit, was followed by an unexpected help which were the speculations that central banks all over the world will stimulate their economies to face market volatility. On Friday, the president of England’s central bank, Mark Carney, said that the growth in the UK will slow down in the next months and additional interest rate cuts and other measures of monetary ease will be necessary.
Sure, Brazil is not out of the woods yet and the new government still has lots to do to recover the economy. However, the better economic climate has started to translate into improvements in the confidence:
Besides the more favorable political environment, what is also helping in this confidence growth is the fact that some economic indicators are improving, albeit still very bad: IBC-Br, Industry and Services.
Monetary Policy Committee (COPOM) has decided to keep the Brazilian interest rate benchmark in Brazil (SELIC) at 14.25% a year, unanimously. The central bank repeated the note issued with the previous decision, in which it says “we see advances in the inflation fighting but the still elevated cost of living and expectations are out of the target”.
Even with the repeated note, economists started to review their opinions about when the interest rate will go down again. The last meeting was still ran by central bank president Alexandre Tombini. Now, Ilan Goldfajn will be the one responsible to deal with variables like economic recession and inflation. Inflation, by the way, that was showing signs of reduction but has again showed resilience.
According to newspaper Folha de São Paulo, despite inflation have shown acceleration in May, the interim government of Michel Temer believes that the fall in the US Dollar exchange rate and the credibility of the new economic team opens space for a reduction in the SELIC. The government is working under the assumption of inflation declaration by year end as well as a further drop in the US$. According to the report, Folha’s initial forecast was for a drop in the interest rate in July but now this may be postponed till August.
And that review in expectation was also followed by other investment banks, such as Goldman Sachs and Bradesco. Bradesco now believes the interest rate benchmark will end the year at 12.75% versus 12.25% before.
Brazil’s current account deficit grew wider than expected in September but was easily covered by foreign investments, central bank data showed on Friday.
Brazil posted a current account deficit of $3.076 billion in September, larger than a gap of $2.487 billion in August and the $2.3 billion deficit forecast by economists for the month, central bank data showed on Friday.
Brazil attracted $6.037 billion in foreign direct investments last month, up from $5.246 billion in August, the central bank said.
Despite the monthly increase, the current account deficit declined as a percentage of Brazil’s gross domestic product in the 12 months through September. It was equivalent to 4.18 percent of GDP, down from 4.34 percent in the previous month.
A weaker Brazilian real is helping exporters and curbing imports, boosting the country’s trade balance after the country recorded its first deficit in 14 years in 2014.
Brazil’s currency dropped more than 30 percent this year to a record low of more than 4 per dollar as investors fret over a steep rise of the country’s debt.
Moody’s rating agency announced on Tuesday the downgrade of Brazil’s sovereign risk rating from ‘Baa2’ to ‘Baa3’, the lowest in the investment grade scale. Moody’s also changed the outlook from “negative” to “stable”. The market was expecting the reduction in the Brazilian rating, but there was a concern that the agency would maintain a negative outlook, which would increase the risk of the country losing its investment grade. In a report, Moody’s assessed that weaker economic performance than expected, the upward trend of government spending and the lack of political consensus on fiscal reforms will prevent the authorities to achieve high primary surpluses enough to contain and reverse the trend of debt increase this and next year.
Read More on Brazilian Macroeconomics
Brazilian antitrust council, CADE (Administrative Council for Economic Defense), opened an administrative process to investigate alleged cartel consisting of 15 foreign financial institutions in order to manipulate the foreign exchange market. It is the first antitrust case in Brazil for manipulating rates in the financial market.
Some of these banks have been investigated for the same practice in the UK, Switzerland and the United States, in cases that came to light in 2013 and which totaled over US$ 5.8 billion in settlements and fines. The Brazilian investigation started from a leniency agreement signed by a cartel participant with CADE and the federal prosecutors. The bank in question, whose name is kept confidential, requested full immunity after cooperating. The institutions investigated in the Brazilian process are: Standard Investment Bank, Bank Tokyo Mitsubishi UFJ, Barclays, Citigroup, Credit Suisse, Deutsche Bank, HSBC, JPMorgan Chase, Merrill Lynch, Morgan Stanley, Nomura, Royal Bank of Canada, Royal Bank of Scotland, Standard Chartered and UBS, as well as 30 individuals.
Brazilian Antitrust Council
Brazilian Exchange Rate