Ibovespa Leads Global Declines as Steelmakers Tumble With Banks

(Bloomberg) -- The Ibovespa posted the world’s biggest drop as equity markets from China to the U.S. retreated and a decline in commodity prices dimmed the outlook for Brazilian exports.

Steelmaker Cia. Siderurgica Nacional SA, known as CSN, was the worst performer on the MSCI Brazil/Materials Index. Homebuilder Cyrela Brazil Realty SA led declines among companies that depend on domestic demand after inflation data discouraged bets that the central bank will reduce borrowing costs anytime soon. Lenders Itau Unibanco Holdings SA and Banco Bradesco SA were the biggest contributors to the Ibovespa’s slump.

The swoon in stocks combined with a drop in the real made Brazil the world’s worst-performing equity market in dollar terms on Friday, with a 5.8 percent loss, after the European Central Bank downplayed the need for more stimulus measures, sending Bloomberg’s commodity index lower for the first time in five days. The decline in raw materials has an outsize impact on Brazil, where commodities make up 60 percent of exports and producers account for almost a quarter of the Ibovespa’s weighting.

"The market believed that authorities everywhere would do almost anything to support activity, and that doesn’t seem so true now," Hersz Ferman, an analyst at the brokerage Elite Corretora, said from Rio de Janeiro. "Assets are now adjusting to a tougher reality."

The Ibovespa dropped 3.7 percent, the most in seven months, to 57,999.73 at the close of trading in Sao Paulo as all but two of its 58 stocks fell.

CSN lost 6.5 percent, while rival Gerdau SA fell 5.3 percent, Itau declined 3.8 percent and Bradesco retreated 5.5 percent. State-controlled oil producer Petroleo Brasileiro SA, known as Petrobras, also followed a drop in crude prices.

ECB President Mario Draghi said Thursday that the bank’s officials hadn’t discussed extending asset purchases. To make the scenario worse for emerging countries, which have benefited from investors searching for higher returns amid low interest rates in the U.S., the probability of the Federal Reserve raising rates in September climbed to 28 percent, up six percentage points from Wednesday, according to fed funds futures.

The real fell 2 percent to 3.2791 per dollar. Swap rates on the contract maturing in January 2018, a gauge of expectations for Brazil’s interest-rate moves, rose 0.12 percentage point to 12.58 percent. The country’s benchmark IPCA consumer price index rose 0.44 percent in August, according to the national bureau of statistics. While the increase matches the median forecast from 46 economists surveyed by Bloomberg, it’s the highest increase for the month since 2007.

Cyrela dropped 6.7 percent. Cia Energetica de Minas Gerais tumbled 7.4 percent, the worst performer on the Ibovespa.

After climbing 34 percent this year on speculation that a new government will be able to tame a budget deficit and pull Brazil out of its worst recession in a century, the Ibovespa is trading at 13 estimated earnings, compared with a ratio of 12.5 for developing nations.

The recent euphoria shows investors are turning a blind eye to the difficulties President Michel Temer’s team will face when trying to get support for austerity measures including social security reform, according to Luis Stuhlberger’s Verde Asset Management.

Investors seem to think that growth will come back "as strong and fast as the deceleration," Verde’s team wrote in a note to clients posted on the fund’s website.